Money Market Funds
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A Growing Urgency: FATCA Agreements in the Asia-Pacific Region
By Keith Lawson
February 21, 2014
Questions are swirling as the 1 July 2014 effective date for the US Foreign Account Tax Compliance Act (FATCA) draws closer. US officials remain adamant that another implementation extension, similar to earlier extensions, will not be given. Against this backdrop, many funds in the Asia-Pacific (APAC) region remain uncertain whether their governments will soon strike an arrangement with the United States that streamlines reporting requirements, or if they should prepare to comply with FATCA’s very lengthy and exacting implementation guidelines.
Why FATCA Matters
FATCA is the United States’ attempt to gather more information about the financial assets that its taxpayers hold in other countries. FATCA’s goal—to ensure better tax compliance by US citizens and residents—is laudable. The burdens imposed on financial institutions, however, are substantial. FATCA requires US institutions and foreign financial institutions that hold any US assets to adhere to new customer identification, reporting, and withholding obligations.
The global implications of FATCA are significant. Many global financial institutions have spent years and millions of dollars preparing for FATCA’s implementation. The detailed requirements contained in the extensive US regulations present unique challenges for many firms. Because of the regulations’ complexities and the need to address certain country-specific issues (such as data privacy), many governments have negotiated intergovernmental agreements (IGAs) with the United States. These IGAs simplify greatly FATCA compliance for financial institutions located in any country that has signed one. So far, more than 20 IGAs have been signed.
Notwithstanding the many benefits of an IGA, only one APAC-region country—Japan—has signed one. Unless a country in which a global fund is organized or distributed has an IGA, the fund and its local distributors are in the extraordinarily difficult position of not knowing what rules will apply. This uncertainty complicates greatly the task of meeting looming compliance deadlines.
FATCA Impact Often Underestimated
FATCA affects APAC funds with any US investments, whether or not they have any US investors. Unless a fund with US investments is FATCA-compliant, it will suffer 30 percent withholding on all amounts—including dividends, interest, and sales proceeds—attributable to its US investments. FATCA also might affect an APAC fund without US investments if such a fund does not reside in a country with an IGA and if the fund’s service providers (such as custodians) decide to limit their risk by doing business only with FATCA-compliant firms.
Effect on APAC Funds and Investors
An APAC fund can become FATCA-compliant in one of two ways. First, the fund can register on the IRS FATCA registration portal (which, among other things, involves signing an individual FATCA agreement). Second, the fund automatically will be FATCA-compliant once its country has signed an IGA (which also entails a requirement that the fund comply with local law).
The most significant issue for many Asian funds is not knowing whether they will be covered by an IGA or whether they need to sign a FATCA agreement on the IRS website. A fund cannot know which steps it must take to become FATCA-compliant until it knows whether its country will sign an IGA.
What Needs to Be Done
Because of this uncertainty, financial institutions located in countries without a signed IGA as of 1 July must be prepared to comply by entering into an individual FATCA agreement.
But it would be best if more countries in the APAC region could quickly finalize their agreements with the United States and thus remove this uncertainty. Broad and uniform adoption of IGAs is necessary for FATCA to be implemented in a workable manner that justifies the costs that accompany implementation. Funds and their investors should encourage governments to complete IGAs and provide this certainty.
Negotiating an IGA with greater urgency is important if resolution is to come before 1 July. Funds and their investors should engage with their governments to determine the status of IGA negotiations, and urge a resolution. FATCA compliance is simpler if it done in accordance with an IGA and the implementation procedures under local law, rather than with individual FATCA registration and its detailed regulations.
There is no time to waste. IGAs are needed urgently. Because an applicable IGA cannot be guaranteed, however, funds must be prepared to register under FATCA and meet the many resulting obligations.
Keith Lawson is Senior Counsel, Tax Law, for ICI and ICI Global.
Creating a Globally Workable Compliance Framework for Financial Account Tax Information
By Keith Lawson
February 13, 2014
By developing a global standard for collecting customer information from financial institutions and exchanging that information between governmental taxing authorities worldwide, the Organisation for Economic Co-operation and Development (OECD) has taken an important step to enhance tax compliance. This common reporting standard (CRS) for the automatic exchange of information (AEOI), which was announced by the OECD on 13 February 2014, will be presented to the G20 at their 22–23 February 2014 meeting in Sydney.
Column Makes the Same Mistakes as OFR
By Paul Schott Stevens
January 20, 2014
In recent months, both the U.S. Treasury Department's Office of Financial Research (OFR) and international regulators such as the Financial Stability Board (FSB) have examined whether asset managers pose risks to financial stability. One report is deeply flawed; the other offers a more informed view. Unfortunately, Gretchen Morgenson’s New York Times column (“Bailout Risk, Far Beyond the Banks,” January 12) veers toward the flawed report.
The Status of Global Retirement Savings: Taking Stock, Moving Forward
By Dan Waters
December 20, 2013
Around the world, as systems for building retirement resources come under increasing pressure, countries of every size and economic situation are facing long-term savings challenges. To meet these challenges, it is critical that pension industry experts, policymakers, and fund industry representatives learn from one another and share solutions that put the needs of savers first.
Navigating a Changed—and Global—Industry
By Jeanne C. Arnold
May 23, 2013
Navigating the ever-changing landscape and increasingly global nature of the fund industry took center stage during several panels at ICI’s 55th General Member Meeting (GMM).
ICI Global Welcomes Improvements in Final FATCA Regulations
By Ianthe Zabel
January 18, 2013
UCITS V—Significant Changes for European Funds and Fund Managers
By Giles Swan
July 3, 2012
Today the European Commission adopted a proposal for revisions to the Undertakings for Collective Investment in Transferable Securities (UCITS) framework, which governs cross-border retail investment funds in Europe.
Proposal to Implement Volcker Rule Raises Significant Issues for Regulated Funds Globally
By Dan Waters
February 14, 2012
Congress enacted the provision of the Dodd-Frank Reform Act known as the Volcker Rule to restrict banks from sponsoring and investing in hedge funds (so-called covered funds) and using their own resources to trade for purposes unrelated to serving clients—something known as “proprietary trading.”
A New Voice for Global Investment Funds
By Paul Schott Stevens
October 10, 2011
Over the past two decades, the world has witnessed the rise of asset managers as global financial intermediaries. The fund industry has been at the forefront of this movement, vigorously expanding its international reach and offering investors opportunities to diversify and to access new markets.
Cracking Down on Tax Evaders Without Cracking Up U.S. Capital Markets
By Keith Lawson
June 15, 2011
The Foreign Account Tax Compliance Act (FATCA) is a law designed to ensure that U.S. persons holding assets through accounts in foreign financial institutions comply with their U.S. tax obligations. In other words, the law aims to crack down on tax evasion through offshore investments. It is set to apply to payments made beginning January 1, 2013.
Switching to International Accounting Standards Wouldn’t Likely Benefit U.S. Fund Investors, ICI Tells SEC
By Gregory M. Smith
June 14, 2011
A key issue for ICI’s Operations team is regulator interest in harmonizing worldwide accounting standards. As Donald Boteler, ICI’s Vice President for Operations and Continuing Education, said in ICI’s latest annual report, “It’s a noble purpose, but it’s a big, big challenge.”
Pursuing Sound Financial Regulation for International Markets
By Ari Burstein
February 25, 2011
Whether at home or overseas, ICI works to ensure that regulators pursue the creation of consistent and sensible rules for the financial markets. Internationally, we recently provided input to the European Commission, which is taking a comprehensive look at ways to reform regulation of European financial markets.
U.S. Retirement Success Can Aid in EU Pension Modernization
By ICI Viewpoints
November 15, 2010
Understanding the successes of the U.S. retirement savings framework can aid European regulators as they consider reform of pension systems in the European Union, ICI said in a comment letter.