Global IRW Newsbrief: How do the final FATCA regulations affect asset managers?

The long-awaited final Foreign Account Tax Compliance Act (FATCA) regulations have arrived and, while much analysis still needs to be done, the US Department of the Treasury and the Internal Revenue Service (IRS) provided welcome relief on a number of key issues for the asset management industry.

That being said, significant implementation challenges still remain for the asset management industry and substantial work must be undertaken through the course of 2013 in order for asset managers to be FATCA compliant by January 1, 2014. Failure to undertake the necessary tasks in 2013 could expose investment managers to a variety of business and investor relation risks.

This Newsbrief highlights key areas for consideration for asset managers (including notable changes from the proposed FATCA regulations) as they set their FATCA implementation agenda for 2013 and beyond.

FATCA creates a new US information reporting regime that is globally enforced through a 30% withholding tax on certain direct and indirect payments of US source periodic income and gross proceeds. In order to comply with FATCA and avoid being subject to the 30% withholding tax on amounts received, FATCA requires a broad range of investment entities to (1) register with the IRS, (2) review their investor base, (3) gather certain documentation, (4) conduct due diligence on their investors, and (5) implement new tax information reporting and withholding procedures.

The impact on the asset management industry is profound. Proposed regulations published last year set forth a framework for compliance, but many asset managers held off moving into implementation or even beginning an assessment until final regulations were issued. With the publication of the final regulations on January 17, 2013, it is now time for these efforts to begin in full.

Guidance is still forthcoming on intergovernmental agreements (IGAs), whereby certain FATCA responsibilities may be discharged locally rather than requiring interaction with the IRS by non-US financial institutions (commonly known as foreign financial institutions or FFIs). The issuance of the final FATCA regulations and the prior release of model IGAs, however, means that substantial implementation efforts must be undertaken by asset managers.