RSM AND HFMWEEK CRS/FATCA SURVEY HOW DO FUNDS INTEND TO ADDRESS CRS AND FATCA COMPLIANCE CHALLENGES?

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1 RSM AND HFMWEEK CRS/FATCA SURVEY HOW DO FUNDS INTEND TO ADDRESS CRS AND FATCA COMPLIANCE CHALLENGES?

2 During the third quarter of 2016, RSM and Hedge Fund Management Week (HFMWeek) surveyed chief operating officers (COOs) and chief financial officers (CFOs) of leading hedge funds regarding how they intend to address compliance challenges associated with the U.S. Foreign Account Tax Compliance Act (FATCA) and the new Common Reporting Standard (CRS). 1 CRS is the new global standard for the automatic exchange of financial information between participating jurisdictions that was developed by the Organisation for Economic Co-operation and Development (OECD). The objectives of the survey were: To assess the level of awareness and familiarity with CRS and FATCA To understand respondent perceptions of the impact and relevance of CRS on the hedge fund industry, in general, as well as for their respective organizations, in particular To gauge respondents confidence in their ability to achieve effective, efficient and timely compliance with withholding, reporting and due diligence requirements under each regime 1 All references to FATCA contained in this report are to provisions set forth under Internal Revenue Code sections 1471 through 1474 and the regulations promulgated thereunder in effect as of the date of this report. RESPONDENT DETAILS The online survey was conducted in September and October of 2016, with 102 fund COOs and CFOs responding. Headquarters: 43 percent of respondents were headquartered in North America (including Cayman Islands, Bermuda and the United States), 34 percent in Europe (including the United Kingdom and Switzerland) and 20 percent in Asia (including Hong Kong and Singapore). No other country had more than five respondents. Firm strategy: Most respondents report a firm strategy of long/short equity (29 percent), multistrategy (11 percent) or other (23 percent). Assets under management (AUM): About one-third of respondents have AUM of $1 billion or more, and about one-third have AUM of $100 million to $1 billion. Respondents with AUM between $50 and $100 million accounted for 12 percent of respondents. One-quarter of respondents had AUM under $50 million. Investors/distribution of funds: Most respondents firms distribute funds or have investors in the United States (63), U.K. (56), Switzerland (34) and Cayman Islands (30).. 1 I Learn more at

3 KEY FATCA AND CRS ISSUES FOR FUNDS TO CONSIDER The overlap in many of the findings between CRS and FATCA is not surprising as the two initiatives are closely related and compliance with both will rely on similar systems, processes and resources. However, as compliance with FATCA is still a relatively new exercise and as compliance with CRS is being done for the first time, funds may be relying too much on those similarities and underestimating both the differences and the cumulative compliance burden presented by FATCA and CRS. Similar, yet not the same While only 37 percent of respondents are extremely or very familiar with CRS, 51 percent claim to be fully prepared or to have made significant progress toward preparation to comply with CRS. Funds should ask themselves some key questions to consider how fully they actually understand CRS requirements and their ability to meet them, for example: In which jurisdictions do you face CRS compliance requirements? How do you plan to identify the country of residence for all investors? Have you communicated with your investors concerning CRS? If not, do you have a communications plan? Have you updated systems, policies and procedures for CRS? FATCA AND CRS THE BASICS FATCA, which became effective in 2010 with phased withholding starting in 2014, generally requires non- U.S. financial institutions to report information on U.S. persons holding income and assets in offshore accounts to the U.S. government and requires nonfinancial foreign entities to disclose information on their substantial (i.e., 10 percent or more) U.S. owners or they will be subject to 30 percent withholding on certain payments received. Using FATCA as a model, the OECD recently introduced CRS as a global standard for the automatic exchange of financial information between governments. CRS requires financial institutions in participating jurisdictions to report information on the financial accounts of residents of over 100 participating jurisdictions to their local taxing authority, which exchanges that information with the governments of other participating jurisdictions as appropriate to assist them with identifying potential tax avoidance by their residents. While both FATCA and CRS have specific due diligence and reporting requirements, unlike FATCA, CRS is not enforced with withholding, but is instead enforced with penalties that vary by jurisdiction. Reporting under CRS starts as early of spring of Deadlines vary by jurisdiction. KEY MILESTONES FOR CRS AND FATCA PRESENT CONFLICTING OPERATIONAL CHALLENGES Dec. 22, 2014 Last date for Model 1 IGA Fls to register with the IRS to ensure inclusion on initial FFI List of 2015 July 1, 2014 Treat accounts opened on or after this date as new accounts (for many jurisdictions this applies only for individuals) Jan. 1, 2015 Deadline for reporting Model 1 IGA Fl to provide upstream witholding agent with GIIN June 30, 2015 Complete due diligence for pre-existing high value individual accounts Sept. 30, 2015 Competent authority must provide required information to the IRS for 2014 (FI reporting deadlines vary by country) June 30, 2016 Complete due diligence for pre-existing lowervalue accounts and pre-existing entity accounts Sept. 30, 2016 Competent authority must provide required information to the IRS for 2015 (FI reporting deadlines vary by country). Reporting of foreign reportable amounts to NPFFIs begin Sept. 30, 2017 Competent authority must provide required information to the IRS for 2016 (FI reporting deadlines vary by country) Sept. 30, 2018 Competent authority must provide required information to the IRS for 2016 (FI reporting deadlines vary by country) Oct. 29, countries sign on to the Multilateral Competent Authority Agreement, committing to implement the CRS Jan. 1, 2016 CRS go-live date for early adopter countries Model 1 IGA CRS Dec. 31, 2016 Complete due diligence for pre-existing high value accounts Sept CRS exchange of information begins for early adopter countries (FI reporting deadlines may vary by country) Dec. 30, 2017 Complete due diligence for pre-existing lowervalue accounts and preexisting entity accounts RSM and HFMWeek CRS/FATCA survey I 2

4 Have key stakeholders in functions throughout your organization that are affected by CRS (such as investor onboarding and tax reporting) been educated on its requirements and do they fully understand how their roles and responsibilities will change or when and how to execute specific CRS related tasks assigned to them? Have you evaluated how all legal entities in the group will be classified under CRS since an entity s CRS classification may be different than what it is under FATCA and since the location of each entity will ultimately drive its reporting obligations? With over 100 countries participating in CRS, the number of reportable persons for CRS purposes will likely be much higher than the number of reportable persons for U.S. FATCA purposes. Further, because CRS is implemented under local laws, each of which has its own deadlines, definitions and requirements, organizations must implement a process for continually monitoring changes under local laws. Most don t have the resources or expertise to identify legislative changes or additional local guidance published that might affect their reporting obligations in a timely fashion. Additionally, as new funds are acquired or new investors are onboarded in new jurisdictions, the risk of potential noncompliance increases if organizations do not have a process for monitoring changes in the rules and for ongoing evaluation of their compliance obligations. Outsourcing is not a cure all The results of our survey indicate that the majority of funds intend to rely on outsourcing rather than internal resources to comply with both CRS and FATCA. While outsourcing is certainly a viable option, funds also need to realize that they own the compliance effort whether they rely on internal or external resources. Funds will also need to identify which aspects of reporting they intend to outsource. Will it be data aggregation? File conversion? Identifying reportable accounts? Tracking the residency of investors? Transfer pricing issues, or something else? They also need to understand what information their outsourced providers will require and how that information will be collected and delivered by their systems and processes. Without adequate understanding and preparation, not only are compliance failures more likely, but the cost of outsourcing could also increase precipitously. FAMILIARITY WITH CRS The results of our survey indicate that most respondents are only somewhat familiar with CRS, but still expect it to have a moderate impact on their business overall. About half of respondents say that they are either fully prepared (20 percent) or have made significant progress in preparation (31 percent) for complying with CRS. Additionally, the majority of KEY DATES FOR CRS IMPLEMENTATION EARLY ADOPTERS Jan. 1, 2016 Onboarding standards for new accounts (both individual and entity accounts) Dec. 31, 2016 Remediation of high-value individual accounts Mar. 31, 2017 First reporting to regulators Dec. 31, 2017 Complete remediation (all individual and entity accounts) Jan. 1, 2017 Onboarding standards for new accounts (both individual and entity accounts) Dec. 31, 2017 Remediation of high-value individual accounts Mar. 31, 2018 First reporting of regulators Dec. 31, 2018 Complete remediation (all individual and entity accounts) NON-EARLY ADOPTERS 3 I Learn more at

5 respondents reported that they are confident in their ability to meet CRS requirements for: Reporting (54 percent) Treatment of new vs. legacy accounts (58 percent) Deadlines for compliance (53 percent) Almost two-thirds of respondents (60 percent) say they need less than three months to review accounts to prepare for CRS. TIME NEEDED TO REVIEW ACCOUNTS TO PREPARE FOR CRS Respondents familiar with CRS Percent responding 60% Less than 3 months (n=90) Lack of familiarity with CRS may be attributable to the fact that, while the rules were introduced three years ago, those rules have still not yet been implemented by many local governments. Many countries are still developing guidance concerning CRS. Companies, however, need to plan for compliance soon, since reporting for CRS began in the spring of Financial information to be reported includes, but is not limited to, interest, dividends, account balances, income from certain insurance products and proceeds from sale of financial assets. In gathering data, tax residency within or exercising control from a particular country is the driving factor. CRS also relies heavily on local anti-money laundering and Know Your Customer (KYC) rules as well as on self-certification by account holders. While the intention is to have a single global standard, requirements may vary across countries, which will make it even more difficult for funds to standardize their processes. CRS VERSUS FATCA 34% 3-6 months 6% More than 6 months When comparing respondents reactions concerning both CRS and FATCA, respondents had similar views on many questions, but were less familiar with CRS. SAMPLE COUNTRIES IMPLEMENTING CRS TO DATE COMMITTED Dominica Greenland Trinidad and Tobago SIGNED Anguilla Argentina Barbados Belgium Bermuda British Virgin Islands Bulgaria Cayman Islands Colombia Croatia Curacao Cyprus Czech Republic Denmark Estonia Faroe Islands Finland COMMITTED Andorra Bahamas Brazil Brunei China Hong Kong Israel SIGNED Albania Antigua Barbuda Aruba Australia Austria Belize Canada France Germany Gibraltar Greece Guernsey Hungary Iceland India Ireland Isle of Man Italy Jersey Korea Latvia Liechtenstein Lithuania Luxembourg Malta Macau Malaysia Monaco Panama Qatar Russia St Kitts & Nevis Chile Cook Islands Costa Rica Ghana Grenada Indonesia Japan Marshall Islands Mauritius Mexico Montserrat Netherlands Niue Norway Poland Portugal Romania San Marino Seychelles Slovak Republic Slovenia South Africa Spain Sweden Turks and Caicos United Kingdom Saudi Arabia Singapore Turkey United Arab Emirates Uruguay New Zealand St Lucia St Vincent and the Grenadines Samoa Saint Maarten Switzerland RSM and HFMWeek CRS/FATCA survey I 4

6 Familiarity: Familiarity with FATCA is much higher than CRS Impact: FATCA has had somewhat more impact than CRS Likelihood to outsource or hire: Respondents are more likely to outsource rather than hire in order to address both CRS and FATCA Likelihood to seek help from professional services firm: The likelihood to seek help from a professional services firm is similar between CRS and FATCA Anticipated spend on compliance: There is little difference in the anticipated cost of compliance for CRS and FATCA CRS COMPLIANCE STRATEGIES AND SPENDING Respondents indicated that they are unlikely to hire additional staff to address CRS compliance needs. More than 40 percent of respondents are either extremely or very likely to invest in outsourced reporting to comply with CRS, with most respondents reporting they are extremely likely (27 percent) or very likely (28 percent) to seek help from an outside professional services or accounting firm. The vast majority of firms (76 percent) anticipate spending less than $25,000 on CRS advisory or CRS compliance. AMOUNT FIRM EXPECTS TO SPEND ON CRS ADVISORY OR CRS COMPLIANCE Respondents familiar with CRS Percent responding Less than $25,000 $25,001 to $75,000 More than $75,000 (n=90) 0% 20% 40% 60% 80% 100% For hedge funds familiar with complying with FATCA, the framework for analyzing CRS will likely feel familiar. Funds will need to obtain CRS documentation from investors, review the documentation and perform due diligence procedures as may be required, and develop a procedure for reporting reportable persons to the relevant authorities. FATCA FINDINGS Respondents are generally more familiar with FATCA than CRS, find it has had a moderate impact on their businesses and anticipate that overlap between FATCA and CRS will help them deal with CRS reporting. Following is a summary of survey findings regarding respondents familiarity with, preparation for and expectations concerning FATCA: Most respondents (60 percent) are familiar with FATCA Almost half (49 percent) of respondents say that FATCA has had a moderate impact on their business overall FATCA s impact has been greater on outsourced reporting than on internal operational and reporting hires Almost half of respondents (49 percent) are likely to seek help from an outside professional services or accounting firm to comply with FATCA requirements The vast majority of firms (80 percent) anticipate spending less than $25,000 on FATCA advisory or FATCA compliance There is concern over a potential lack of standardization between CRS and FATCA reporting due to local enhancements to the Extensible Markup Language (XML) schema Respondents say the significant overlap between CRS and FATCA eases coping with and understanding new rules OTHER CRS FINDINGS Other findings regarding respondents familiarity with, preparation for and expectations concerning CRS include: XML schema requirements: Overwhelmingly, firms expect the CRS reporting XML schema requirements to increase their tax reporting costs over those in CRS as improvement on current reporting requirements: Most do not see CRS as an improvement, or much of an improvement, on current reporting requirements. CRS compliance concerns: Respondents are concerned with the expense, complexity and penalties of mistakes in complying with CRS. Comfort with understanding CRS requirements: Comfort with understanding of select CRS requirements is moderate, and only about one quarter are extremely comfortable or very comfortable. 5 I Learn more at

7 Comfort with understanding of due diligence: We also see moderate comfort with understanding of enhanced due diligence procedures for high-value accounts. The enhanced due diligence procedures require financial institutions (FIs) to conduct electronic searches of their data for certain highvalue accounts. These requirements differ by jurisdiction and may require modifications to systems and procedures since they differ from FATCA. Familiarity with country-by-country differences: There is low familiarity with the country-by-country differences in CRS reporting. There is moderate importance of these differences. Preparation for due diligence for high-value accounts: There is low preparation for the different due diligence level for high-value accounts in the new CRS standard. CRS checks in countries where it is not required: Many firms (41 percent) undertake checks in preparation for the adoption of CRS, even in countries where it is not currently required. They do so to reduce costs (52 percent) and improve compliance (70 percent). Investor inquiries into firm s CRS preparation: About onequarter (27 percent) of respondents say that investors are asking them about their firm s preparation process for CRS. DATA AND SYSTEMS ISSUES While most companies intend to leverage systems, policies and resources used for FATCA to comply with CRS, many are concerned that CRS XML schema requirements and the format of CRS reports will differ significantly from FATCA s and may vary from jurisdiction to jurisdiction. These differences will present significant costs and operational challenges since modifications may be required for both upstream and downstream systems in various areas throughout the organization, including the onboarding, tax reporting and compliance functions. Additionally, CRS requires collection of data (such as tax residency) that was not previously gathered or captured for FATCA purposes and that is based on different reporting thresholds than those applied under FATCA. DIFFERENCES IN FINDINGS BY ASSETS UNDER MANAGEMENT Smaller funds report lower familiarity with both CRS and FATCA, with only 4 percent of respondents with AUM of less than $50 million reporting familiarity with CRS and 32 percent of those respondents reporting familiarity with FATCA. By comparison, 38 percent and 75 percent of respondents with AUM of more than $1 billion reported familiarity with CRS and FATCA, respectively. FAMILIARITY WITH CRS BY AUM Under $50M (n=25) $50M-$100M (n=12) $100M-$1B (n=33) Over $1B (n=32) FAMILIARITY WITH FATCA BY AUM Under $50M (n=25) $50M-$100M (n=12) $100M-$1B (n=33) Over $1B (n=32) 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% FATCA and CRS will present ongoing compliance challenges for all funds. While the two compliance actions are similar, they are not the same. Funds will have to understand and address both to ensure an effective global compliance effort. For more information on FATCA and CRS, please visit rsmus.com/globalinformationreporting RSM and HFMWeek CRS/FATCA survey I 6

8 For more information about RSM US LLP, please contact us: rsmus.com Outside the United States, contact our Global Executive Office for assistance with your inquiry. +44 (0) This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. RSM and the RSM logo are registered trademarks of RSM International Association. The power of being understood is a registered trademark of RSM US LLP. April 2017 RSM US LLP. All Rights Reserved. tl-nt-tax-fs-0317-hfmweek FATCA/CRS Summary