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“Many people recognise that regulation is now a big part of the world we live in, and accept they’ll need to comply”

that stay outside the regime may also experience difficulties investing in other funds, which will prefer to deal with participating and deemed-compliant FFIs.

Is the worst yet to come? To add to the dilemma posed by FATCA, there is a strong possibility that this is just the beginning of a raft of similar changes – the Investment Management Association recently warned that other countries will introduce similar regimes. Indeed, there are already moves in Europe to potentially extend the EU Savings Directive – which places automatic tax information exchange requirements on banks – to other businesses and funds, although there are no plans yet to introduce any tax penalties. While many market observers believe the US is the jurisdiction with the greatest power to regulate FFIs, the EU has some serious clout too. “When the EU Savings Directive is extended to include trusts, companies and more funds, arguably it will go further than FATCA,” says Tony Mancini. “This is likely to happen within a couple of years of the implementation of FATCA, and will automatically bring in all 27 EU Member States.” The European Commission’s proposed amendments to the EU Savings Directive aim to stop EU taxpayers avoiding paying tax in their home jurisdiction on investment income from trusts and non-bank intermediaries in other EU countries and third-party countries – including Jersey and Guernsey. The EU is also looking to extend the directive – adopted in its current form in 2005 – to cover certain types of non-interest income as well as interest payments. This means the Channel Islands’ large alternative funds industry could eventually be under similar obligation to automatically exchange information on investment income payments made to EU investors. Meanwhile, Tom Carey believes that

FATCA represents the shape of things to come in an increasingly regulated global financial marketplace.

“A lot of this comes down to whether countries have a problem with their budget deficit. The advent of FATCA is the US trying

to ensure that it does not lose tax revenue,” he says. “When it comes to regulation, many people recognise that it is now a big part of the world we live in, and they accept that they’ll need to comply.” As a result, Channel Island funds and administrators are advised to ensure that any system and data management changes they implement today will meet their requirements tomorrow. “Any systems being considered need several basic functional requirements if you plan to do business with those covered by the legislation,” explains Chris Clark. “Disparate or legacy data is not a hiding place; remediation and unification will be a necessity. Legacy systems able to cope with changes elegantly across jurisdictions will need to be part of your FATCA

FATCA: the facts

The US Foreign Account Tax Compliance Act (FATCA), which was incorporated into the Hiring Incentives to Restore Employment (HIRE) Act and signed into law in March 2010, aims to clamp down on tax avoidance by US investors with assets abroad. It calls upon all foreign financial institutions (FFIs) with US investors and/or investments in US securities, to report directly to the IRS on all US-source investment, bringing major challenges with account holder identification, information gathering and reporting.

Under FATCA, all FFIs with US investors/investments will have to: l Register as a compliant FFI with the IRS by 30 June 2013; l Pledge that they will identify all their US taxpaying investors. This means that they will have to conduct due diligence on all their account holders to ascertain whether or not they are US citizens and liable for US tax; l Disclose information on the assets held by all US investors (both foreign and US securities) to the IRS, including their transactions during the course of a year, as well as their actual level of investment at year-end; l Report on assets they are managing for other financial and investment institutions, which have attracted investments from US taxpayers; l Pledge that they will withhold (and pay over to the IRS) 30 per cent of payments made to account holders, as well as other FFIs which fail to provide adequate information on their requirements to the US or their investors’ citizenship. All FFIs with US investors must also pledge to withhold 30 per cent of payments to FFIs with US investors that opt not to participate in the regime.

FFIs with US investors and/or securities that do not join the regime will be liable for a 30 per cent withholding tax on all payments of US-source income (payments made to an entity in the US) as well as a 30 per cent tax on proceeds from the sale of US securities.

October/November 2011 37

implementation plans, as will a host of transactional process considerations.” Similarly, Mancini notes that FATCA system changes may help alleviate some of the cost and work required should other countries follow the US – although the possibility of additional costs cannot be ignored. “The only consolation is that this is a cost businesses in all jurisdictions will need to incur,” he says. As things stand, the picture is still not clear for FATCA, and probably won’t be until the end of the year. As for the EU Savings Directive, that also hangs in the balance. So quite where businesses go from here is yet to be determined. l

LIZ SALECKA is’s European Editor

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