Investors grapple with global tax "new norms"

Asset managers appear resigned to the drive by governments globally to collaborate on information exchange and withholding requirements for combating tax evasion, says JP Morgan.
Investors grapple with global tax "new norms"

Asset managers have been overwhelmed by the amount of operational changes they have to understand and implement in a short time-period related to multiple US and European regulations, say JP Morgan executives.

Most fund executives accept these regulations are here to stay, even though at face value many of the changes do not provide immediate value or benefit for their investments, says Laurence Bailey, Asia-Pacific head of investor services at the US bank.

Rules that combat tax avoidance and/or evasion – such as the US Foreign Account Tax Compliance Act (Fatca) – have today almost become a “new world order”, no longer spearheaded by Washington alone but acknowledged by most other jurisdictions as a new “norm”, notes Carlos Hernandez, JP Morgan’s global head of investor services in New York.

He referred to a communiqué from the G20 meeting in Washington in April, which cited tax avoidance as a top priority for all the participating finance ministers and central bank governors from both developed and emerging markets.

“Market participants used to view Fatca as a piece of US-centric tax reform that brings about unnecessary extra-territorial implications to the rest of the world for the benefits of protecting the US internal revenue,” says Hernandez. 

However, the subject of legislating against tax avoidance has almost taken on a life of its own, characterised by a new environment in which governments enter into collaborations or treaties for information exchange to achieve the same goal, say JP Morgan executives.

For example, in the G20 communiqué, finance ministers and central bankers agreed on the urgency of implementing automatic exchange of information to combat tax evasion. It also said 14 jurisdictions have failed to implement a legal framework to enforce transparency standards to combat tax avoidance, particularly with a view to tax havens. The jurisdictions were not named.

Meanwhile, in Europe, the pressure for countries to sign agreements on automatic information exchange has intensified, after revelations that a state in southwest Germany had, in a controversial move, bought what was supposed to be private data linked to German clients of Credit Suisse suspected of avoiding paying tax to Frankfurt.

Last year, Germany’s upper legislative chamber voted against a proposed tax treaty that would have allowed the government to recover tax on money held in Swiss accounts by German citizens.

Cross-border anti-tax avoidance moves such as these have meant higher costs for global custodians and fund administrators. “[With regard to Fatca,] while it seems a mechanical process, we’ve put a lot of effort into automating records and tax declaration documents for our clients,” says Bailey.  

Delays are almost inevitable for participants seeking to meet the coming Fatca deadlines, as market intermediaries, clearing houses and investors try to grapple with the Act’s vast legal implications and operational challenges, he adds, as was the case with the implementation of clearing requirements under Dodd-Frank.

By the start of 2014, non-US financial institutions seeking to be Fatca-compliant as registered foreign financial institutions (FFIs) with the US Internal Revenue Service will have to start reporting details of offshore accounts of US clients worth more than $50,000. Otherwise they will face a 30% withholding tax on US-sourced income.

Meanwhile, says Hernandez, custodians and fund administrators should spread awareness among fund houses about why new processes and risk management measures for meeting compliance are not just new expense items for them.

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