Governance under AIFMD

Beginning January 1, 2013, the provisions of the Financial Account Tax Compliance Act (FATCA) will impose a 30% US withholding tax on any US-sourced income and the gross proceeds from the sale of investments that produce US sourced interest or dividends (withholdable payments) received by any offshore fund or other foreign financial institution (FFI). This withholding tax is avoided if the FFI enters into an agreement with the US Government and agrees to comply with new documentation requirements, due diligence procedures, and reporting obligations. These new requirements are aimed at detecting US tax residents that may be evading US federal income tax by holding investments directly or indirectly through an FFI.

FATCA has important implications for our clients in the asset management industry, as it will:

  • Significantly increase the types of payments that could be subject to US withholding tax, such as direct or indirect payments of gross proceeds, or payments on certain swaps, and the number of entities that could have liability for US tax on such payments, including offshore funds and offshore distribution channel intermediaries that hold, or through which others hold, direct or indirect interests in US investments
  • Expand the population of entities that will have US tax information gathering, withholding, and reporting responsibilities and potential financial exposures for non-compliance
  • Increase the business risks arising from relationships with third-party distribution intermediaries, through which indirect investors hold interests in funds, and with service providers upon which funds may rely for compliance
  • Impose US tax documentation requirements on direct and indirect US and non-US investors
  • Force many in the industry to modify internal systems, control frameworks, processes, and procedures to meet FATCA compliance requirements, costing asset managers significant time and money.

Initiating a program now to identify and assess the critical business, tax, and operational impacts arising from FATCA will increase an asset manager’s opportunity to address the business issues and implementation challenges through a complete, effective, and cost-efficient implementation program that will permit full compliance by January 1, 2013 (the effective date of FATCA’s new documentation requirements, due diligence procedures, and reporting obligations).