The treatment of an investment entity in the model
intergovernmental agreement the US Treasury has developed to implement the
information reporting and withholding tax provisions of the Foreign Account Tax
Compliance Act (FATCA) is not helpful to
hedge fund managers, in the view of the global hedge fund industry. In a letter
to Treasury and the IRS, the Alternative Investment Management Association noted
that the agreement provides that an investment entity is treated as a financial
institution and must report to its own jurisdiction information about all US
holders of its equity, debt and other financial accounts if the investment entity
conducts specified investment management operations as a business for or on
behalf of a customer or is managed by an entity that conducts such operations for
or on behalf of a customer. According to AIMA, this definition broadens a
financial institution beyond the provisions of FATCA itself, and also beyond the
draft FATCA regulations, to expressly include the investment manager or investment
adviser.
AIMA does not believe that it was the intent
of Treasury to implement an agreement that expands the definition of financial
institution to bring hedge fund managers within its scope. Indeed, if that was
the intent, it would be inappropriate, said AIMA, given that the objective of
the statute itself does not have such a broad scope. AIMA urged Treasury and
the IRS to revise the IGA to provide that the term “Investment Entity” means
any entity that conducts as a business trading in money market instruments
(bills, certificates of deposit, derivatives, etc.); foreign exchange;
exchange, interest rate and index instruments; transferable securities; or
commodity futures trading.
If the broad definition of investment entity
currently in the agreement is not clarified, cautioned AIMA, a non-US based hedge
fund manager of offshore funds is likely to have to implement two FATCA projects:
one for itself and another on behalf of its funds, under two different regimes,
albeit, with some synergies. This could give rise to some anomalous situations,
warned AIMA, under which a fund manager would need to apply the
intergovernmental agreement on its share capital in the place where the manager
operates, but the fund, assuming it is in another jurisdiction, would have to
report under another agreement under the full FATCA.
On a separate and broader note, AIMA found it
problematic that the general definitions and categories differ within the model
IGA and the draft FATCA regulations.
Some standardization of categories, with only a few exceptions, would
clearly be preferable, said the hedge fund group. More generally, it is unclear
to what extent the IGA represents a significant change from the draft
regulations or whether the IGA represents some movement in the light of
industry comments submitted: for example, the focus on information on file is useful but is
this something only offered under the auspices of an IGA.
Finally, AIMA opined that for large, global financial
institutions the approach in the model IGA is likely to complicate matters, not
least because it introduces new terminology, which is not aligned with that in
the draft FATCA regulations nor in the legislation itself.
The U.S. Treasury developed the model intergovernmental agreement first
with EU partners to implement the
information reporting and withholding tax provisions of FATCA. The model
agreement marks an important step in establishing a common approach to
combating tax evasion based on the automatic exchange of information. The
United States
will, in close cooperation with other partner countries, the OECD, and, when
appropriate, the European Commission, work towards common reporting and due
diligence standards in support of a more global approach to comply with FATCA.
There are two versions of the model agreement,
a reciprocal version and a nonreciprocal version,
which both establish a framework for reporting by financial institutions of
certain financial account information to their respective tax authorities,
followed by automatic exchange of such information under existing bilateral tax
treaties or tax information exchange agreements. Both versions of the model
agreement also address the legal issues that had been raised in connection with
FATCA, and simplify its implementation for financial institutions.