Asian alts managers warned of UK 'Fatca'

Rules requiring firms with alternative funds structured in UK overseas territories to comply with tax reporting will be enforced next year, but have largely flown under the radar.
Asian alts managers warned of UK 'Fatca'

Asian managers are focused on Fatca compliance with US authorities, but they also need to be mindful of meeting the UK equivalent for alternative funds, notes Angelica Kwan of consultancy PwC.

The Foreign Account Tax Compliance Act is part of a clampdown on tax avoidance by US authorities, requiring foreign financial institutions to identify reportable accounts from American clients to the US’ Internal Revenue Service (IRS).

The IRS earlier this month gave foreign financial institutions a transitional period running until 2016 to comply, and relaxed the withholding penalty it would have levied for non-compliance, as reported.

However, these latest relaxations* only apply to financial institutions that have shown “good faith” in complying with the tax law in the first place.

What is less well publicised, however, is that UK authorities have imposed similar reporting requirements on alternative funds organised in British overseas territories or British Crown dependencies.

The UK rules will impact Asian firms that have structured funds in the Cayman Islands, British Virgin Islands (BVI), Guernsey, Jersey, Anguilla, Bermuda, Gibraltar, Isle of Man, Montserrat and the Turks and Caicos Islands. 

Financial institutions will be required to provide information on reportable accounts to local tax offices. These would be held by UK tax residents, whether individuals or companies, or be accounts held by certain non-UK entities controlled by a UK specified person. Cayman and BVI tax authorities have until September 30, 2016, to exchange information with the UK’s HM Revenue & Customs for 2014.

Asian fund houses acknowledge they will have to comply with the UK rules, but are focused on the US’ Fatca, says Kwan, Hong Kong-based US tax partner.

“Of course Fatca has gotten a lot of attention, and that’s appropriate because it was the first comprehensive, very ambitious exchange of information framework of its kind in the world,” she says. “Nobody wants to start from scratch, but the UK rules add to something that is already quite cumbersome to begin with.”

While compliance with the UK’s rules will require Asian managers to comply in similar fashion to Fatca, Asian funds typically have fewer UK investors than American investors.

One Hong Kong-based hedge fund general counsel estimates that its own fund has an estimated 5% of investors that are European-based, most of which are from the UK.

And given that UK tax rules are territorial-based rather than global, the effects are likely to be even more limited.

“We wouldn’t be unduly stressed over UK Fatca because we’re just going to approach it like any other reporting obligation,” says the counsel. “It doesn’t fundamentally affect how we do business whereas regulatory issues like banning short-selling – that is fundamental because it impacts how we make money.”

Other countries could follow suit with similar tax arrangements. The general counsel points to the recently agreed tax exchange system by the Organisation for Economic Co-operation and Development. “A good idea is contagious,” he says.

But unlike Fatca, the UK reporting regime does not include provisions on withholding penalties for non-compliance, notes law firm Maples.

The UK signed Fatca-like intergovernmental agreements with the Cayman Islands last November, and with English Channel islands Jersey and Guernsey and the Isle of Man last October.

The agreements signed between the UK government and British overseas territories are reciprocal, while those signed with dependencies, excluding Gibraltar, are not.

It means UK financial institutions will not be required to provide information on accounts held by residents of overseas territories.

Last November, the Cayman Islands and the US inked a pact on Fatca requiring Cayman-organised funds to transfer tax information on US investors to the US Internal Revenue Service.

*Under Fatca previously, non-US financial institutions would have been subject to a 30% withholding tax on US-sourced income had they not started collating account details of US persons on their books by July 1.

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