Fatca: why European GPs should beware

At a seminar held in London last week by Ipes, after an hour-long talk on the ramifications of Fatca, an audience member asked: "All of our investors are European institutions, will Fatca apply to us at all?"

Tim Andrews, director at Ipes, replied: "Ultimately, Fatca applies at local government level; it's no longer just about US individuals."

George Cotterell, solicitor in Macfarlanes' tax and structuring group pointed out: "A lot of private equity firms will find they aren't caught by the regulation but they still need a GIIN (Global Intermediary Identification Number), so they still need to go through the classification process."

Scope of new regulation set to continue widening

The panellists' response highlighted two of the most relevant parts of this new regulation for European private equity.

Fatca is the result of years of effort and attempts by the US government to ensure all US citizens are paying tax. "To understand Fatca you need to understand how the US deals with tax," said Cotterell. "All US citizens are subject to tax, even if not a resident in the US. This system has caused a problem for the Internal Revenue Service (IRS). There have been lots of initiatives in the past to tackle the issue and Fatca is the IRS's solution – it forces foreign institutions to pass information to the US about Americans' financial accounts. It puts the onus on reputable institutions to comply, and there is a charge for non-compliance."

Global gathering
Julio Castro, principal at KPMG's US tax practice, outlined the origins of Fatca: "The initial reaction to Fatca was that it was madness. But, over time, funds and banks have been discussing the new rules with their own authorities, as local governments must assist institutions with compliance. The UK found the proposed ruling interesting and wanted to do the same."

As the regulation has developed, according to Castro there are now more than 30 inter-governmental agreements (IGA) in place, with a further 40 on the way. "These agreements mean that all information can be exchanged in a reciprocal manner." Furthermore, the OECD is now modelling its tax information exchange on Fatca, which will see every country executing on the agreement so that information can be exchanged on a multi-lateral basis.

The other key aspect of the new rules is obtaining a GIIN. According to Cotterell, all institutions will need a GIIN going forward. Andrews agreed: "GIIN is vital, especially when exposed to US counterparties (banks and institutions) as they will require a GIIN in order to transact with you."

Four stages
Complying with the new rules can be broken down into four main stages:

1. Classification of fund structure: working out what entities fall into scope, required for obtaining GIIN number. Can be done internally or externally.

According to Cotterell: "There are lots of people saying they don't have US investors and they don't do deals in the US, however, the legislative architecture of Fatca has evolved into global legislation; it is now domestic law in each jurisdiction and there are charges for non-compliance."

The most pressing aspect of the classification process is that it is the only way to obtain a GIIN, which will be crucial for dealing with US institutions in the future.

One might expect the regulation to only focus on the fund itself; however, this regulation is big and wide. As a typical fund structure incorporates lots of different parties and groups, current guidance from HMRC is that the net has been widely cast – Fatca could potentially include the majority of fund structures as well as all holding companies.

According to Andrews: "There needs to be some evidence to support classification; ideally an audit pack containing core documents – LPA, certificate of registration, evidence of being listed (if a public entity)."

Castro added: "We are in the classification process for many clients and there is a lot of uncertainty. Some funds have more than 500 entities and we might need to register each one. On top of that, we're seeing holding companies in different jurisdictions. As the US and the IGAs have different rules, treatment of classification for each one could be different."

2. Registration: for entities that fall into the scope, they need to register and appoint a responsible officer, all done online and once approved GIIN number will be given

The registration process is done entirely online in four stages. First, an online profile must be created. Second, complete the registration form. Third, sign and submit the form. Fourth, receive approval; this is where the GIIN is given.

"As you go through the process, you are given an ID and a password. If registering lots of entities, make sure you note down each ID and password as they are needed to access the GIIN," said Andrews.

3. Investor due diligence: working out which investors in which fund structure are reportable

This is predominantly an administration exercise and the objective is to identify whether investors are reportable. "The immediate process here is to update the KYC process by the end of June. It needs to include information on the investor's tax registered address and GIIN. We're already seeing bigger funds send out investor audits," added Andrews.

4. Reporting: ongoing submission of information

According to Ipes's Andrews: "While we don't know what reporting will look like yet, what is clear is that if you can make your reporting as systemised and automatic as possible, it will be much simpler all round."

Three key dates
1. The immediate priority is for end-June, by then all KYC processes need to be Fatca compliant
2. 22 December: deadline for registration and classification stages
3. End-May 2015: UK start date for reporting

In order to understand Fatca and ensure full compliance, it is crucial the new regulation is understood as local ruling, rather than a US-driven attempt to clamp down on tax avoidance. While its roots can be traced back to the IRS's efforts to better tax US citizens, the rules have evolved dramatically and today Fatca is a global concern. Furthermore, with an ever-growing list of IGAs and the OECD's intention to use the new programme for its own tax information exchange system, private equity firms would do well to initiate the classification and registration processes immediately.

The panellists advised private equity firms to address the classification process in a serious manner, ideally creating an audit pack along the way to satisfy any potential questions from the regulator down the line. Firms would do well to build a reporting system into existing processes, like those carried out for capital accounting – "That is the best way to reduce the burden and the cost," said Andrews.

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