Many managers are still in the process of dealing with FATCA’s requirements and implications, despite the implementation timeline is looming large.
According to an online survey conducted in December 2013 by SEI in partnership with DMS Offshore Investment Services Ltd, awareness of FATCA’s imminent deadline is surprisingly low.
FATCA compliance – behind the curve
Foreign Account Tax Compliance Act (FATCA) is designed to prevent tax evasion by U.S. taxpayers utilizing unreported foreign financial accounts. The act stipulates U.S. persons to report the financial accounts they hold outside the U.S. and foreign financial institutions (FFIs) to report U.S. account holders, with all of the information ultimately going to the Internal Revenue Service. The measure was enacted in March 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE).
According to the survey, managers are behind the curve on FATCA- related preparations. Some of the factors that lead to this conclusion include the fact that only 14% of managers have executed service agreement with reporting FFI’s administrator. Interestingly 26% of the respondents are either unprepared or are not aware of the requirement.
Moreover one-third of the survey respondents has either not yet established a plan for completion of investor due diligence nor have decided on how to proceed. 41% of the respondents had not yet decided whether to rely on existing due diligence documents or obtain new W-8 and W-9 forms from all investors in the reporting FFIs.
The following chart highlights the FATCA timelines between 2014 and 2015:
The following chart highlights the FATCA timelines between 2016 and 2017:
Over 48% of the survey respondents said they didn’t know the deadline by which FFIs are required to have a Global Intermediary Identification Number (GIIN). An FFI is defined as a ‘financial institution’ organized outside the U.S. such as a bank, investment fund, broker-dealer or custody bank.
Once registered, FFIs must certify in 2015 that they were compliant with FATCA obligations as of July 1, 2014. In order to ensure that they are registered on the first GIIN list, which comes out on June 2, 2014, FFIs must register by April 25, 2014.
The survey also reveals managers are underestimating the costs of FATCA compliance, with 63% estimated legal documentation and advice to cost less than $10,000 and 69% estimated an administrator’s FATCA due diligence to cost less than $10,000.
According to June Oakes, Director of Regulatory and Compliance Solutions for SEI’s Investment Manager Services Division, as the FATCA regulation imposes a withholding tax on institutions that fail to provide the information required, FATCA has become an important and urgent element of managers’ businesses.
The survey report highlights the following key action steps may be adopted to meet the FATCA requirements: