US agrees to enter Fatca partnerships

US authorities have agreed to pursue an intergovernmental framework with a number of European countries for the implementation of tax rules (Facta) that is expected to lighten the regulatory burden for fund managers, experts say.

The US, France, Germany, Italy, Spain and the UK last week published a joint statement that sets out a common approach to combat tax evasion, where firms would report information on foreign taxpayers to their local authorities. Other fund centres, notably Ireland and Luxembourg, have yet to reach an agreement.

The Foreign Account Tax Compliant Act (Fatca) originally required foreign funds to enter into an agreement with the US Internal Revenue Service (IRS) or otherwise face hefty tax penalties.

Under the new proposals, firms in Fatca-partnering countries will not have to enter into a detailed agreement with the IRS, but only “register” with the tax authority.

These firms would be able to “comply with their reporting obligations under Fatca by reporting information to the Fatca partner rather than reporting it directly to the IRS”.

The US authorities would eventually get the information about its taxpayers, while decreasing the reporting costs for foreign firms.

Adrienne Baker, a Boston-based partner at Dechert, says: “This would be consistent with the policy of the US Treasury, which is not to generate revenues but rather to get information.”

The US concessions are expected to save European fund managers up to $1bn in costs. However, KPMG says it is not all rosy as managers will each still have to face between $15m and $150m of Fatca compliance costs over the next five years. International managers in particular could face high costs.

Adrian Harkin, global Fatca leader at KPMG, says: “If you are an asset manager based in only one geography then the introduction of bilateral agreements could be helpful.

“But asset managers based in multi-geographies might fear [they] have to understand different versions of Fatca. It is going to be a very complex programme [for them].”

According to KPMG, the $1bn Fatca savings for fund managers represent around 10 per cent of the total savings for foreign firms brought in by the new rules. The insurance sector is a “bigger winner” than the asset management industry, says Mr Harkin, but the overall message is that everyone has been given some help.

Asset managers will benefit, for example, from the introduction of “deemed-compliant” categories, which will have a significantly lower compliance burden than previously planned. These firms will not need to enter into an agreement with the IRS, but will simply “register” with the tax authority.

These exemptions have been granted to local banks, smaller banks and collective investment vehicles, carving out around 1,200 financial institutions, according to KPMG.

The US Treasury says this will allow the IRS to focus “the application of Fatca on higher-risk financial institutions that provide services to the global investment community”.

Another new rule to benefit asset managers is the possibility of using existing ‘know your customer’ or anti-money laundering processes.

Although the five European countries would mostly enact some form of local legislation that requires due diligence and incentives to give information, these rules are unlikely to be as punishing as the US ones.

According to original proposals, Fatca would impose a penal 30 per cent tax on any investments in US equities, unless the fund requests every investor to provide evidence on whether or not they are US taxpayers, the UK’s IMA says.

Julie Patterson, director of authorised funds and tax at the IMA, says: “The approach envisages firms reporting to their domestic authorities and governments sharing that information. In practice, this would mean that UK firms and funds would not have to sign up to an agreement with the IRS, reducing many of the industry’s legal concerns with the original proposals.”

Europe’s largest fund domiciliation centres, Ireland and Luxembourg, have not signed up to the mutual implementation of Fatca-type rules, but Ms Baker says she hopes they would do so in the future.

Baptiste Aboulian is associate editor at Ignites Europe, a Financial Times publication, where this article first appeared