The US government’s new law for tackling tax evasion will have serious repercussions for European funds as they will face a 30% tax on the returns from all their US-based investments unless proof is provided that their clients are non-US investors.
In a bid to tackle tax evasion more efficiently, the US government recently voted in the Foreign Account Tax Compliance Act (FACTA) which will come into effect from January 1, 2013.
Under the FATCA, a 30% withholding tax is applied on any payment from US sources – interest, dividend or sales proceeds – made to an investment fund. Unless the fund identifies its US investors to the US Treasury and complies with verification and due diligence procedures it will be subject to the tax.
Effectively, any fund which invests in the US is affected by this new law and it translates into new withholding tax and reporting obligations which have the potential to change the way funds currently operate.
The irony of a situation where European investors will bear the brunt of a US tax initiative is all too real for tax expert Georges Bock of the KPMG consultancy firm.
‘It’s not that we are against the US government’s right to chase its tax evaders, we absolutely agree with its decision to go after them,’ said Bock, speaking at an ALFI conference in London on Thursday. ‘But what we question is how it is being done and how disproportionate its action is.
‘At the end of the day it is going to be European consumers that are going to pay and for me that is rather unacceptable.
‘You are going to be considered a US investor, unless you can prove that you are not one. If you can’t, you will face a 30% tax on everything going into your account.’
Although most investors have heard of the new US tax many feel it does not concern them, according to Bock, believing that as long as they do not have any US investors in their fund then they do not fall under the new regulation’s requirements.
‘That is wrong. As soon as you invest in the US you are in scope. And funds are in scope because they invest in the US on behalf of investors.’
Another concern is that the reporting and due diligence required is a lengthy process which takes up to two years, according to Bock. But with just over 18 months before it is implemented, time is too short.