The Foreign Account Tax Compliance Act (“FACTA”) was enacted by Congress in 2010 as part of the HIRE Act and will become effective January 1, 2013. The legislation is a new cornerstone in the U.S. government’s long standing campaign to crack down on Americans who hide assets in overseas accounts to avoid U.S. income taxes. FACTA applies to virtually all non-U.S. funds making investments in the U.S. or having U.S. investors and to U.S. funds making payments to non U.S. persons who do not comply with FACTA disclosure requirements. To remain compliant, the foreign financial institution (“FFI”), including hedge funds, funds of funds, commodity pools and other offshore investment vehicles will be required to disclose details about their U.S. and certain foreign clients to the IRS every year.
FACTA mandates that offshore investment funds enter into an agreement with the IRS (“FFI Agreement”) or be subject to 30% withholding on any payment made by the fund to U.S. investors refusing to provide the required disclosure and non-U.S. investors without proper FACTA documentation.
FFI’s that enter into an FFI agreement with the IRS will need to report the following information on their U.S. accounts:
- The name, address, and Taxpayer Identification Number (TIN) of each account holder that is a specified U.S. person and, in the case of any account holder that is a U.S. owned foreign entity, the name, address, and TIN of each substantial U.S. owner of such entity;
- The account number
- The account balance or value at year end (to be confirmed by Regulations);
- Gross dividends, interest and other income paid or credited to the account (timing will be determined in the FFI agreement).
Alternatively, an FFI may make an election to provide full IRS Form 1099 reporting on each account holder that is a specified U.S. person or U.S. owned foreign entity as if the holder of the account were a natural person and citizen of the U.S..
Reporting of gross receipts and gross withdrawals or payments from U.S. accounts will not be required for the first year of reporting (2013). However, an FFI will be required to report as a recalcitrant account holder any US Account holder identified by June 30, 2014 for which the FFI is not able to report the information required under Section 1471(c)(1) (for instance due to failure to obtain a waiver from the account holder).
Financial institutions organized under U.S. law will be required to withhold payments to non-U.S. entity investors in such funds that refuse to provide the information and documentation required by the IRS.
IRS Describes Online FFI Registration Process
On June 12, 2012, the IRS described its plans to establish an online “FFI Registration Process” that will enable offshore funds and other FFIs to register and enter into an FFI Agreement to become participating FFIs. Such online Registration Process will allow users to set up accounts, establish passwords, and designate others to access the account on the FFI’s behalf. This online process will require each FFI to designate a “FATCA responsible officer” who will typically sign the FFI Agreement. The FATCA responsible officer will be able to delegate full FATCA registration duties (including signing) to another in-house individual or an authorized U.S.- licensed tax professional. Also, under this online process, up to five points of contact can be designated to help complete all aspects of registration except signing the FFI agreement.
Next Steps for Private Funds
Fund managers should review their organizational structure, including all U.S. and non-U.S. funds and investments, in order to assess the impact to both foreign investors and domestic entities:
- An analysis should be made if the current investor account information is on file, identifying all sources of payments received;
- Developing a strategy for communicating the impact of FACTA to investors;
- Update fund offering documentation and other investor agreements to disclose additional reporting obligations imposed by FACTA and outline the withholding risks for non-compliant investors;
- Coordinate with fund administrator, auditor and potentially broker to ensure mandated registration and compliance once FACTA rules are finalized
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