FATCA's Due Diligence Expansion

Considerations for Corporate Counsel

Private Equity and Fund Management

As we mentioned last month, private equity and hedge fund management remain key drivers of M&A activity in the marketplace and global economic growth. Hedge funds and private equity firms are surely within the gambit of being classified as “withholding agents” under FATCA. Needless to say, the private equity sector remains a prime target for FATCA, if it has not felt the shockwaves already.

A clear example can be found in the case of private equity firms in the Asia-Pacific region, which recently broke out of a two-year slump in 2014 with strong performances across the board in the sector. Generally, Asian fund managers who do not have any capital from U.S. investors need not be concerned with FATCA. However, investment from U.S. investors has become an important part of many Asian firms' limited partner base, as general partners continue to expand their group of investors outside of Asia seeking larger sums for their investment pool.

This trend continues to run rampant for many foreign private equity firms. If the goal for these firms is to continue the trend of attracting U.S. investment, general partners would be well advised in having corporate counsel understand the tax ramifications of FATCA. Luckily, if foreign private equity firms have not transitioned their structures, there is still limited time to do so as long as it is done before Dec. 31, 2015.

Of particular importance to the private equity sector are the effects that FATCA will have on Offshore Trust Companies, which are employed by U.S. clients to serve as offshore trust fiduciaries for legitimate asset protection purposes. FATCA imposes cumbersome and expensive due diligence requirements on offshore trust companies with U.S. clients, which may ultimately lead to these companies opting out of providing fiduciary services to U.S. clients entirely. A definite casualty is the smaller trust company, which simply lacks the resources to comply with FATCA as a business.

Non-Financial U.S. Companies

The new compliance procedures under FATCA impose additional considerations for in-house corporate counsel of non-financial U.S. companies. If they have not already done so, in-house counsel should be in communication with the compliance department to ensure proper compliance projects are in line with IRS audit manuals for withholding. FATCA will require the compliance department of most companies to engage in a document collection process with its payees, which surely affects the business relationship and dealings of the company with suppliers, vendors, and contractors. Careful attention by corporate counsel to this compliance process can prevent unwarranted complications going forward.

Due to increased IRS attention to withholding under FATCA, a compliance project must always begin with a check on the company's current systems and withholding procedures under section 1441 and 1442 of the Code. Once a check is performed on the company's current systems, the company should be prepared to design its future system with a view to how the IRS would view the program under FATCA. Although FATCA withholding procedures are in general congruent with section 1441 and 1442, FATCA imposes additional reporting on the payor not previously required, as mentioned above. Therefore, a document collection process should be specifically outlined and instituted for future dealings.

Since most non-financial companies operating in the United States have a form of cross-border dealings, some form of FATCA compliance will be required in managing the company's business affairs going forward. In-house counsel should be involved with the compliance department in order to avoid complications with current vendors, suppliers, and contractors. In negotiating agreements and ongoing business dealings with payees, in-house counsel should be familiar with the document collection process and include similar provisions into the company's agreements. This practice will assist in-house counsel in addressing any compliance concerns at the time of the agreement, and avoid any future complications.

Conclusion

The message being given by the IRS is clear: If you wish to participate in the United States capital markets, you had better comply with U.S. tax law. Although full understanding of FATCA may be beyond the scope of their representation, general corporate counsel must now at least ensure that FATCA compliance procedures are in place for their corporate clients.

Manuel Garcia-Linares is the managing shareholder and George L. Metcalfe, Jr . is an attorney with the Florida law firm of Richman Greer. They can be reached at [email protected] and [email protected], respectively.

Last month, we discussed the fact that although Congress' purpose and intent in passing 2010's Foreign Account Tax Compliance Act (FATCA) in order to target U.S. taxpayers using offshore accounts to hide monies overseas FATCA was met, it has been achieved at a cost of imposing heavy burdens on those already compliant. The beauty of FATCA is that its grasp has no limits. That being said, FATCA poses new considerations for corporate counsel relating to their corporate clients and shareholders.

We also mentioned that at the most general level, FATCA requires foreign financial institutions (FFI) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities, in which a U.S. taxpayer holds a substantial ownership interest. Thus, it imposes a new system of information reporting and a new 30% withholding tax on withholdable payments made by U.S. persons and others to Foreign Financial Institutions (FFI) and certain Non-Foreign Financial Entities that do not meet specific reporting requirements.

We conclude our discussion herein.

Considerations for Corporate Counsel

Private Equity and Fund Management

As we mentioned last month, private equity and hedge fund management remain key drivers of M&A activity in the marketplace and global economic growth. Hedge funds and private equity firms are surely within the gambit of being classified as “withholding agents” under FATCA. Needless to say, the private equity sector remains a prime target for FATCA, if it has not felt the shockwaves already.

A clear example can be found in the case of private equity firms in the Asia-Pacific region, which recently broke out of a two-year slump in 2014 with strong performances across the board in the sector. Generally, Asian fund managers who do not have any capital from U.S. investors need not be concerned with FATCA. However, investment from U.S. investors has become an important part of many Asian firms' limited partner base, as general partners continue to expand their group of investors outside of Asia seeking larger sums for their investment pool.

This trend continues to run rampant for many foreign private equity firms. If the goal for these firms is to continue the trend of attracting U.S. investment, general partners would be well advised in having corporate counsel understand the tax ramifications of FATCA. Luckily, if foreign private equity firms have not transitioned their structures, there is still limited time to do so as long as it is done before Dec. 31, 2015.

Of particular importance to the private equity sector are the effects that FATCA will have on Offshore Trust Companies, which are employed by U.S. clients to serve as offshore trust fiduciaries for legitimate asset protection purposes. FATCA imposes cumbersome and expensive due diligence requirements on offshore trust companies with U.S. clients, which may ultimately lead to these companies opting out of providing fiduciary services to U.S. clients entirely. A definite casualty is the smaller trust company, which simply lacks the resources to comply with FATCA as a business.

Non-Financial U.S. Companies

The new compliance procedures under FATCA impose additional considerations for in-house corporate counsel of non-financial U.S. companies. If they have not already done so, in-house counsel should be in communication with the compliance department to ensure proper compliance projects are in line with IRS audit manuals for withholding. FATCA will require the compliance department of most companies to engage in a document collection process with its payees, which surely affects the business relationship and dealings of the company with suppliers, vendors, and contractors. Careful attention by corporate counsel to this compliance process can prevent unwarranted complications going forward.

Due to increased IRS attention to withholding under FATCA, a compliance project must always begin with a check on the company's current systems and withholding procedures under section 1441 and 1442 of the Code. Once a check is performed on the company's current systems, the company should be prepared to design its future system with a view to how the IRS would view the program under FATCA. Although FATCA withholding procedures are in general congruent with section 1441 and 1442, FATCA imposes additional reporting on the payor not previously required, as mentioned above. Therefore, a document collection process should be specifically outlined and instituted for future dealings.

Since most non-financial companies operating in the United States have a form of cross-border dealings, some form of FATCA compliance will be required in managing the company's business affairs going forward. In-house counsel should be involved with the compliance department in order to avoid complications with current vendors, suppliers, and contractors. In negotiating agreements and ongoing business dealings with payees, in-house counsel should be familiar with the document collection process and include similar provisions into the company's agreements. This practice will assist in-house counsel in addressing any compliance concerns at the time of the agreement, and avoid any future complications.

Conclusion

The message being given by the IRS is clear: If you wish to participate in the United States capital markets, you had better comply with U.S. tax law. Although full understanding of FATCA may be beyond the scope of their representation, general corporate counsel must now at least ensure that FATCA compliance procedures are in place for their corporate clients.

Manuel Garcia-Linares is the managing shareholder and George L. Metcalfe, Jr . is an attorney with the Florida law firm of Richman Greer. They can be reached at [email protected] and [email protected], respectively.