Regulatory Priorities

PEGCC Files Comment Letter on the Foreign Account Tax Compliance Act (FATCA)

On April 30, 2012, the Private Equity Growth Capital Council filed comments on proposed regulations for the implementation of the Foreign Account Tax Compliance Act (FATCA). FATCA requires that Foreign Financial Institutions (FFI) enter into reporting agreements with the IRS and provide the IRS with relevant information. The PEGCC is interested in the FATCA regime because many of our member firms have a sizable number of entities in their funds families that are expected to become participating FFIs, and numerous others that will need to otherwise comply with FATCA reporting or certification procedures.

The PEGCC supports FATCA’s overarching policies of ensuring transparency and compliance with the tax laws, and the PEGCC is committed to working with regulators to further those policies.  There are, however, several aspects of the recently issued proposed regulations under FATCA that should be revised to make implementation of the law more administrable (and therefore more effective) without impacting its substantive goals.

In filing the letter, PEGCC President and CEO, Steve Judge stressed the following, “Given the enormous undertaking required to administer FATCA, we believe that it is imperative ─ both from the government’s point of view and from the point of view of those taxpayers that will take part in administering FATCA ─ that the procedures under FATCA be streamlined without sacrificing the scope and accuracy of the information made available to the IRS.”

The single most significant general comment made in the PEGCC letter is that the proposed regulations should be amended to take better account of the differences between investment fund families and global banking groups ─ most importantly by allowing fund families to comply with FATCA on a more centralized basis than currently appears to be contemplated.

Notice 2011-34 indicated that Treasury and the IRS, at least at one point, considered providing a “centralized compliance option” for investment fund groups that could be monitored centrally, although the concept does not appear in the Proposed Regulations. The PEGCC hopes that the “centralized compliance option” can be resurrected and introduced into the final regulations along the lines discussed in the PEGCC’s Comment Letter.

The comment letter addresses areas where the FATCA regulations should be streamlined to achieve the regulatory goals more effectively and reduce burdens on private equity firms.  Specifically, the PEGCC recommends that the regulators improve the proposed rule to:

  • allow fund families to enter into FFI agreements on a consolidated basis, where one entity (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;
  • 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;
  • 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;
  • 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.

The PEGCC looks forward to working with regulators to achieve the goals outlined in its letter.