08.16.2013
By Terry Flanagan

IRS To Open Fatca Registration Portal

When the Internal Revenue Service prepares to open its registration portal for the Foreign Account Tax Compliance Act (Fatca) on Monday, August 19, financial institutors will began the formal process of compliance, which includes know-your-customer (KYC) requirements.

Fatca, which began as a tax withholding system for foreign financial institutions, has evolved into an information sharing arrangement between the U.S. and other countries.

“The original intent of Fatca was to prevent hedge funds and other financial institutions from skirting U.S. tax laws,” said Lansing Gatrell, director at Markit. “It has since morphed into a tax information sharing regime, whereby the IRS will not impose withholding provided the other country enforces the transparency rules of Fatca.”

Lansing Gatrell, Markit

Lansing Gatrell, Markit

Fatca compliance is a process-intensive requirement placed upon the financial industry that demands an automated solution.

Custodians and fund administrators have the opportunity to offer Fatca services for their fund customers, which Markit is facilitating via its Fatca Service Bureau, which it launched this year in collaboration with Compliance Technologies International (CTI), a provider of tax withholding and information return reporting technology, consulting, and outsourcing services.

The Fatca Service Bureau unites the capabilities of Markit Counterparty Manager and CTI’s specialized tax validation and reporting systems and comprises sophisticated document management, automated tools for IRS registration and e-tax form submission.

For the thousands of funds and other financial institutions required to register as a Foreign Financial Institution (FFI) under Fatca requirements, the Fatca Service Bureau provides tax domain expertise and operational efficiency.

“Banks have experts in compliance, operations, and tax needed to comply with Fatca, but hedge funds don’t,” Gatrell said. “The Fatca Service Bureau is an online platform that allows fund administrators to share regulatory documentation with counterparties from a central location.”

Fatca requires FFIs invested in U.S. assets to document their clients such that they can affirm to the IRS that they are not aiding U.S. persons in evading U.S. taxes. It further requires FFIs to report the identities of their U.S. investors and report financial information each year to the IRS. It is estimated that the law will impact over 300,000 financial institutions and their funds across virtually every asset class.

“The interplay between the final Fatca regulations and intergovernmental agreements is complex and still unfolding. It’s important for fund managers to educate themselves before rushing to register,” said Dan Byrne, tax principal at Rothstein Kass. “While the IRS Fatca registration portal will open soon, there are still some important pieces of Fatca guidance which remain outstanding.”

Pending intergovernmental agreements between foreign countries and the United States will allow tax information reported under the local governments of these countries to be automatically exchanged with the IRS.

The tax administrations from the United States, Australia and the United Kingdom in May announced a plan to share tax information involving a multitude of trusts and companies holding assets on behalf of residents in jurisdictions throughout the world.

The three nations have acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands. The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.

There is nothing illegal about holding assets through offshore entities; however, such offshore arrangements are often used to avoid or evade tax liabilities on income represented by the principal or on the income generated by the underlying assets. In addition, advisors may be subject to civil penalties or criminal prosecution for promoting such arrangements as a means to avoid or evade tax liability or circumvent information reporting requirements.

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