FATCA & Beyond - Global Information Sharing and Private Equity Funds

Transcription

1 FATCA & Beyond - Global Information Sharing and Private Equity Funds Jenny Wheater August Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm and Affiliate Offices New York London Singapore Philadelphia Chicago Washington, D.C. San Francisco Silicon Valley San Diego Boston Houston Los Angeles Hanoi Ho Chi Minh City Atlanta Baltimore Wilmington Miami Boca Raton Pittsburgh Newark Las Vegas Cherry Hill Lake Tahoe Myanmar Oman Mexico City Duane Morris LLP A Delaware limited liability partnership

2 Issues What is FATCA? What further information sharing was established as a result of FATCA? How do these impact funds? What practical steps should funds take? Future developments 1

3 General This is a very complex area and is fast developing. These slides are intended to give a general overview and not detailed advice. Application of information sharing regimes will be fact specific. These slides are correct as of August 2014 but things could change beyond that date. 2

4 What is FATCA? FATCA is the Foreign Account Tax Compliance Act 2008 which adds new sections to the United States Internal Revenue Code. Although part of United States law, FATCA only applies to certain foreign entities. FATCA imposes a withholding tax of 30% on most US source income and gross proceeds payable to affected foreign entities unless such entity enters into an agreement with the IRS to supply details of any US account holders it has. Account holders includes owners, partners etc. in relevant cases. 3

5 What is FATCA? FATCA arose out of concern that many US nationals were concealing their assets in overseas accounts. Thus, FATCA requires the entities in which these accounts are held to look for and name these US nationals or face heavy withholding. Agreement with the IRS requires agreement to conduct due diligence etc. to ascertain the existence of US account holders. 4

6 What is FATCA? FATCA entered into force in July First FATCA filings due in

7 FATCA fallout Many other tax authorities were inspired by the idea of using the FATCA concept to identify any of their own nationals who may be concealing assets overseas. The first step in extending the idea of exchange of information arose in the form of Intergovernmental Agreements ( IGAs ) for FATCA compliance. 6

8 IGAs There are two types of IGA Model 1 and Model 2. Under Model 1 entities report information on their US account holders to their own tax authorities with modified due diligence requirements in ascertaining which accounts are US. Under Model 2 entities still report to the IRS but with modified requirements. IGAs also eliminate some burdens of FATCA e.g. requirements to close non-compliant accounts. 7

9 IGAs Importantly, some Model 1 IGAs are reciprocal. Under reciprocal IGAs, certain US entities have similar (but less onerous) requirements to report accounts held by residents of the other jurisdiction. Reciprocal arrangements expanded concept of information sharing through tax authorities. 8

10 UK FATCA Following the enactment of FATCA, the United Kingdom began reviewing the possibility of further information sharing. In 2013 the UK entered into a series of agreements to improve international tax compliance with its Crown Dependencies and Overseas Territories. Agreements with Isle of Man, Jersey, Guernsey and Gibraltar are reciprocal. Agreements with the Cayman Islands, Bermuda, Montserrat, Turks & Caicos, the BVI and Anguilla are nonreciprocal. 9

11 UK FATCA For reciprocal agreements, certain entities in the UK must report account holders in the other jurisdictions. For non-reciprocal arrangements, only entities in the other jurisdictions must report any UK account holders. There are no requirements for UK businesses. These agreements became known as UK FATCA 10

12 Common Reporting Standard In 2013 the G20 countries announced their intention to introduce a global system of exchanging information between jurisdictions in relation to the holders of financial accounts. Idea was to make the FATCA concept a global one. The nickname GATCA Global Account Tax Compliance Act was coined but now the term CRS for Common Reporting Standard is used. 11

13 Common Reporting Standard In February 2014 the OECD published the Model Competent authority Agreements for a Common Reporting Standard. Approved by the G20 countries as a CRS model. In August 2014, HMRC in the UK published a discussion document for the implementation of the CRS in the UK, due in

14 Impact on funds FATCA and the other information sharing initiatives impact private equity funds because funds are likely to be regarded as financial institutions for reporting purposes. Financial institutions are subject to the maximum due diligence and reporting burdens under information sharing. Within a fund structure there may be more than one financial institution the carried interest vehicle, the manager and certain holding companies could all come within the definition depending upon the facts. Even those entities which are not financial institutions need to consider their status in terms of being active or passive nonfinancial entities. There are some, albeit lesser requirements for passive non-financial entities. 13

15 Impact on funds With the various implementations of information sharing, funds are not well served. For example funds are mostly structures as partnerships and where a partnership is resident is not clear. Both the Cayman Islands and the UK have a FATCA IGA but Cayman regards a partnership as resident where it is organised and the UK regards a partnership as resident where it is managed and controlled. Thus an English limited partnership with a Cayman general partner is not regarded as resident in either jurisdiction under the IGA interpretation. Duplicate reporting is inevitable as things currently stand. If a fund has a holding company subsidiary which fits the definition of a financial institution then the account holders will be the same but the fund and the holding company could be in different jurisdictions, necessitating two reports. 14

16 Impact on funds IGAs under FATCA are subject to local law. This means that all affected entities must comply. Under FATCA, it was open to an entity not at risk of US withholding not to comply. This is likely to become the norm as the CRS develops. 15

17 Impact on funds any light? Under FATCA, the concept of sponsorship within a fund structure has provided some assistance. The manager of a fund is likely to be able to sponsor other financial institutions within a structure. However, this must be done on the basis of the law in the country in question. Thus a Cayman fund with a carry vehicle in Jersey will need to report under both IGAs. If a country with no IGA is involved reporting will be under FATCA. Many fund investors will be exempt from FATCA (e.g. pension funds). These may usually self-certify their status and funds may rely on this. Going forward, it is likely that some of the issues described above will be addressed between jurisdictions. Collecting information will soon become the norm. 16

18 What should funds do? Right now, the global focus needs to be on FATCA and, in the case of the jurisdictions impacted, UK FATCA. The CRS, while moving quickly, is not yet in force. Thus funds need to secure compliance with FATCA. This can be done by a series of steps. 17

19 FATCA steps Identify jurisdiction of each entity involved in the fund structure. If there is an IGA then the IGA must be reviewed; if not, then FATCA itself will apply. Identify the FATCA status of the entity. Is it a financial institution ( FFI ) or a non-financial institution ( NFFE ). If it is an NFFE then is it active or passive? Is it exempt from FATCA compliance under FATCA or a relevant IGA? Determine manner of compliance will one entity within the fund structure sponsor others? For entities requiring it, obtain a Global Intermediary Identification Number ( GIIN ) via the FATCA portal. If required, commence due diligence under FATCA or the relevant IGA to identify reportable accounts. 18

20 FATCA steps Going forward, funds will need to supply their GIIN to other financial institutions to confirm their compliance with FATCA. Funds may also need to supply their GIIN to US withholding agents in form W-8BEN. Funds will need to consider an intake questionnaire or similar. This is to ensure that they can comply with FATCA by way of due diligence required of their investors. A standard form should be prepared. Future fund documents should be checked to ensure that they allow for such questionnaire. 19

21 Conclusion The aforementioned steps may be simple or complex, depending upon the fund structure involved. However, funds need to consider this immediately in the case of FATCA. Compliance with the CRS is likely to be similar but go beyond US accounts. Further developments are likely. 20

22 Further information Jenny Wheater, Partner, London +44(0)

23 FATCA & Beyond - Global Information Sharing and Private Equity Funds August Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm and Affiliate Offices New York London Singapore Philadelphia Chicago Washington, D.C. San Francisco Silicon Valley San Diego Boston Houston Los Angeles Hanoi Ho Chi Minh City Atlanta Baltimore Wilmington Miami Boca Raton Pittsburgh Newark Las Vegas Cherry Hill Lake Tahoe Myanmar Oman Mexico City Duane Morris LLP A Delaware limited liability partnership