IRS offers relief on FATCA

In a move sure to be welcomed by the private funds community, the US Internal Revenue Service (IRS) extended key deadlines contained in the Foreign Accounts Tax Compliance Act (FATCA), including deadlines for GPs to register certain entities in their fund structures and when non-US tax officials must exchange information with the US tax authority.

The IRS is giving fund managers an additional year – from December 31, 2015 to December 31, 2016 – to register feeder funds, holding companies and other sub-fund type vehicles under an umbrella “sponsoring entity” that handles reporting and compliance for the entire group structure, which GPs say is needed to avoid unnecessary FATCA administrative costs. Previously GPs were expected to register each individual entity within the structure, a timely and costly process.

The IRS also postponed when it will begin to apply a punitive 30 percent withholding tax on gross proceeds and certain other types of income originating in the US when traveling outside of the US to non-compliant managers – extending its start date two years to January 1, 2019.

Some tax experts question if the gross withholding tax remains a necessary element of FATCA, which was signed into law in 2010. Over the last five years, they argue, the tax authorities of most countries have demonstrated that they are on board with FATCA’s policy objectives, and that the threat of gross proceeds withholding (to which they have not agreed ) seems redundant.

The IRS likely understands that “due to the manner in which FATCA has evolved, its collection of information on US accounts will come primarily through foreign countries who have so far not agreed to the concept of gross proceeds withholding, accordingly there is little urgency in  implementing it for the next several years,” said Jay Bakst, a tax partner at professional services firm EisnerAmper. 

Finally, the IRS extended the reporting deadlines for 2014 data for countries that have reached Model 1 intergovernmental agreements (IGAs). Entities based in these jurisdictions will not be subject to withholding under FATCA, so long as their host regulators continue to demonstrate “firm resolve” to bring the IGA into force, and any information that was required to be exchanged by September 30, 2015 is exchanged by September 30, 2016.