Asset Management Alert asset management industry?

Asset Management Alert
What does the Cayman Island IGA really mean for the
asset management industry?
In brief
The impact of the Foreign Account Tax Compliance Act (FATCA) on the asset management industry is profound.
Virtually every asset management fund will have to comply with FATCA as each likely will be considered either a
US withholding agent (USWA) or a foreign financial institution (FFI). Compliance involves understanding not
only what the FATCA regulations issued by the US Department of the Treasury (US Treasury) in January 2013
(the FATCA regulations) require, but, just as importantly, what various intergovernmental agreements (IGAs)
and local law require as well.
Since September 2012, the US Treasury has entered into a number of IGAs with various partner countries
specifically to address the challenges faced by foreign entities as they attempt to comply with FATCA. The IGAs
not only address legal impediments to compliance, such as local data privacy and other types of restrictions in
certain jurisdictions, but also modify certain compliance burdens associated with FATCA reporting and
withholding.
Of particular significance to the asset management industry is the recent negotiation of the IGA between the
United States and the Cayman Islands (Cayman/US IGA). Both governments have initialed the agreement to
indicate their intent to sign it. They also have indicated that the official signing will be held as soon as possible,
after which the agreement will be made publicly available.
While the general implications of the Cayman/US IGA are known, there are still many questions that will not be
answered until the agreement is signed and guidance is provided by the Cayman Islands Government. However,
through the presentation of some frequently asked questions (FAQs), this alert describes some of the more
relevant implications of the Cayman/US IGA based on the IGAs signed to date.
In detail
Importance of the Cayman/US IGA
The Cayman Islands has served as an essential financial center for many enterprises, particularly in the asset
management industry. The Cayman/US IGA, generally applicable to funds established or located in the Cayman
Islands (Cayman FFIs), is expected to simplify an asset manager’s FATCA compliance program. Although IGAs
significantly modify the instances in which FATCA withholding otherwise would apply, asset managers still face
substantial compliance tasks under FATCA.
Cayman/US IGA based on Model 1
The US Treasury has promulgated various model agreements, including Model 1 and Model 2, upon which
negotiations with FATCA partner countries are based. According to Cayman Islands officials, the Cayman/US
IGA is based on the so-called Model 1 IGA. The US Treasury continues to update these model agreements (click
here to view the most recent versions).
FAQ #1: What are the practical differences between a Model 1 IGA and a Model 2 IGA?
Both Models are intended to serve as a long-term solution for local law restrictions that otherwise would have
prevented compliance with an FFI agreement. Model 1 IGAs require FFIs established or located in FATCA
partner countries to follow the terms of the Model 1 IGA as implemented through local law and report
information regarding US accounts to their local tax authorities, which will then share that information with the
Internal Revenue Service (IRS).
Model 2 IGAs, on the other hand, require FATCA partner countries to direct and enable local FFIs to register
with the IRS and report specified information about US accounts directly to the IRS, similar to participating FFIs
(PFFIs) in non-IGA countries. Another significant difference is that, except as specifically modified by the IGA,
an FFI under a Model 2 IGA is generally required to comply with the terms of an FFI Agreement as provided in
the FATCA regulations similar to PFFIs in non-IGA countries.
FAQ #2: What is a reporting financial institution (FI)?
Under a Model 1 IGA, a reporting FI is generally defined as any financial institution that is not a non-reporting
FI. Under an IGA, certain FIs that are deemed to pose a low risk of tax evasion are considered non-reporting FIs.
Certain FIs that are treated as deemed-compliant or as exempt beneficial owners (e.g. certain pension and
retirement funds) under the FATCA regulations are considered non-reporting FIs. In addition, each country that
enters into an IGA with the US is able to designate certain types of entities in that country that will be nonreporting FIs. Annex II of each IGA includes a list of the types of local entities that will be treated as nonreporting FIs.
FAQ #3: Is the local law classification or the US tax classification of a fund under a Model 1
IGA relevant for FATCA purposes?
Both are relevant as the classification used depends on the FATCA requirement being assessed.
Similar to PFFIs in non-IGA countries, the US tax classification of a fund under a Model 1 IGA will determine the
type of documentation it may need to furnish to a USWA in order to ensure the correct amount of withholding
tax on US source income. For example, if a fund is classified as a corporation for US tax purposes, it would
generally furnish a Form W-8BEN-E, Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding (Entities), indicating that it is the beneficial owner of the income it is receiving. Whereas, if a fund
is classified as a flow-through entity (e.g., a partnership), it would furnish a Form W-8IMY, Certificate of
Foreign Intermediary, Foreign Flow-Through entity, or Certain US Branches for United States Tax
Withholding, to indicate it was not the beneficial owner of the income that it is receiving. In addition to a Form
W-8IMY, the flow-through entity would also generally furnish a withholding statement that contains allocations
of income to payees and beneficial owners as required.
The US tax classification of a fund covered under a Model 1 IGA is also relevant for determining whether a fund
under a Model 1 IGA is a member of an expanded affiliated group (EAG), and whether a fund could be the
common parent of an EAG (see FAQ #13).
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Although the US tax classification of a fund is relevant for these purposes, the general FATCA compliance
obligations of a reporting Model 1 FFI (e.g., registration with the IRS, tax reporting and withholding,
documentation and due diligence on investors, etc.) will be determined by the applicable IGA and relevant local
law, rather than the FATCA regulations. Of particular relevance is whether an entity is respected as a separate
legal entity or disregarded for US tax purposes. Cayman local law may vary, but as a point of reference, the
United Kingdom’s (UK’s) Guidance Notes on this matter specifically state that entities disregarded for US tax
purposes will be respected as separate entities under local law. It appears that the Cayman Islands may mirror
the UK treatment.
A typical example in the asset management industry is an entity organized in the Cayman Islands that has
elected to be disregarded for US tax purposes. Assuming the Cayman/US IGA is similar to the UK/US IGA, that
entity should be respected as a separate legal entity covered by the Cayman/US IGA and treated as either a
reporting or non-reporting Cayman FI.
Registration with the IRS
FAQ #4: Does a fund under a Model 1 IGA need to register through the IRS online system
and obtain a global intermediary identification number (GIIN)?
Yes. Although not required to sign an FFI Agreement, a reporting FI under a Model 1 IGA is required to register
with the IRS and obtain a GIIN. In addition, a reporting FI may authorize one or more ‘points of contact’ to
receive FATCA information from the IRS on its behalf. However, a non-reporting FI under a Model 1 IGA is not
required to register with the IRS.
It should be noted that, according to Annex II of the Model 1 IGA, a sponsored investment entity that is not a
withholding foreign partnership (WP) or withholding foreign trust (WT) and which has not identified any US
reportable accounts (generally, US taxable investors) will be treated as a non-reporting FI. Non-reporting FIs are
treated as certified deemed compliant FFIs under the US Treasury regulations. As a result, a sponsored
investment entity under a Model 1 IGA with only foreign and US tax exempt investors may not be required to
register with the IRS to obtain a GIIN. According to the Model 1 IGA, if the investment entity ultimately ends up
getting US reportable accounts, the sponsoring entity must register the investment entity within 90 days after
such account is first identified. However it should also be noted that the IRS has not yet issued guidelines on how
sponsoring entities will register their sponsored entities.
FAQ #5: By what date should a fund under a Model 1 IGA register with the IRS?
Generally, an entity needs to register by April 25, 2014 to be included in the first list of registered FFIs to be
published by the IRS on June 2, 2014. However, there are a couple of provisions that allow a Model 1 FFI to
register at a later date.
First, the FATCA regulations provide that a fund subject to a Model 1 IGA is not required to provide a GIIN to a
withholding agent until January 1, 2015 unless:

The fund elects (or needs to renew its election) to be a qualified intermediary (QI), WP, or WT; or

The fund has ‘branches’ in a jurisdiction not covered by a Model 1 IGA.
While most funds subject to a Model 1 IGA would meet the requirements to rely on the extended deadline to
register, it may still be practical to be on the first list of registered FFIs. Not registering could create
administrative complexity if the fund is not on the published list and does not have a GIIN to provide
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withholding agents. While the fund is technically not subject to withholding, it runs the risk of inadvertently
being subject to withholding and potentially having to claim a refund or request a credit. It seems any marginal
benefit associated with waiting the extra few months may be overcome by the administrative hassle.
Second, sponsored entities may use their sponsoring entity’s GIIN until 2016, allowing them additional time to
register and obtain their own GIIN. As of now, guidance is still pending on how sponsoring entities will obtain
the GIINs on behalf of their sponsored entities. Also, as stated in FAQ #4, sponsored investment entities under
Model 1 IGAs may not be required to register at all unless and until they have US reportable accounts.
Identifying a responsible officer
FAQ #6: Does a fund under a Model 1 IGA need to have a responsible officer (RO)?
Yes. Although the IGAs make no reference to an RO, the role of an RO for a reporting Model 1 FFI is different
than that of an RO for a PFFI under the FATCA regulations. The RO of a reporting Model 1 FFI only needs to be
authorized under local law to establish the status of the FI for registration purposes whereas the RO of a PFFI
has responsibility over a PFFI’s FATCA compliance program and is required to make various compliance
certifications to the IRS. It is not anticipated that the Cayman Islands will require an internal controls
certification, but more information should be available once the Cayman/US IGA is signed.
While there is no requirement for reporting Model 1 FFIs to regularly certify to the IRS regarding internal
controls, it is still recommended that funds design a governance model to support FATCA compliance, including
a framework of internal controls to mitigate risk to their entities and related business functions and/or third
party service providers.
Due diligence procedures
FAQ #7: Will a fund under a Model 1 IGA be subject to the same due diligence procedures as
PFFIs under the FATCA regulations?
Not exactly. While significant overlap between the due diligence procedures of the FATCA regulations and the
IGAs exists, substantial differences remain. These include:

In documenting new individual investors, reporting Model 1 FFIs may generally rely on a self-certification
from an individual and information otherwise collected for anti-money laundering (AML)/know your
customer (KYC) purposes to determine the status of an individual investor. However, the FATCA regulations
generally require a PFFI to obtain tax withholding certificates (e.g., Form W-8BEN) and/or documentary
evidence to establish the status of an individual investor. Although the IGAs do not require an actual Form
W-8, the self-certification process can clearly be satisfied by completing the appropriate Form W-8.

For pre-existing individual investors, a search for US indicia and the relationship manager inquiry are still
required when appropriate. If no indicia are found, no further action is necessary unless there is a change in
circumstance. If indicia are found, the fund would have to get documentary evidence similar to that required
of new investors.

For pre-existing entity accounts, PFFIs generally have to comply with the same requirements as USWAs, in
that the focus is around whether the investors are specified US persons or FIs. However, reporting Model 1
FFIs have a streamlined process under which they determine the status of entity investors based on a
combination of self-certification, AML/KYC processes, and publicly available information. Similar rules
apply for new entity investors.
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
In addition, funds are allowed to rely more heavily on the fact that an entity investor is located in any IGA
jurisdiction, based on publically available information, so long as they are not on notice that the investor is a
nonparticipating FFI (NPFFI).
As the standards differ between IGAs and the FATCA regulations, funds should confirm with their administrator
that they are applying the appropriate set of rules for each entity.
FATCA withholding on income
FAQ #8: Will a reporting Model 1 FFI be subject to FATCA withholding on income it
receives?
At the fund level, FATCA withholding should apply only if the fund has not resolved any identified instances of
significant non-compliance within 18 months of first receiving notification from the US and the US treats the
fund as a NPFFI.
FAQ #9: What are the implications of FATCA withholding to investors in a fund that is
covered under a Model 1 IGA?
An investor in a fund covered under a Model 1 IGA could experience FATCA withholding to the extent the
investor is not FATCA compliant or does not furnish adequate documentation with respect to its investment.
Although reporting Model 1 FFIs are generally not responsible for withholding 30% FATCA tax, they will need to
furnish documentation to USWAs when they receive US source income. Based upon the documentation received
from a reporting Model 1 FFI, a USWA will withhold 30% FATCA tax on withholdable payments paid to the fund
that are allocable to investors who are not FATCA complaint or who have not furnished adequate
documentation.
Reporting obligations generally
FAQ #10: Will a fund under a Model 1 IGA have any reporting obligations?
Yes, it is anticipated that the information reported to the local tax authority will be substantially similar to that
required under the FATCA regulations. The local tax authority will exchange such information with the IRS, but
it remains unclear how that reporting will be submitted (i.e., electronic media, a local tax form, or a US
information return such as Form 8966 and Form 1042-S). To the extent a reporting obligation exists under any
other US information reporting regime, those requirements would presumably still apply.
Use of sponsored groups
FAQ #11: If a fund under Model 1 IGA is part of a sponsored group which includes FFIs that
are not Model 1 IGA funds, does the sponsoring entity follow the rules under the Model 1
IGA or the FATCA regulations?
The sponsoring entity should follow the rules of the particular Model 1 IGA as implemented by local law for
those funds it is sponsoring that are resident or located in a country governed by the Model 1 IGA; it should not
follow the FATCA regulations in that instance. A sponsored group, however, can include funds subject to a Model
1 IGA, Model 2 IGA, or the FATCA regulations. As such, the sponsoring entity should follow guidance that is
appropriate to where the fund is located or resident rather than the guidance appropriate to the sponsor.
FAQ #12: Can a fund under a Model 1 IGA be a sponsoring entity?
Yes, to the extent an FI in a Model 1 IGA country meets the requirements under the FATCA regulations and is
able to fulfill the requirements on behalf of the FFIs in the sponsored group, it can act as a sponsoring entity.
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Expanded affiliated groups
FAQ #13: In determining whether a reporting Model 1 FFI is a member of an EAG, should the
local laws of the relevant IGA country or the FATCA regulations be followed?
Unlike other compliance requirements under an IGA, the US tax classification, the FATCA regulations, and other
US tax concepts should be followed for purposes of this determination. An EAG is a group of entities connected
through more than 50% ownership with a common corporate parent. To determine whether a corporate entity is
a member of an EAG, the 50% test is determined relative to vote and value. For non-corporate entities, voting
power is not taken into account.
In a typical master/feeder structure in the asset management industry, the offshore feeder is generally treated as
a corporation for US tax purposes and owns an offshore master fund that is generally treated as a partnership for
US tax purposes. In such example, the offshore feeder and master fund would be part of an EAG to the extent the
offshore feeder owns more than 50% of the master fund. The fact that the Cayman feeder is sometimes a
partnership under local law does not change this assessment as the US tax classification of an entity is followed
for EAG determinations.
FAQ #14: What are the implications to a reporting Model 1 FFI of being in an EAG?
In general, all PFFIs and registered deemed-compliant FFIs that share common ownership sufficient to be part
of the same EAG must be registered and identified as members of the same EAG. As part of an EAG, a lead FI
must be selected to register the entities pursuant to each FI’s applicable status (e.g., PFFI, reporting Model 1 FFI,
etc.) Each member of an EAG has the ability to taint the FATCA compliance of the other members to the extent it
does not comply with the registration requirements under either the applicable IGA or the FATCA regulations,
depending on which rules are applicable to each entity in the group.
FAQ #15: Can a fund under a Model 1 IGA be a lead FI of an EAG?
Yes. A lead FI initiates and is authorized to carry out most aspects of each of its member FI’s FATCA
registrations. Thus, its registration schedule will be impacted by the registration needs of its member FIs. To the
extent it intends to be a lead FI for one or more member FIs that are not established and operating exclusively in
other Model 1 IGA jurisdictions, it may not be able to avail itself of the extended January 1, 2015 date to avoid
being subject to FATCA withholding.
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The takeaway
While many countries are contemplating or have signed IGAs with the US Treasury, the initialing of the
Cayman/US IGA is one of the more significant developments for the asset management industry. Asset
management professionals should be prepared to analyze the impact of the IGA and other guidance once it is
made public. Issues to consider include:

Annex II of the Cayman/US IGA which will specify the entities treated as exempt beneficial owners or
deemed-compliant FFIs and the types of accounts that are excluded from the definition of ‘financial
accounts’

Legal entity management issues such as the identification of EAGs and sponsoring relationships prior to
entering any information into the IRS on-line registration system at the beginning of 2014

Gauging the efficiency of internal controls

Enhancing existing policies and procedures

Evaluating the use of automation and technology

Training relevant stakeholders within the organization
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Dominick Dell’Imperio
+ 1 646 471 2386
[email protected]
Rebecca Lee
+ 1 415 498 6271
[email protected]
Candace Ewell
+ 1 202 312 7694
[email protected]
Erica Gut
+ 1 415 498 8477
[email protected]
Kara Friedenberg
+ 1 646 471 5748
[email protected]
www.pwc.com/us/assetmanagement
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US Federal, state or local tax penalties
that may be imposed on any taxpayer.
© 2013 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may
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