The asset management industry is challenged with reaching an agreement quickly over “who should invest what” in preparation for implementing the 30% withholding requirements under the Foreign Account Tax Compliance Act (Fatca).
Mark Oh, director and head of tax for Asia-Pacific at BlackRock, sees the nature of Fatca as having a significant cost impact for everyone in the asset management chain, from product manufacturing and distribution through to asset safe-keeping and servicing. Foreign financial institutions (FFIs) that opt for compliance need to sign up with the US Inland Revenue Service by July 2013.
While BlackRock appreciates Fatca's policy end-goal – that it seeks to clamp down on evasion by US taxpayers that own financial assets overseas – Oh says a more risk-based approach is merited that takes into account the real risk of US tax evasion linked to a financial institution.
Otherwise, the “hundreds of millions” in additional cost of compliance that Fatca is slapping on the asset management industry could bring unintended consequences by making investors circumvent US capital markets.
“We have set up a global project management team that engages various functions internally, looking at implementing processes over nine work streams,” says Oh.
These work streams are in turn split into three main umbrella groups: communications; IRS agreements and obligations; and operating model. Together, they are looking at establishing processes such as client on-boarding, fund documentation, IRS registration and system-building, such as those for making Fatca withholding requirements.
The far-fetching operational impact that Fatca brings to FFIs is not limited to reporting requirements linked with tracking US customers. Equally onerous is the requirement that participating FFIs would have to make “pass-through payments” by withholding 30% tax for any payment linked to US assets made to a non-participating FFI.
Such a withholding requirement is meant to incentivise foreign financial institutions to participate and be compliant with Fatca.
In reality, it has drawn criticism over how institutions which do not have US clients are effectively compelled to join the club of participating FFIs or risk being cut off by them. For example, a 30% tax deducted from a non-participating bond settlement agent might adversely affect the investment return that ultimately gets passed to the bond investor.
“We are performing analysis and working out who sits where in the entire manufacturing to distribution chain," says Oh. "For example, if you are relying on external fund accounting and fund administration who are involved in calculation of the fund’s assets, they would need to put in place a withholding process for potentially withholding that 30% when the US-sourced income payments are passed along the distribution chain."
Downstream, an intermediated distributor for numerous intermediated investors who traditionally are placed under a nominee account may now need to build a client on-boarding system to be able to track US account holders and US money; otherwise, it might risk a punitive 30% withholding tax.
“There is likely to be cost that must be shouldered all along the distribution chain, hence there needs to be some agreement and discussion between these various parties so that each party sees clearly where they sit within the distribution chain,” says Oh.
He adds that BlackRock is involved in regional educational work because today there are still a lot of local distributors in Asia that are not aware of why Fatca might impact their business.
While the $3.5 trillion global asset manager has, on one hand, been coping with Fatca globally, on the other it has also been communicating concerns and recommendations regarding implementation on Fatca as presently proposed by the US Treasury.
In Asia, BlackRock has been working with the Hong Kong Investment Funds Association, which with the Hong Kong Trust Association and Hong Kong Federation of Insurers has written to the US Treasury urging it to broaden Fatca to accommodate the differing features of foreign retirement plans.
BlackRock has also written to the US Treasury stating its concern about the “very US-centric nature of the proposed regulations”, particularly regarding the onus placed on foreign retirement plans.
Oh adds: “Fatca's unintended consequences could be a shift in capital-market flows away from US products and securities and an enormous administrative burden for retail investors and institutions around the world, including in Asia. We think this is a perspective which few have considered."