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The Investment Fund Industry Should be Preparing for FATCA Already

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Multifonds, a leader in flexible, multi-jurisdictional, single-platform fund administration software, says that while in some cases FATCA’s implications remain unclear, on other points asset managers, administrators and vendors can make progress now.

The US’s Foreign Account Tax Compliance Act (FATCA), which will come into effect on January 1 2013, has far-reaching implications for the investment fund industry. The new regulations force financial institutions to adapt to more stringent information and reporting requirements, with more rigorous identification and documentation of investors, and withholding taxes for non-compliance.

FATCA requires the automatic exchange of information about US persons with foreign financial accounts. It achieves this by subjecting each foreign financial institution (“FFI”) and other foreign entities that invest their own funds or their clients’ funds in US securities, to a 30% US withholding tax on US-sourced income and gross proceeds resulting from sales of US-sourced instruments, unless the foreign institution agrees to tell the US government information about the foreign financial accounts of US persons.

With that in mind, Multifonds organised workshops with fund accounting and transfer agency clients to assess how prepared they were, and what still needed to be done for them to become fully FATCA compliant on schedule. The workshops, which included 28 individuals from 11 tier 1 asset managers and fund administrators, considered the implications of FATCA in terms of recording, withholding tax calculations and reporting.

The main conclusions were that, in the case of fund accounting, the new regulations will mean additional requirements to record static data, such as whether an instrument is categorised as US or not, as well as the calculation of the pass through payment percentage (“PPP”) of the fund. For transfer agency, the static data recording needs centre on the attributes of the fund and investors – whether they are US or non-US – as well as the withholding calculation based on the PPP.

However, some aspects of the FATCA regime remain unclear, particularly the required reporting.

Alexandre Delabre, Head of Transfer Agency Product Management at Multifonds and a member of the ALFI FATCA working group, said: “Although the regime will not come into force until January 2013, with the first phase of requirements coming into effect on July 1 2013, asset managers and fund administrators should look to take action now and start to classify their funds and investors based upon the expected FATCA regulation. Once the regulation is issued, asset managers and fund administrators will only have a short period of time to gather the required investor documentation in order to be ready to comply by the effective date.”

The new regulations go well beyond the incumbent Qualified Intermediary (QI) regime, which will remain in place. Non-compliance with FATCA would be expensive and damaging to financial institutions’ customer relations if clients are unnecessarily subject to the withholding tax. However, compliance will require them to have their confidential account information provided to the US’s Internal Revenue Service.

Keith Hale, Global Head of Transfer Agency at Multifonds, said: “It is very clear that FATCA will have a significant impact on the global investment fund industry, including UCITS funds, and not just on US corporations, funds and investors. We see the change having a similar level of systems impact as the European Saving Directive in 2005. In addition, it is quite possible that other governments around the world will implement similar reporting requirements equivalent to FATCA in the future.”

The Multifonds user group is meeting again w/c September 26 to review progress towards the resolution of the outstanding issues, and to agree the first phase of development required.

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