Hong Kong-based alternative asset managers with Cayman Islands-domiciled funds are rushing to comply with the US Foreign Account Tax Compliance Act (Fatca), after the Cayman authorities signed a tax information exchange agreement (TIEA) with the US at the end of last month.

Fund managers hope they will derive client-related benefits from being registered as Fatca-compliant, but they should be wary of registering if they are not in fact ready, says Angelica Kwan, US tax partner at consultancy PwC based in Hong Kong.

Firms that register with the US Inland Revenue Service between January and April will be included in the June 2014 foreign financial institution list just ahead of the July Fatca deadline.

There are a number of benefits to being on the IRS’s first published list, argues Kwan.

“Some funds or other foreign financial institutions that want to be on the first 'good list' that the IRS will publish are thinking of signing up by late April [for marketing purposes],” she says. “That doesn’t mean you have to sign up by April. If you are not ready, you probably shouldn’t sign up.”

Admittedly, there could be negative consequences for firms that are not on the first list, particularly those holding US assets. In theory, if they’re not on the IRS’s good list, the fund firms' counterparties, such as custodians, may mistakenly withhold the 30% US-sourced income tax, believing they are not Fatca-compliant.

Even if a fund is not on the good list, as long as it shows evidence that it is in the process of applying for Fatca, it can avoid the 30% withholding tax, Kwan notes. As such, she advises that firms do not rush into it.

Nonetheless, Kwan expects an online registration portal set up by the IRS in August to experience heavy traffic from Hong Kong-based fund managers at the start of 2014.

Meanwhile, Alex Last, Hong Kong-based partner at offshore law firm Mourant Ozannes, anticipates the Cayman Islands authorities will provide more guidance and legislation to ensure the rules are implemented well before Fatca comes into practice in July 2014.

(From next summer, foreign firms will have to report their American clients’ financial details to the IRS – those that don’t comply face taxes of 30% on US-sourced income.)

Under the model 1 intergovernmental agreement (IGA) and the new TIEA, foreign financial firms in the Cayman Islands – an offshore jurisdiction widely used by hedge and private equity funds – will only have to provide the relevant information to the Cayman regulator to avoid paying withholding tax on their US-sourced income. The Cayman authorities then report to the IRS.

This differs from the model 2 IGA, which requires financial institutions to report directly to the IRS.

Many expect the model 1 agreement to reduce the administrative and compliance burden, which could mean lower costs for Cayman funds. Others are considering a similar model – for example, China is expected to sign a model 1 agreement with the US ahead of the July deadline.

The lighter compliance burden offered by the model 1 agreement will be very appealing for local managers with Cayman-domiciled funds, says PwC’s Kwan.

Asset managers in Hong Kong have generally been slower than banks and insurers to prepare for Fatca, she adds, but that is not surprising as fund houses typically have fewer customers than do banks and insurers. “But I think everybody is starting to really focus on this right now,” she adds.