By Debbie Payne and Gary Burr of PricewaterhouseCoopers – On 8 February 2012, the US Department of Treasury and IRS issued long-awaited draft regulations providing guidance on the application of the FATCA regulations.

Of more significance is the Joint Governmental Statement issued on the same day by the UK, France, Germany, Italy and Spain. This changes FATCA from a piece of unilateral US legislation to the start of an extensive multi lateral reporting system.

A further consequence is that FATCA will now become part of not just UK legislation but the domestic legislation of many FATCA Partners. For the UK it is already clear that the drafting will need to be adapted to ensure that it is aligned with existing UK legislation. The same process will almost certainly take place in a number of other territories resulting in many versions of FATCA all of which are slightly different.

For many organisations this will mean reporting to multiple tax authorities in accordance with the local domestic law. How can this reduce the complexity or the cost of implementation?

What does it all mean for me?

Fund managers need to accept what has always been the case that FATCA is not just a US problem and plan accordingly. It is almost certain that once other tax authorities have established their reporting systems under FATCA they will seek to use these to collect information for their own purposes; the US is not the only country seeking to counter tax evasion or with a need to increase tax revenues.

Also whilst the announcement of FATCA Partners adds further uncertainty around the extent of the rules and the precise reporting requirements the timeline for the introduction of withholding has not changed.

Fund managers should be discussing with their administrators whether the administrators will be able to collect the information required both for existing and new investors and whether this can be done before 30 June 2013 at the very latest.

To take account of the likely expansion of FATCA the so called US Indicia used to identify US persons should be converted to more generic questions to seek to ensure that the requirements of other countries can be satisfied without the need to start a new review. Confirming that an individual is not a US tax payer will not answer the question of where they are tax resident.

Fund managers will also need to put in place systems to ensure that where they don’t get the required information from investors, they are able to withhold on payments to so-called ‘recalcitrant’ investors and pay this money to the IRS.

Thought should also be given to who will be the FFI’s ‘responsible officer’ for these purposes and what systems and process will be in place to give that person comfort that they can sign off the FFI agreement.

Will it apply to my fund?

The definition of an FFI under FATCA is very broad and includes almost all types of fund vehicles. Whilst the new regulations do provide some limited exemptions (discussed further below), most funds will be caught squarely within the FATCA provisions and unless they enter into an FFI agreement with the IRS, they will be subject to the 30% withholding. This withholding will apply from 1 January 2014 on payments of US sourced fixed or determinable annual or periodic income (e.g. interest, dividends) paid to the non-compliant fund. From 1 January 2015 the withholding will be expanded to include gross proceeds from the sale of investments that produce US source interest or dividends (and certain foreign passthru payments will be included from 1 January 2017).

What exemptions are there?

As noted above, the new regulations introduced some exemptions or partial exemptions. An FFI should not be subject to withholding if it:

• Qualifies as an exempt FFI; or
• Attains status as a “deemed compliant FFI”.

Broadly, an Exempt FFI includes those listed as “exempt beneficial owners”, which may include certain retirement funds, central backs, foreign governments, etc, or entities wholly owned by these bodies.

Deemed compliance – Are these of any assistance to global fund managers?

In a fund context the only potential relief is for registered deemed compliant FFI’s. Whilst this should mean that you have no annual reporting and withholding obligations, the administrative burden of FATCA will not disappear completely. Certain “qualified collective investment vehicles” and “restricted funds” will be entitled to register as deemed compliant.

The draft regulations provide conditions which a fund must satisfy to be either a qualified collective investment vehicle or a restricted fund. The conditions are such that certain UCITS funds may qualify but it is not expected that alternative or other non-regulated funds will satisfy the conditions.

More fundamentally some of the conditions rely on the status of your investors or business partners. This gives rise to significant commercial risk because a fund could breach its FATCA status for reasons beyond its control. How often does an individual relocate from the UK to the US? A change of status to a US person would breach the conditions to qualify as a “qualified collective investment vehicle”.

So I’m neither an exempt FFI nor a deemed compliant FFI, what next?

If a fund is neither of the above, it will have to enter into an FFI agreement with the IRS or a FATCA partner to prevent suffering the 30% withholding.

The registration process for FFIs will open on 1 January 2013 and applications should be submitted by 30 June 2013 to ensure there is no withholding applied from 1 January 2014.

At the time you submit an application you are certifying that you can comply with FATCA hence the ability to delay starting a FATCA project is now limited.

What changed with in the draft regulations?

Modification of Due Diligence Procedures for the Identification of Accounts

• The proposed regulations reduce the burden associated with reviewing records of pre-existing accounts to determine U.S. status as follows:
• Increasing the threshold for manual reviews to $1,000,000 for pre-existing individual accounts;
• Providing guidance on the scope of a "diligent review" of paper account records (e.g., paper search);
• Providing a $250,000 de minimis rule for pre-existing entity accounts, and extending the reliance on information collected during a "know your customer" or "anti-money laundering" process (KYC/AML); and
• Eliminating the special rules in the Notices for so-called "private banking accounts."

Timing of reporting requirements

• The proposed regulations extend the transition period on the scope of information reporting by FFIs as follows:
• 2014 and 2015: FFIs must begin reporting name, address, TIN, and account balance of U.S. accounts (for calendar years 2013 and 2014).
• 2016: FFIs must begin reporting income associated with U.S. accounts (for calendar year 2015).
• 2017: FFIs must begin reporting gross proceeds from securities transactions (for calendar year 2016).

Passthru Payments

• The proposed regulations extend the date on which FATCA withholding begins on foreign passthru payments from January 1, 2015, to January 1, 2017.

Guidance on Procedures Required to Verify Compliance

• The proposed regulations modify the guidance provided in the Notices by providing that the responsible officer of an FFI will be expected to certify that the FFI complied with the terms of the FFI agreement. In addition, verification of compliance through a third-party audit is not required.

Transition Rule for Affiliates with Legal Prohibitions on Compliance 5

• The proposed regulations provide a two-year transition rule (to 1 January 2016) for certain members of an expanded affiliated group to become a participating or deemed compliant FFI. The transition period provides FFIs located in jurisdictions that have laws that prohibit the tax withholding or reporting required under FATCA with additional time to fully implement FATCA, without preventing other FFIs within the same expanded affiliated group from entering into an FFI agreement. However, an FFI still will need to agree to perform due diligence to identify U.S. accounts and maintain certain records during this transition period. During this two-year transition period, an FFI member of an expanded affiliated group that does not enter into an FFI agreement will be subject to FATCA withholding on withholdable payments that it receives.

Definition of "Financial Account”

• The proposed regulations refine the definition of Financial Account to exclude most debt and equity securities issued by banks and brokerage firms while focusing on traditional bank, brokerage, money market accounts, and equity interests in investment vehicles. Debt or equity interests are considered regularly traded on an established securities market if trades in such interests are effected, other than in de minimis quantities, on such market or markets on at least 60 days during the prior year, and the aggregate number of such interests that are traded on such market or markets during the prior year is at least ten percent of the average number of such interests outstanding during the prior year.

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