FATCA compliance: Easier said than done

Guess what? Fund managers are struggling with FATCA compliance. And there’s no one-size-fits-all solution 

If there was ever any doubt that fund managers subject to the US Foreign Account Compliance Act (FATCA) are underestimating how much time and expense is required to comply with the new rules, an SEI report released last week set the record straight. The most alarming stat? About half of the GPs surveyed said they weren’t even aware of an IRS registration deadline for FATCA reporting purposes – which is now just weeks away, on April 25.

However, these findings need to be put into context. FATCA is one of those sweeping laws that impacts different firms in different ways; each advisor’s compliance burden will depend heavily on its fund structures, domiciles and LP profiles. This helps to explain why some GPs are behind the curve with their preparations.

Take the April registration deadline. GPs registered by that date will have the honor of being on the first monthly list of FATCA-compliant entities, which the IRS plans to publish on June 2. For some firms, making that first list – which will be used by banks, custodians and other types of withholding agents to verify FATCA compliance – may be important in order to avoid withholding tax. For others, notably those that don’t actually have any taxable US-sourced income, missing that date will have no real consequence.

Equally, many GPs are waiting for one or more countries to sign the necessary intergovernmental tax information agreements with the US (IGAs) before they register; Luxembourg, for example, an important fund domicile due to its elaborate tax treaty network, only signed its IGA with the US last week. 

The Internal Revenue Service has to bear some responsibility for the current situation, too. Another notable finding of the SEI research was that one-third of surveyed GPs haven’t fully planned out how to gather investor information for reporting purposes. But that’s partly because many groups have been waiting for the IRS to publish the final version of its Form W-8BEN-E, designed to facilitate FATCA reporting – which only happened on Friday (and even then there were no accompanying instructions).

Other groups – generally those who are most confident in their pre-FATCA investor documentation – are planning to supplement their existing documents with any information needed to comply with FATCA as and when these various forms are finalized. That’s particularly likely for funds whose investors are largely individuals rather than institutions, says EisnerAmper tax partner Jay Bakst.

The other big talking point around FATCA compliance is whether some GPs have been relying too heavily on third-party providers – as a result of which, certain things have fallen through the cracks.

Given the bill’s complexity, some GPs may find it tempting to want one or more of their service providers to “take care of FATCA” for them (assuming the price is right). But they can’t outsource this problem entirely; ultimately, they’ll always be responsible for their own compliance.

The more prudent approach, then, might be to engage a trusted advisor (one who is well versed in FATCA) to formulate a customized FATCA action plan that sets forth in a clear manner exactly what your FATCA-related needs are – and then determine who will do what, by when, and for how much. That should avoid the sort of confusion that might lead to firms not complying with the rules, or paying for extensive service offerings that their particular funds don’t need, or something equally undesirable in between. 

One thing’s for sure though: as the bill’s deadlines begin to draw near, firms that need to act had better get a move on.