and their clients. Most offshore hedge funds that have US source income will need to enter into an FFI (Foreign Financial Intermediary) agreement with the IRS. The hedge fund will then be responsible for:
• Identifying US account holders within the fund; • Reporting certain information to the IRS regarding US accounts;
• Verifying its compliance with its obligations pursuant to the agreement;
• Ensuring that a 30 percent tax on certain payments of US source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information; and
• Calculating and reporting a pass-through payment percentage figure.
If the fund itself does not enter into an FFI agreement, or is not otherwise compliant with FATCA, it could be subject to a 30 percent withholding tax on gross sales proceeds. FFI registration with the IRS
completion of Form PF should be a collaborative effort between a fund administrator and its clients.
In the case of FATCA, the most significant impact for the fund administrator will be on shareholder systems, which may need to be updated so that they identify US investors properly, based on the information that is available in the current records. This might seem straightforward, but a fund will be required to look for indicia, or evidence that an investor is a US person. For example, an investor from Europe who sent a subscription from a US bank account would need to be further investigated to determine whether s/he is, or is not, a US person.
FATCA includes a list of prescribed information that may need to
be included in your shareholder system to keep track of the status of investors. The shareholder systems may also need adjustment to be able to track recalcitrant investors (investors who do not provide sufficient information to reveal whether they are a US person). For such investors, cash systems may also need to be adjusted to ensure any future payments are subject to withholding.
As with Form PF, a partnership approach for FATCA compliance is recommended. One approach is for the fund administrator to affirm to the fund that specified procedures have been applied to the records of the fund as maintained by the fund administrator. The fund can then take this representation and incorporate it into its records to come to an overall conclusion with respect to FATCA compliance.
“While the responsibility for regulatory reporting such as Form PF and FATCA will rest with the hedge fund, the fund administrator will need to be involved.”
by hedge funds will commence on January 1, 2013, and to ensure additional withholding taxes are not levied against the hedge fund in the future, this process must be completed by June 30, 2013. A hedge fund actually has until December 31, 2013, to register as an FFI, but the IRS will not guarantee the agreement will be in place to avoid certain tax withholdings which take effect on January 1, 2014.
While the responsibility for regulatory reporting such as Form PF and
FATCA will rest with the hedge fund, the fund administrator will need to be involved. If you have visited your hedge fund clients recently, the question “What is your solution for Form PF and FATCA reporting?”, invariably comes up. Hedge fund administrators will need to address these questions, and rather quickly, given the upcoming reporting deadlines.
Hedge funds will be looking to their hedge fund administrator to assist them with compliance with these new regulatory reporting requirements. For example, Form PF has many data points that need to be completed. A fund administrator may need to conduct reviews of its systems to determine which parts of Form PF can be sourced from existing data currently maintained by the administrator. A secondary review may need to be done to determine whether there are external solutions that can be implemented to source data for Form PF based on existing information maintained by the administrator, such as risk reporting elements.
Finally, the administrator and the client need to agree which data will be produced by each of them respectively. Ultimately, the
42 CAYMAN FUNDS | 2012 Form PF and FATCA reporting may both require an element of IT
investment on the part of the administrator, and both will take time. It has been estimated that it will take up 75 hours for a large advisor to develop the initial reporting, and 35 hours for each subsequent report. The SEC has noted that it expects some, or all, of Form PF reporting to be outsourced, or internal reporting systems developed. Clearly, there will be a view on the part of many clients that administrators should bear some of this reporting burden.
In the case of FATCA, the cost of implementation is even more significant. It has been estimated that the cost for each multinational bank to implement FATCA will be $100 million. While it will not be as much for individual fund administrators, it gives an idea of the scale and impact of this legislation.
Now is the time for fund administrators, if they haven’t already done so, to conduct a review of their systems and start working with clients to support their regulatory and FATCA reporting requirements. There will be a level of time and IT investment, but this should pay off for the fund administrators so that they can increase the scope of value-added services they offer to clients. Depending on the level of value-added services offered, additional revenues should be available to the fund administrator. Finally, enhanced regulatory and FATCA reporting to clients will make them more connected to the administrator through greater integration and dependencies.
Brian Burkholder is head of the single manager division of UBS Fund Services Americas. He can be contacted at:
brian.burkholder@ubs.com
Brian Burkholder is based in the Cayman Islands. He is a Canadian chartered accountant.
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