US tax rule may wipe 30% off wealth firm client returns

The Investment Management Association (IMA) is lobbying the US government over its plans to force all taxpayers – whether American or not – to prove they have no form of tax liability to the US or else face a 30% penalty on their returns.

The regulation, known as Fatca, may be rolled out as early as 1 January 2013 and has far reaching consequences for the asset and wealth management industry.

Under the rules – a provision of President Obama’s Hiring Act – the US Internal Revenue Service (IRS) could withhold 30% of all gross proceeds of a fund or investment where the end investor has failed to provide evidence of any tax liabilities to the US.

Two high profile asset managers told Wealth Manager that Fatca could result in firms of all sizes facing a huge burden in compliance, costs and administration for what is ultimately a set of US regulations aimed at guarding against tax avoidance. ‘Funds that have US investors will be captured by it, therefore it is important for the UK industry... it could have an impact for investors’ returns,’ one added.

The IMA’s head of tax Stephen Lynam went further and outlined the far-reaching impact of the legislation, adding that the IMA has written to the IRS expressing its concerns.

‘It’s absolutely clear it’s going to have some very major impacts on the UK market. What the Americans have done is draft a legislation that assumes the world is the US; to assume every investor is ultimately a US tax payer and to put the onus indirectly on the investor [to prove otherwise] but directly on the entities under the Fatca net,’ Lynam said.

He added that Fatca extends well beyond the reach of the asset management industry and spreads to any ‘holder of assets’. This means wealth managers, platforms, fund management groups and financial advisers (except those that solely offer advice) are caught by the legislation in its present form.

‘Those entities are everybody; firms do not even have to be regulated as a financial institution in the US or anywhere,’ Lynam said. ‘[There could be] possible disinvestment from the US or a reduction in business put through platforms, and the returns that get back to the customer.