Speak to any private equity chief financial officer these days and it won’t be long until the Foreign Account Tax Compliance Act (FATCA) crops up. Usually the conversation revolves around the difficulty of complying with the act’s reporting obligations.
FATCA requires foreign financial institutions (FFIs), which include non-US private equity firms with US investors, to enter into a reporting relationship with US tax authorities or face a hefty 30 percent withholding tax on certain payments traveling outside the US.
Many technology providers and fund administrators have tried to make CFOs’ lives easier by offering to take this reporting burden off their hands. For instance, Markit and Compliance Technologies International will perform all aspects of FATCA compliance on behalf of its customers, including sending all necessary reports to tax authorities.
To little surprise, that level of service is being embraced by many busy chief financial officers. “There are a number of clients who will say they want to outsource the whole thing [FATCA]. We surveyed our clients on a similar regulatory matter and about 30 percent said they want to outsource everything,” says Jason Haft, principal at technology provider SunGard.
But market sources are advising GPs to carefully consider outsourcing their FATCA work. They say the potential ramifications if there is a compliance misstep are severe and key questions around FATCA remain unanswered.
For instance, FATCA requires GPs to name a responsible officer to accept personal liability in the event of non-compliance. But who would take on this role if the bulk of the firm’s FATCA work was outsourced: the GP or outside service provider?
FATCA allows this role to be outsourced, says Joe Holman, chief executive of fund administrator Orangefield Columbus. “But the real question is ‘can you outsource the liability?’”
Holman says he hasn’t seen any contracts from outsourced responsible officers regarding what type of liability they will accept, but he expects they will want indemnification from the GP. He argues this defeats the point of outsourcing everything as, other than accepting liability, the responsible officer will merely need to hit the send button.
And despite offering a full-suite FATCA service, service providers say that does not necessarily mean they will take on the responsible officer role either; a GP will have to name someone internally to accept liability.
So while FATCA reporting may be handled by a third-party service provider, advisors are warning GPs that they should preserve some level of control over the process and regularly discuss with their service providers FATCA compliance as an oversight measure.
Market sources say keeping a close eye on proceedings will serve the GP well in the long run too. “The whole of the regulatory ethos is a move towards proper governance,” says Chris Collins, director at technology provider Sapient Global Markets. Unfortunately for fund managers, that will mean better understanding the rules in a bill as complicated as FATCA.