Ignore FATCA at your peril – providers express crackdown fears

The European funds industry is waking up to the fact that the proposed new US rules designed to stamp out tax evasion could fundamentally affect the business of the smaller fund distributors.

A new set of US tax rules designed to combat tax evasion could result in substantial extra costs for European funds and financial institutions, according to Société Générale Securities Services (SGSS).

The tax, known as the Foreign Account Tax Compliant Act (FATCA), is due to come into force in January 2013, and will require non-US financial institutions to identify and collect a large amount of information about their US clients.

SGSS says, in effect, the new tax rules will require foreign financial institutions to become an instrument of the US Inland Revenue Service (IRS).

Institutions will have to check and report on all of their clients to determine their tax status.

Financial institutions will need to obtain a waiver from the US tax authorities if they do not want, or cannot supply the necessary information because local laws do not authorise such disclosures.

Failure to provide adequate information will incur a 30% withholding tax and potential closure of an account.

Big impact

SGSS says FATCA will have a big impact on the worldwide financial industry during the next few years and bring “huge implementation and processing costs and effort”.

Details of the new rules are still being discussed, but a final version is expected to be published by the end of this year.

The US Congress ­estimates that the government loses about $100bn per year in tax revenues as a result of offshore tax abuses. Officials are determined to crack down on tax evasion.

US tax authorities expect the new rules will generate up to $8.7bn over 10 years. However, critics suggest that this is a small amount compared to the estimated tax loss and the costs and resources that will be needed to implement the new rules.

Financial institutions say they will have to sift through a huge number of accounts to seek out US citizens or residents who might be evading US taxes, which will require a considerable investment in both software and staff.

Industry analysts have estimated the cost was likely to be about $20-$50 per account.

The response from the EU has been slow, but it has picked up steam as the potential impact of the new rules has dawned.

The European Commission has called for a more flexible regime for firms and funds that state in their prospectuses that they do not have US investors, a demand also made by the Association for the European Investment Management industry (EFAMA).

In talks with US treasury and IRS officials, EFAMA has suggested a simplified regime to reduce the burden of reporting and withholding the tax for funds that do not allow US investors, but discussions remain inconclusive.

The Commission wrote to the US Treasury in April to highlight the burden that the new rules would represent for Europe’s financial industry, and suggested expanding the EU ­savings directive to US persons.

“The EU is starting to get the idea of the costs to the fund industry,” says Pascal Bérichel, head of fund distribution services at SGSS (pictured).

However, without an agreement with the US, European regulators will have to advise European funds and financial institutions on how to proceed with the US law.

According to an SGSS note: “We will need to change the way we work in order to follow the FATCA rules, should the final decision be that we need to go ahead.

If the decision is not to conform to FATCA, there might be a trend to redeem from the US market for non-US investment vehicles, as this currently seems to be the only way to avoid FATCA.”

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