A group representing private equity firms is asking the Internal Revenue Service and the Treasury Department to streamline the process for following the requirements of the Foreign Account Tax Compliance Act and allow them flexibility in case an investor proves to be recalcitrant in providing information.
FATCA, which was included as part of the HIRE Act of 2010, has provoked controversy by requiring foreign financial institutions to provide information to the IRS about their U.S.-based account holders. The provisions are intended to help close the tax gap by complementing earlier requirements for taxpayers to declare their foreign bank accounts to the IRS. Foreign banks have balked at providing information on their customers to the U.S. government, and in some countries the provisions violate banking secrecy laws.
The IRS and the Treasury Department have tried to address some of these concerns by delaying some requirements and issuing proposed regulations (see IRS and Treasury Propose New FATCA Rules). The comment letter from the Private Equity Growth Capital Council came in response to the proposed regulations.
In the letter, the PEGCC noted that many of its private equity member firms have many entities in their fund families that are expected to become foreign financial institutions, or FFIs, under FATCA’s definition.
The PEGCC said it supports FATCA’s overarching policies of ensuring transparency and compliance with the tax laws, and the PEGCC added that it is committed to working with regulators to further those policies.
“The PEGCC fully supports FATCA’s overarching policies of ensuring transparency and compliance with the tax laws, and we are committed to working with the Treasury Department and the IRS to further those policies,” wrote PEGCC president and CEO Steve Judge in the letter. “There are, however, several aspects of the recently issued proposed regulations under FATCA that we believe should be revised to make the implementation of FATCA more administrable without impacting its substantive goals. Given the enormous undertaking required to administer FATCA, we believe that it is imperative that the procedures under FATCA be streamlined without sacrificing the scope and accuracy of the information made available to the IRS.”
The comment letter addresses areas where the FATCA regulations could be streamlined to achieve the regulatory goals more effectively and reduce burdens on private equity firms. A central goal of the comment letter to is encourage regulators to create a centralized compliance option for investment fund families.
The PEGCC recommends that the regulators change the proposed rule to allow fund families to enter into FFI agreements on a consolidated basis, where one entity, known as the “Compliance Member,” is authorized by other entities within the family to act on their behalf and to bind them all to the terms of a single FFI agreement.
The letter also recommends that regulators allow the Compliance Member to comply with the FATCA reporting requirements on behalf of the members of its group on a centralized basis, such that the Compliance Member would interact directly with the IRS on behalf of the group and would take legal and financial responsibility for the group’s compliance with FATCA.
Regulators should not require investment funds (particularly private equity funds, which are subject to practical and legal constraints regarding the redemption of their investors’ interests) to incur the potentially severe financial hardship of redeeming investors that are recalcitrant account holders as a condition of avoiding a default under an FFI agreement, but rather use alternative means of incentivizing investors not to become recalcitrant account holders, according to the group.
The PEGCC also wants to rationalize the rules for information reporting in tiered partnership structures and adapt them better to investment fund structures; and integrate FATCA reporting for partnerships with current obligations of some foreign partnerships to file Form 1065 and related Schedules K-1.
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