The Foreign Account Tax Compliance Act (FATCA), the US law designed to prevent US tax-payers from avoiding tax and concealing their assets from the United States Internal Revenue Service (IRS) is set to have a significant impact on investment managers in the Kingdom of Saudi Arabia, says Advent Software.
The firm warns that despite the belief that they are exempt from FATCA, many Saudi-based managers are at risk of being affected.
FATCA requires that foreign financial institutions (FIs) register with the IRS by January 2014 and if they do not register, they will then be regarded as “non-participating”. This means that a 30% withholding tax will be applied to all their income on American assets from 2014 as well as to the proceeds from the sales of these assets from 2015.
Saudi managers have the option to refuse to take on US clients or sell off their US clients thereby avoiding FATCA compliance. However, Advent questions whether managers will willingly pay the price for loss of business.
In a briefing note, Jad Fares, Advent’s regional sales manager for the Middle East and North Africa (MENA), writes that both registration and compliance are arduous. Many fund management companies will require 18 months or longer in order to become FATCA-compliant. They need to learn about FATCA tax law and to monitor communications from the US Department of the Treasury to develop processes in order to better understand their US clients. Extensive evaluation of their current systems and processes in areas such as corporate actions, tax operations and account structures would also need to be a priority.
Fares adds that from a software and IT standpoint, it is critical that firms have a plan in place for technology enhancements and updates as they look to consolidate their process and procedures. Institutions will be required to change the way they support on-boarding of new investors, capturing accounting enhancements and changes, processing new data as well as the ability to provide additional documentation that satisfies the new reporting requirements.
For those managers that do register, their work is not over. They will have to conduct extensive due diligence on all clients for evidence of not just US citizenship but any US connections. Passport checks will be the norm as will other forms of identification checks; whether clients are green card holders or hold US addresses, whether interest or dividends are transferred to a bank account in the US or even if a client was born there.
“Undoubtedly, FATCA is a compliance burden but this law is here to stay and for many managers, time is of the essence,” Fares concludes.
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