For those closely tracking the US Foreign Account Tax Compliance Act (FATCA), the next big date to circle in the calendar is April 25, 2014 – the day when private equity firms with any US investors must be registered with the Internal Revenue Service (IRS).
In 21st century fashion, the US tax authority is simplifying the registration process by allowing GPs and other financial institutions to register online. The IRS launched the portal on its website in late August, leaving firms eight months until the April registration deadline.
The portal will allow GPs around-the-clock access to their FATCA accounts, provides a secure channel to update contact information, receive notices from the IRS and manage their member information.
IRS: seeking online
Even those firms who will submit tax information to their home government, as opposed to entering into a direct reporting relationship with the IRS (as a percentage of GPs will need to do) must complete the online registration form. Those that don’t will suffer a painful 30 percent withholding tax on payments travelling out of the US.
Some firms may think they do not have to register by virtue of having no US sourced income (and thus no money for the US taxman to withhold for non-compliance). However legal sources warn that many governments have signed bilateral information exchange agreements under FATCA that require all financial institutions, even those without US investors, to identify themselves with the IRS.
It’s fair to assume some GPs will feel uncomfortable submitting key firm information to a foreign power – especially one known for amassing sensitive data on a global scale – but tax experts state the form will be used by the IRS to issue what’s called a Global Intermediary Identification Number (GIIN). The GIIN helps the US identify a financial institution as FATCA-compliant to withholding agents by collecting details about the firm’s s name, mailing address and other basic information. The GIIN categorizes financial institutions by type (i.e. bank, broker-dealer, private equity firm and so on) and category (whether reporting as a single FFI or as part of a group of FFIs for example).
STEP BY STEP
When registering, the first question GPs will answer is what type of foreign financial institution (FFI) they are. Most GPs will label themselves a “Sponsoring Entity”, says Jenny Wheater, a tax partner at Duane Morris. That’s because private equity firms will want to take on the reporting duties of all funds underneath their umbrella, including any carried interest vehicles, feeder funds and holding companies that sit beneath them. Wheater explains each of these entities will still receive its own GIIN – and be classified under the “sponsored investment entities category” as a “registered deemed compliant FFI” – but channel basic details through its parent entity (i.e., the management firm).
GPs need to take care when sponsoring entities based in another jurisdiction. The UK for instance will require local GPs taking on the reporting duties of funds based, in say, Luxembourg to adhere to the FATCA agreement signed by Luxembourg (and not the one agreed by the UK for that particular entity). GPs sponsoring entities in a country that has not yet signed a FATCA agreement can follow the agreement signed by their local tax authority.
For a lot of FFIs, located in jurisdictions where IGAs are still being negotiated, there is little merit in registering early
The second step for firms will be to confirm whether they will be reporting directly to the IRS as a foreign financial institution (FFI) or through their home government under a FATCA Intergovernmental Agreement (IGA).
GPs operating in countries without an IGA, and who prefer not reporting directly to the IRS, may want to wait before registering. Originally the US said GPs could treat soon to be signed FATCA agreements as effective for all intents and purposes, but later changed course, stating the agreements must be inked into law before GPs can start relying on them.
“For a lot of FFIs, located in jurisdictions where IGAs are still being negotiated, there is little merit in registering early – they may as well wait until their IGA is in place,” advises Wheater.
The registration process ends here, but the IRS will not start issuing GIINs until 2014. Nonetheless, the April deadline marks another significant milestone for private equity firms who are making whatever preparations they can to meet the massive US tax law.