FATCA - Impact on Cayman CLO Issuers
The US Foreign Account Tax Compliance Act ("FATCA"), which was enacted to combat offshore tax evasion by United States ("US") taxpayers who hold their investments and other assets in foreign accounts, will impose a US withholding tax on US source interest, dividends, and certain other types of passive income of “foreign financial institutions” ("FFI") and other "non-financial foreign entities" ("NFFE") that fail to perform certain diligence and provide information regarding their US account holders and, in certain circumstances, US investors. The US Treasury has issued proposed FATCA regulations addressing these FATCA provisions. The final regulations are expected to be issued later this year, and could differ significantly from the proposed regulations.
Although FATCA is effective as of 1 January 2013, the proposed regulations provide that FFIs and NFFEs that do not comply with FATCA will only become subject to a 30% withholding tax with respect to such US source income from 1 January 2014. Withholding on gross proceeds is delayed until 1 January 2015.
While FATCA does not apply to payments under any obligation outstanding as of 18 March 2012, the proposed regulations have extended this date to any obligation outstanding as of 1 January 2013.
In recognition of the burdens associated with FATCA compliance and to facilitate coordination with local law restrictions, the US Internal Revenue Service (the "IRS") is developing an alternative approach for FFI compliance with FATCA that will require: (i) the FFI to collect and report the required information to its own government; and, (ii) the relevant government to enter into an intergovernmental agreement with the US (an "IGA") to report this information annually to the IRS. The Cayman Islands Government has established a FATCA Task Force to evaluate the recently published US Treasury’s Model 1 IGA to Improve Tax Compliance and to Implement FATCA and the soon to be released Model 2 IGA currently being developed with the US Treasury, Japan and Switzerland.
The Securities Industry and Financial Markets Association ("SIFMA") provided detailed comments on the proposed FATCA regulations to the IRS and the US Treasury Department in April 2012. In particular, SIFMA suggested that: (i) the final regulations should contain a certified deemed-compliant FFI exemption for certain types of existing securitization vehicles (including CLO vehicles) and, importantly, new securitization vehicles; and, (ii) as IGAs will not be in effect by the time many of the FATCA provisions take effect, FFIs in countries where there is not an IGA in place, and the local laws prohibit the transmittal of personal information be deemed-compliant until such time as the US government reaches a solution with such countries. In cases where countries are in negotiations with the US to develop an IGA, FFIs should be deemed-compliant until sometime after either such IGA is adopted or the countries have concluded that they cannot agree to an IGA.
In early 2011, MaplesFS, which provides administration services to a large portfolio of structured finance issuers and hedge funds, commenced an evaluation of the impact of FATCA on its business and clients. Systems and processes across all business units and client profiles were reviewed to ensure the requirements of FATCA can be met. MaplesFS continues to monitor announcements to ensure that both the company and its clients are well prepared. MaplesFS has engaged an experienced team from a leading industry consultant to assist with the ongoing assessment of FATCA and the implementation of changes to documentation, systems and processes in order to ensure compliance and assist clients in addressing FATCA requirements.
Clearly the final impact of FATCA on CLO and other structured finance issuers remains uncertain. However, Maples and Calder and MaplesFS will each continue to monitor the implementation of these regulations and to work with clients towards appropriate compliance solutions.