The Foreign Account Tax Compliance Act — the law that imposed new investor due diligence and reporting requirements on many financial institutions — is something with which many in the asset management sector have had to become intensely familiar in recent years. During 2014 and 2015, the first milestones of registration, initial investor identification and reporting were reached by general partners.
You would be forgiven for thinking that with the intergovernmental agreements associated with FATCA signed and the reporting underway, the private equity industry could move on. Unfortunately, life — and tax regulation particularly — is rarely so smooth and simple. FATCA is here to stay as a focus while the process of “bedding down” gets underway. Managers will be working to move their new processes from a one-off set of tasks into the “business as usual” part of the compliance timetable.
The lengthy implementation period means that many still have a number of tasks to complete. These include finalizing documentation of remaining pre-existing investor accounts, determining what extra data will be reported alongside the year-end account balances for 2015 and beyond, and registering sponsored fund entities with the IRS for their own unique global intermediary identification numbers. (The IRS has deferred this latter deadline until December of this year.)
Aside from these outstanding issues, many general partners face crunch times at the end of May and June. The former is the local reporting deadline for the U.K., Cayman Islands, British Virgin Islands and Singapore, among others. For the Channel Islands, Luxembourg and more (including U.S. financial institutions, which will also be required to submit additional data), the deadline is June. This reporting is from a fund's perspective and mainly covers distribution figures for the relevant periods — alongside year-end account balances. The generous extensions seen in some jurisdictions last year should not be expected again — all part of the transition to a “business as usual” environment for the new system.
But while many managers can't quite move on from FATCA yet, the regulatory agenda already has. In 2016, the focus for tax transparency is set to move to what is often termed “automatic exchange of information,” or AEOI — which essentially refers to multilateral applications of the same principles behind FATCA. It refers to a number of similar initiatives.
One such initiative is the similar reporting regime between the U.K. and its crown dependencies and overseas territories. Entities in locations under these regulations will be filing their reports for the first time this year, and they need to have completed reviews of remaining pre-existing accounts by the end of June.
More widely, AEOI also encompasses the common reporting standard, or CRS. Spearheaded by the Organization for Economic Co-operation and Development, it is designed to facilitate automatic exchange of information from financial institutions between a variety of jurisdictions. This means yet more local reporting requirements based on agreements already signed by more than 90 countries, with more than 50 “early adopters,” including the whole of the European Union (which will enable withdrawal of its separate Savings Directive).
For those financial institutions domiciled in the early adopter group, a key milestone has already passed, with these firms required to integrate the CRS system for their new account holder onboarding process by the start of the calendar year. The OECD recently released pro formas for self-certification, and some jurisdictions such as the Cayman Islands have released their own templates for accountholder onboarding and remediation. Getting this process right in 2016 — supported by procedures, systems, resources and training — will be key to navigating the first reporting challenges in 2017. Before that, firms in early adopter jurisdictions must have completed their reviews of pre-existing high-value individual accounts (more than $1 million) by the end of the year. Those funds in non-early adopter countries — such as China, Australia, Mauritius and Hong Kong — will face the same challenges in 2017, going into 2018.
Given the volume of activity, it's no surprise that tax regulation was named in our Annual Review global survey as one of the major challenges facing fund managers in 2016, only just below market regulation and the core activities of fundraising and deal-finding. For Asia-based managers in particular, the issue emerged as the primary expected challenge for the year ahead. While FATCA may be approaching its sixth birthday, it's clear that tax regulation in general continues to be a major focus for the sector.
Giri Girisanthan is group head of technical, training and product development at Augentius.