Asset managers are stalling on making the operational changes necessary to comply with the Foreign Account Tax Compliance Act (Fatca) for both practical and political reasons, according to Kerry White, managing director, global product management at BNY Mellon Asset Servicing.
This piece of US tax regulation is intended to enforce the disclosure of US taxpayers and therefore capture all potential tax revenue that is payable on the worldwide income of US persons in order to prevent tax evasion.
It will require all firms earning income on US assets to report on this fact, or else face a 30% withholding tax.
For asset managers across the globe, they have to know exactly when, where and how they are earning revenue on US assets. For all non-US foreign financial institutions (FFIs), they will need to enter into agreements with the US Treasury by June 30 2013.
In addition, Fatca also requires that an FFI obtain, verify and transmit information to the Internal Revenue Service (IRS) on account holders that that refuse to sign a waiver permitting an FFI to disclose account information under the statute, as well those that does not comply with Fatca. Under this statute, FFIs will be forced to close these accounts and/or collect the 30% withholding tax.
It’s a large task that requires an understanding of the movement of revenue to and from counterparties and clients and it will require a complete overhaul of systems and reporting structures.
Fatca is currently in draft form so the rules are not yet defined. This means while some asset managers are doing the groundwork to prepare themselves, the actual reengineering of systems has not yet taken place.
According to White at BNY Mellon, people are aware that the political landscape is subject to change before the 2013 deadline.
"Everybody is studying it, they are hiring staff to help them assess it, but they are not necessarily reengineering their systems yet. Part of it is because we have another big election before this comes into to law. You do see firms lobbying heavily, there have been pieces of legislation in the past, for example when a new tax was applied to government bonds, and then it was repealed when a new government came into play,” she says.
According to Rob Bridson a partner in PricewaterhouseCooper’s financial services tax team, such a change may be positive as the current structure of Facta goes too far.
“Widely held investment vehicles that would not have been a typical tax evasion strategy prior to the regulation will be caught by Fatca. The feeling is these vehicles would never been used for tax evasion historically, so why would you force them to comply with an onerous regime?” Bridson told Global Investor/ISF.
As it currently stands it has been created in a way that for those who want to have US investors or invest into the US, it is unavoidable.
However, some have tried. EFAMA, the association for the European investment management industry, has lobbied heavily for exemptions for ‘deemed complaint funds’, while Japanese and Australian banks want to opt out entirely and take the 30% withholding hit – the cost of which will no doubt be passed on to investors.