US tax authorities extended deadlines that will provide GPs an extra six months to register their names with the Internal Revenue Service as part of the massively complicated US Foreign Account Tax Compliance Act (FATCA).
For those that fail to comply, the withholding of US dividends, interest and other sources of income has also been delayed six months.
FATCA requires foreign financial institutions (FFIs) to report tax information on their US clients or face a hefty 30 percent withholding tax.
The deadline for GPs to begin submitting tax information on their US investors remains March 31, 2015. However information reported only needs to cover the 2014 calendar year, and not 2013 as well, as indicated in prior IRS guidance.
“This [FATCA deadline extension] is really helpful because it will give funds more time to get their information together to register and get their procedures in place,” said Scott Jones, tax partner at Proskauer.
Jones adds that private equity firms are in “different places” with some being relatively ready to meet FATCA’s requirements while others are not.
Joan Arnold, a tax partner at Pepper Hamilton, said private equity was late to the party in understanding FATCA’s implications and what it meant to achieve FATCA compliance.
Arnold added the industry will benefit from refinancing distributions not potentially being withheld for a further six months. “[GPs] are making distributions from refinancings, and those distributions from a US portfolio company will be US-sourced income that in January would have been subject to withholding.”
She elaborated that some fund managers are not yet in a position to demonstrate their entire LP base is FATCA compliant, meaning such distributions face withholding tax. “For those biting their nails that the funds would have to withhold refinancing distributions, the January reprieve was very welcome,” she added.
Steve Bortnick, also a tax partner at Pepper Hamilton, welcomed the extensions as well. He added that the extra time will give the IRS time to respond and clarify the areas of the act that are still open to interpretation. “The more we get to speak to the IRS the better.”
The extensions were attributed to an “overwhelming interest” from foreign countries to prepare and sign tax information exchange agreements, according to a statement from the Treasury.
“Given the groundswell of international interest in FATCA, we are providing an additional six months to complete agreements with countries and jurisdictions across the globe, before withholding begins,” said Robert Stack, treasury deputy assistant secretary for international tax affairs.