G8 foreshadows global FATCA

As expected G8 countries wrapped up their summit in Northern Ireland earlier this week vowing to clamp down on money laundering, tax evasion and corporate tax avoidance. Private equity tax lawyers thinking three steps ahead are predicting the creation of a massive and complicated global tax information exchange network to be used by major industrialized nations trying to sniff out tax cheats. 

“We’ve already seen the introduction of the US FATCA [Foreign Account Tax Compliance Act], so I think the rest of the world is catching up to the that,” said one New York tax lawyer. 

FATCA requires foreign financial institutions, including private equity firms, to report tax information on their US clients – or face a hefty 30 percent withholding tax. Other countries have followed the US’ lead by introducing their own FATCA-like legislation. In April the UK, France, Germany, Italy and Spain developed a multilateral tax information exchange plan that uses FATCA as its blueprint. 

The effect of greater tax transparency on private equity will be relatively small compared to banks and other financial institutions that the reforms are targeting, agree multiple tax experts. 

“To the extent that private equity firms are just making yet another disclosure to tax authorities, it shouldn’t be a problem. General partners are already doing their best to pay what taxes they owe, so more transparency wouldn’t change that,” said a second New York-based private equity tax lawyer. 

Instead talks of reform are being targeted at firms such as Google and Amazon – who have ignited controversy by strategically domiciling their assets and intellectual property in tax-friendly jurisdictions – leading G8 countries to target offshore financial centers where hundreds of billions of tax dollars are out of reach. The use of blind trusts and intermediate holding companies in tax planning strategies has fueled the controversy. 

Private equity firms’ use of offshore domiciles such as the Cayman Islands for US investments, and the Channel Islands for EU investments, does not appear to be under threat, tax experts agree. “The real problem is the tremendous cost and effort to comply with tax reform,” said the first New York tax expert. 

GPs are individually spending “tens of thousands of dollars on accountants, law firms and software providers to comply with FATCA”, he said. To comply with FATCA, GPs are amending their existing on-boarding processes and speaking with third-party experts to keep abreast of new compliance developments, among other considerations. 

While compliance costs may be GPs’ primary concern from greater tax transparency, one UK-based tax partner said confidentiality will also be an issue going forward.

“Many firms will have misgivings about handing over sensitive tax details to tax authorities they may regard as not competent,” he said. 

The G8 summit has created a stir over tax transparency, but legal experts expect reform to be a long-term process.  

“It’s not surprising that these [G8 agreement] papers have been produced and signed but there is a lot of ‘should’ wording in these declarations. It remains to be seen what actually happens as a result, although there is certainly  strong economic and political pressure for change,” said Heather Corben, tax partner at SJ Berwin.

Nicholas Donato contributed to this report.