On Investment Data Quality Matters…

This post was recently published in TabbFORUM (26th April).

It is the second in a series of blogs that explore some upcoming or in-play regulation and its impact on the funds industry.

So what the FATCA is FATCA?

Well the Foreign Account Tax Compliance Act to give it the full name treatment is in layman’s terms an attempt by the Internal Revenue Service  in the US to stem the loss of tax revenue as a result of US tax citizens attempting to avoid tax liability through investment in foreign investment companies and funds.

The IRS estimate that there is a $100bn in lost tax revenues that can be attributed to US citizens under reporting of offshore investments – the goal of FATCA is to force these investments into the open such that the IRS has full visibility which will in turn drive greater compliance with tax code.

How does FATCA impact the funds industry? Offshore asset management firms and funds will either be required to comply with FATCA by registering with the IRS i.e. sign an agreement with the IRS, either directly, or through a parent affiliation agreement (e.g. with their Parent entity) – or – they can choose to not register with the IRS.

What does FATCA registration mean for the fund in terms of actionable compliance?  In simple terms, it means the fund has to wade through its investors and clearly identify each as tax liable in the US or not. In addition, it must report to the IRS at least annually and comply with various requirements regarding due diligence and verification procedures in its FATCA-related processes. Finally, the fund must withhold 30% of any payment it makes to investors who cannot be clearly identified as non-US for tax purposes.

So funds could choose just not to register, right….? Well that all depends…if the fund invests in US securities and it decides to become a non-participating firm for FATCA purposes, then the fund will be liable for 30% withholding tax on any interest, dividend or sales proceeds on any US securities that it holds. In this case it is very much in the funds interest to be registered as a participating firm.

What about the asset managers transfer agent?  Does this mean the transfer agent has to comply? In simple terms, yes – the transfer agent needs to be affiliated to the fund or register themselves. In Europe, this is a problem for the transfer agent since lots of entries in the book are held in nominee (omnibus) accounts as there can be a myriad of distribution partners and feeder structures directing assets to the fund. So FATCA is clearly going to present some serious data management challenges as working through the nested layers of nominee accounts down to the actual investors – this is challenge for the fund, the transfer agent and any distributors or feeder structures to the fund.

So do all funds distributors need to be FATCA compliant? There is a choice – if the distributor is compliant there should be no problems – if the distributor is a non-participant then the fund needs to apply 30% withholding tax to all investors in this distributor.

So does this mean the fund is just an agent for the IRS?…It would seem so.