By Peter Tyson and Simon Riveles
On August 19, 2013 the Internal Revenue Service (IRS) launched a new online registration system for financial institutions needing to register with the IRS under the Foreign Account Tax Compliance Act (FATCA). FATCA, which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 to counter tax evasion, requires foreign financial institutions, which include hedge funds, to report on the holdings of U.S. taxpayers to the IRS, or face a 30 percent withholding tax on a broad range of U.S. income sources. The new FATCA Registration website provides a secure environment with around-the-clock availability for financial institutions to establish online accounts, customize home pages to manage accounts, designate points of contact to handle registrations, oversee member and/or branch information, and receive automatic notifications of status changes.
An Overview of the New Online Registration Process
1. Using the new FATCA online system, a financial institution will be given a FATCA ID that will enable it to create an online FATCA account for itself and, if applicable, for Members of an Expanded Affiliated Group for which it is designated as the Lead.
2. Each financial institution must then complete and submit the required registration form, Form 8957. Form 8957 is comprised of four parts:
(i) Part 1 must be completed by all financial institutions to provide basic identifying information.
(ii) Part 2 (if applicable) must be completed by a Lead financial institution of an Expanded Affiliated Group in order to identify each Member financial institution for which it is acting as a Lead and that is treated as a: Participating Financial Institution not covered by an IGA (PFFI); Registered Deemed-Compliant Financial Institution (RDCFFI), or; Limited Financial Institution (LFFI).
(iii) Part 3 (if applicable) must be completed only by a financial institution, including a foreign branch of a U.S. financial institution, currently acting as a Qualified Intermediary, Withholding Foreign Partnership, or Withholding Foreign Trust and that wishes to renew its agreement.
(iv) Part 4 must be completed by all financial institutions and requires a financial institution to: (a) certify that the information provided in the FATCA registration form is accurate and complete, and; (b) agree or confirm that it will comply with its FATCA obligations, if applicable, in accordance with the status or statuses for which it has registered itself or any of its branches.
3. Each financial institution will then receive approval from the IRS, and be issued a Global Intermediary Identification Number (GIIN).
By January 1, 2014, each financial institution will be expected to finalize and submit its registration information on the FATCA Registration website. However, any information entered into the online FATCA Registration system before this date will only be stored, and cannot be submitted. Thus, no GIINs will be issued through the online FATCA Registration system until at least January 1, 2014.
Hedge Funds and FATCA: Registration and Obligations
FATCA regulates foreign financial institutions, which include in its definition entities that were created or are organized outside of the U.S., and that are primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in such an item. Thus, any offshore entities of a hedge fund are likely to be considered foreign financial institutions under FATCA. The following is a brief description of the applicable registration and reporting requirements for certain hedge fund structures under FATCA.
Domestic Funds: While onshore funds (i.e. domestic feeders, stand-alone domestic funds, and domestic fund-of-funds) are not considered foreign financial institutions under FATCA, they are considered withholding agents. A withholding agent is broadly defined as “any person, U.S. or foreign, in whatever capacity acting, that has the control, receipt, custody, disposal, or payment of a withholdable payment or foreign pass-thru payment.” As withholding agents, onshore funds will have to report the FATCA tax status of its investors via IRS Form W-9, as well as perform other withholding and reporting obligations, such as filing a withholding income tax return on Form 1042, reporting withholdable payments on Form 1042-S, and providing general reporting information on Form 8966. Domestic funds do not need to register with FATCA. Note that domestic funds with offshore entities may have additional and more extensive investor-related compliance procedures.
Offshore Funds: Offshore funds (i.e. offshore feeders and master feeders) must register any offshore entity with FATCA, and must enter into an agreement with the IRS, known as a Foreign Financial Institution Agreement, stipulating that the offshore fund, among other things, will undertake certain due diligence obligations with respect to its current and future investors, submit information returns to the IRS regarding certain U.S. investors, and make withholdings on payments of certain U.S. income sources to non-U.S. entity owners that fail to comply with FATCA. Additionally, offshore funds must maintain a Form W-9 for its domestic feeder fund, and must complete a “post-FATCA” Form W-8.
Conclusion
Until January 1, 2014, hedge fund managers should consider their applicable FATCA registration and reporting obligations. Hedge fund managers should begin filling out Form 8957 to ensure that the required registration information is timely and accurate. Hedge fund managers should also carefully design and implement compliance and oversight procedures in order to meet any FATCA obligations regarding account due diligence, reporting, and withholding.
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