HIRE Act - Issues for management companies, their funds and their service providers | Brochure
Foreign Account Tax Compliance Act
Taking yet another step towards the goal of addressing offshore accounts reporting, the Foreign Account Tax Compliance Act (‘FATCA’) will impose a 30% withholding tax on income, capital, and other payments from the U.S. unless Foreign Financial Institutions (‘FFI’)1 enter into an agreement with the IRS to report all U.S. investors.
Enacted on 18 March 2010, FATCA has extensive ramifications affecting the commercial basis on which financial institutions, including non-U.S. funds, hold U.S. assets and deal with U.S. clients and investors. While regulations are yet to be drafted to give practical effect to the legislation which applies to payments made after 31 December 2012, the support for this law dates as far back as the 2007 Stop Tax Haven Abuse bill co-sponsored by the then Senator Obama.
Many institutions have concerns that the extent of the changes required indicates that the time available to become compliant may be insufficient. FATCA requires foreign financial institutions including non-U.S. investment vehicles, their management companies and their service providers to obtain information about every holder of every account across all of their affiliated entities, to comply with verification and due diligence procedures to identify U.S. accounts and to report annually with respect to any U.S. account or pay the new 30% withholding.
Securities lending transactions
Furthermore, the HIRE Act includes a provision focused on securities lending transactions with a U.S. element. Generally, dividends received from long positions on U.S. equities are subject to 30% U.S. withholding tax for a beneficial owner of the dividend not otherwise entitled to a reduced rate under an income tax treaty with the U.S. or under U.S. domestic law. Historically the tax treatment imposed on payments made under swap arrangements was generally determined by reference to the residence of the recipient. Consequently, persons not entitled to a reduced rate of U.S. withholding tax could, it is argued, enter into equity swap transactions with persons eligible for reduced rates and receive equity based returns potentially subject to a lower rate of U.S. withholding tax.
In an effort to curb abuse in this area, the HIRE Act imposes a 30% U.S. withholding tax on ‘Dividend Equivalent Payments’. This has been defined as (i) any substitute dividend; (ii) any payment made under a specified notional principal contract (SNPC) that directly or indirectly is contingent upon, or determined by reference to the payment of a dividend from sources within the U.S.; or (iii) any payment determined by the Treasury Department to be substantially similar to a dividend or its equivalent.
While the timeline for FATCA allows for some adjustment time, the effects on securities lending transactions have begun to phase in starting in September 2010.
A practical approach
Management companies, on their own account and on behalf of their funds, in addition to their service providers, need to act now in order to understand the scale of the compliance challenge they face and to have a chance of an orderly and cost effective implementation of the required process and procedures.
The U.S. Treasury and the IRS have requested comments with respect to some specific aspects of the FATCA legislation by 1 November 2010. To provide comments many investment managers are:
- Undertaking FATCA communication programs, including workshops, to increase the awareness and understanding of the new requirements within the business
- Undertaking risk assessments, including a gap analysis for existing compliance processes which need to be scalable to accommodate the demands of other potential disclosure regimes, for example OECD and European Savings Directive
- Developing compliance processes and establishing effective project management structures to implement those processes effectively
- Understanding the associated systems, data and process implications
- Specifying and implementing the required systems, data and process enhancements
How Deloitte can help
Our team of specialists can provide assistance and advice to management companies, their funds and their service providers through the aspects of the compliance implementation.
These services include:
- Performing a customised review of independent asset managers to help them determine the potential impact FATCA will have on their business. This includes working with the product and technology personnel to better understand your business and offerings in order to provide an indication where resources may be needed to address the impacts of FATCA
- Analysing pressure points in your organisation under the current FATCA legislation that may be updated once the supporting draft regulations are available
- Interacting with other service providers to the funds of the investment managers in order to advise on your efforts to carry out the required compliance
- Working with the investment manager to segregate historical legacy areas where FATCA will impact your business and assist with establishing a clean platform for new fund launches or updates to the funds offering documents
- Working with you to assess the immediate impact of your funds that engage in securities lending
Please contact your usual Deloitte contact to discuss what may be the right range of these services for your specific needs.
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