Further to the FATCA Brief issued to clients of Appleby in November 2013, we present below a tailored addition to the Brief specific to investment funds that are domiciled in a jurisdiction that has either entered, or has confirmed it will enter, into a Model 1 Intergovernmental Agreement (IGA) with the US Treasury in respect of the US Foreign Account Tax Compliance Act (FATCA).
The following summary presents our understanding of the requirements and responsibilities of investment funds under the Model 1 IGA and how Appleby Fund Services (Isle of Man) Limited ("AFSIOML") can assist with the fund's obligations.
As a financial institution (FI), the fund is responsible for ensuring that it understands what its obligations are under the applicable Model 1 IGA and for making sure that it is fully compliant. As administrator, we are able to contract with funds to carry out certain activities on their behalf but the fund itself is ultimately responsible for its own compliance, and for monitoring the actions of any party to which it delegates its obligations.
There are three broad categories under which the Model 1 IGA obligations will fall – (i) registration with the IRS, (ii) due diligence to facilitate the identification of US reportable accounts and (iii) reporting to the relevant jurisdictional tax authorities on US reportable accounts. We discuss each of these areas below with reference to the UK and Cayman Model 1 IGAs that have been signed already. It is anticipated that the Model 1 IGAs to be signed between the US Treasury and other jurisdictions, including the British Virgin Islands and the Isle of Man, will not differ significantly from those already signed.
Despite not reporting directly to the IRS, a reporting FI under a Model 1 IGA is required to register with the IRS and obtain a global intermediary identification number (GIIN).
Under the Model 1 IGA, a reporting FI is defined as any financial institution that is not a non-reporting FI. A non-reporting FI is an entity that is considered as being low risk in terms of tax evasion including certain FIs that are treated as deemed-compliant, have exempt beneficial owners (e.g. certain pension and retirement funds) or are sponsored investment entities under the FATCA regulations. A definition of the entities that each jurisdiction deems to be non-reporting FIs is set out in Annex II to the relevant IGA. As this may vary between jurisdictions, we strongly advise that each fund takes specific tax advice to establish its status in terms of registration requirements.
An FI may appoint a sponsoring entity, provided they are authorised to act on behalf of the FI (such as a fund manager, fiduciary, corporate director or managing partner) to fulfil applicable registration requirements. This may be beneficial, for example, where there are several funds under common management to be registered. The sponsoring entity would then agree to perform all due diligence, withholding, reporting and other requirements under the Model 1 IGA on behalf of all FIs it sponsors.
Registration with the IRS will be the responsibility of the fund, or the sponsoring entity, which must appoint a responsible office (RO) for this purpose. AFSIOML will be able to assist with the administrative element of the registration process under instruction from the fund, if required.
Under the Model 1 IGA, reporting FIs are required to apply certain due diligence procedures in order to identify US reportable accounts, both to identify pre-existing account holders and as part of the identification process for new account holders. The due diligence procedures are set out in Annex 1 of the relevant IGA. Until all IGAs have been signed and finalised, it is not certain how much the due diligence requirements might vary between jurisdictions.
As AFSIOML currently performs AML due diligence reviews of investors for the funds we administer, we anticipate that this will be a service that funds may wish to delegate to us. AFSIOML is familiar with the due diligence procedures set out in Annex 1 of the UK and Cayman Model 1 IGAs and has performed analysis to identify any updates necessary to either our systems or processes in order to comply with these procedures. We will follow closely the progress of other Model 1 IGAs so that we are able to ensure compliance with their due diligence requirements once released.
Under the Model 1 IGA, reporting FIs will be required to report annually certain information on US reportable accounts to the relevant authorities of that jurisdiction. The information that is to be reported and the timing of the information to be passed on to the IRS by the relevant tax authority is set out in the main body of the Model 1 IGA and applies to all Model 1 jurisdictions. As of the date of this communication, no jurisdiction has finalised local legislation for compliance with its IGA, which will determine the manner in which this information will be passed from the fund to the relevant authorities.
The fund and its governing body will be responsible for ensuring appropriate reporting to the relevant authorities. AFSIOML will be able to contract to provide such reporting for the fund's governing body, if required.
As well as familiarising themselves with their obligations under the Model 1 IGA and ensuring they fully understand the status and requirements of the fund, fund governing bodies may also wish to consider other matters such as communications to investors in respect of FATCA and whether the fund's governing and subscription documents require update.
Appleby continues to advise its fund clients to obtain independent tax advice in respect of FATCA. Based on our understanding of the legislation, we consider that funds should assume that they will be affected in some way by FATCA unless they are advised otherwise, regardless of whether or not the fund has US investors or investments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.