The Association of Investment Companies (AIC) has suggested to members with modest investments in US securities that they may be better off not signing up to controversial tax initiative FATCA and taking the penalty charge.
FATCA, or the Foreign Account Tax Compliance Act, is a set of measures designed to fight offshore tax evasion by US citizens. It will be a significant cost and administrative burden for financial institutions and investment companies.
For companies which do not derive a significant proportion of their revenues from the US and have few US investors, the cost of complying outweighs the 30% withholding penalty, the AIC said.
Any investment company with US investments will need to split payments into two streams, to show how much income has been generated from the US.
Under the proposals, foreign financial institutions (FFIs) must identify and report on US taxpayers within their client base or suffer a 30% levy on any US-sourced income.
Investment companies will need to disclose details of the US citizens on their share registers and pass them to the Internal Revenue Service (IRS).
However, the number of US shareholders with stakes in UK registered trusts is minimal, argues the AIC.
“If you are not invested in the US, or have minimal exposure, it might be better to take the modest hit from the 30% withholding tax as opposed to racking up much more substantial costs from all the administration in complying,” said Ian Sayers, director general at the AIC (pictured).
“For these trusts the impact would be too small, so it is not worth signing up.
“VCTs, for example, are predominately made up of UK retail money and UK investments, so they may not have to sign up and in fact will be better off not complying.”
The body is also in discussions with the US authorities to soften the blow for investment companies who cannot escape FATCA, such as US closed-ended funds and global mandates with a high proportion of US holdings.
“We are working with FATCA to try and give regularly traded funds a lighter burden. We believe if a company shows it is regularly traded and has a turnover in excess of 10% a year, the amount of administration required should be softened.”
Meanwhile, in a submission to the US authorities last week, the IMA called for the FATCA deadline to be extended. The first rules are due to come into force this year.
Autumn 2012: IRS to publish final model FFI agreement.
January 2013: Entities can start signing IRS agreements.
January 2014: Start of withholding of US-source income to non-participating entities.
January 2015: Start of withholding of US-source gross proceeds to non-participating entities, also reporting of ‘passthru payments’ commences.
January 2017: Institutions required to withhold on their payments to other non-participating institutions.
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