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Alternative Market Briefing

FATCA regs finalized, but hedge funds still in limbo

Tuesday, January 29, 2013

Bailey McCann, Opalesque New York:

On January 17, the IRS issued finalized Foreign Account Tax Compliance Act (FATCA) rules. These rules will impact financial firms and investors of all stripes foreign and domestic. In essence, the rules are designed to go after US tax cheats regardless of where they reside. In establishing the scheme, the IRS has signed most other countries on to an information sharing and tax reporting agreement in order to ensure they are getting all taxes legally owed in the US. However, for hedge funds and private equity firms, which have been keenly awaiting the results of the deliberations around finalizing the rules key provisions are still up in the air. The US is still negotiating with key countries in the Caribbean on a model for tax reporting.

For foreign governments who are working with the IRS on FATCA, there are two models of doing this. Under option 1, individuals or entities report their US taxable investments, and the foreign government reports those to the US on an automated basis. With option 2, the foreign investor or firm sets up a reporting arrangement directly with the IRS and the foreign government will do some measure of IRS reporting on its own. So far, Switzerland is the only country to sign on to the second option.

Right now, the IRS is negotiating with most other countries about which model they intend to use. The result of these negotiations, more than the finalized rules, will have a significant impact on hedge......................

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