Academic journal article Business Law International

FATCA and Funds - Where Are We Now?*

Academic journal article Business Law International

FATCA and Funds - Where Are We Now?*

Article excerpt

FATCA is the acronym for the United States Foreign Account Tax Compliance Act, which, by the time it was signed into law by President Obama in 2010, had become part of the Hiring Incentives to Restore Employment Act 2010. While new legislation is frequently credited with being the most significant in recent years, in the case of FATCA this may be genuinely true. The impact of FATCA will reach far beyond the borders of the United States and will have an impact on structures and institutions that have never before had dealings with the US Internal Revenue Service (IRS) . It is not an exaggeration to describe this new law as ground breaking.

FATCA seeks to prevent offshore tax evasion by US nationals and is primarily targeted at overseas banks, but the investment fund industry is also affected by the statute. Therefore, the global fund industry must prepare itself to comply with this legislation and, importantly, must keep appraised of any changes to the law, since representations continue to be made to the IRS.

This article highlights the key measures arising from FATCA as they affect the investment fund industry, taking into account the proposed regulations (the 'Proposed Regulations') published in February 2012. The volume of material and number of issues still to be resolved mean that it is simply impossible for this article to address all the aspects of FATCA that an investment fund must consider. Additionally, the Proposed Regulations have not been finalised and certain aspects of the law's implementation have been delayed and are subject to further consideration. Accordingly, this article focuses on explaining how and why the fund industry is affected by FATCA, the tasks facing a typical investment fund in complying with FATCA and the principal problems that still remain. It also summarises the current timeline in relation to the implementation of FATCA. The nature and complexity of this area are, however, such that investment funds will require professional advice, for which this article is not a substitute.

Background - the need for FATCA

US citizens, wherever resident, are subject to US federal income tax on their worldwide income. Offshore tax evasion has been perceived to be an increasing problem, with estimates ranging from US$100 billion to US$345 billion in lost tax revenue per year to the US government. While the issue has been present for some time, recent cases served to bring it to the fore.

In a number of instances, former employees of various banks revealed information to the IRS or other tax authorities, which indicated that a significant number of US individuals were, as suspected, concealing certain accounts offshore. These instances were perceived by the US legislators as providing the evidence and impetus for action by the US authorities to address the issue of offshore tax evasion by US taxpayers.

The result is FATCA.

FATCA sources

The actual FATCA legislation is deceptively short. It adds a new Chapter 4 to Subtitle A of the United States Internal Revenue Code 1986 (the 'Code') . Chapter 4 comprises Code sections 1471-1474.

The legislation was supplemented by four IRS notices - Notice 201060, Notice 2011-34, Notice 2011-53 and Notice 2011-55 (collectively the 'Notices') . More recently, in February 2012, the much anticipated Proposed Regulations were published. The Proposed Regulations codify and amend certain concepts published in the Notices but also add significant new provisions, all of which are intended to implement the FATCA legislation. Equally, however, certain issues remain outstanding from the perspective of the fund industry. Consultation in respect of the Proposed Regulations ended on 30 April 2012 and a public hearing on the Proposed Regulations has new occurred. Final regulations are currently scheduled to be issued in the summer of 2012.

It is important to note that, as with any draft regulations, the actual implications of the Proposed Regulations cannot be fully known at this point. …

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