European investors deterred from US investments by FATCA

The US Foreign Account Tax Compliance Act (FATCA) is deterring European fund managers from investing in the US, as they are finding it difficult to justify the cost of complying with the regulation to investors.

European investors will be pushed out of investing in US assets by the requirement to comply with FATCA, Luxembourg’s fund industry association ALFI said.

Due to be implemented on 1 January 2013, the regulation was designed by the US authorities to target tax evaders and clamp down on overseas assets held outside the US.

But compliance with the regulation impacts on the fund management industry as well as banking, as it applies to funds investing in US assets, said ALFI representatives.

“There are still so many players that think they do not sell to US investors, therefore FATCA does not apply to me.

“As soon as you invest in the US, you are in its [the regulation’s] scope,” said Georges Bock, partner and head of tax and banking at KPMG Luxembourg.

If asset managers fail to declare they are non-US citizens, an automatic withholding tax of 30% is applied on all interest, dividends and gross proceeds from US sources, said ALFI.

Compliance, on the other hand, is set to cost $30-40 per investor, according to analysis by experts.

“We absolutely agree with their [the US authorities’] goal on tax evaders,” said Bock. “But who is going to pay the bill? It is hard to accept that for European consumers it is more attractive to go through the US than European funds,” he added.

The IRS meanwhile recently acknowledged there may be an issue of accountability for compliance with FATCA, due to the service providers who manage and service funds on behalf of manufacturers. But responsibility for compliance cannot be outsourced. “The fund is on the hook,” said Bock.

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