Foreign fund houses become first movers

Indian ones adopting a wait-and-watch approach

Some entities in the mutual fund sector seem to be keeping a closer watch on the Foreign Account Tax Compliance Act (Fatca) than others. Foreign fund houses had a head start on the new regulations, which sought to track the assets of American citizens abroad, including their investments in financial institutions such as mutual funds in India, industry sources said.

Vijai Mantri, managing director and chief executive, Pramerica Asset Managers, said the company had already put necessary systems in place. “We are already compliant, as we are owned by a US entity,” he said.

Mutual funds with foreign partners were keener to implement the new processes, said a consultant who advised asset management companies on such issues. “Some foreign fund houses, many of which would also have some operations in the US, have already begun preparing for its implementation. My sense is pure Indian mutual funds might take some time to decide on how best to tackle the new norms,” he said.

The Act requires foreign financial institutions, including mutual funds, to register with the American tax authorities and provide details on assets held by American citizens. The norms require more stringent compliance practices and are likely to increase costs for the mutual fund industry, about half of which is recording losses.

The new rules are expected to be in place by the mid-2014.

“Under Fatca... foreign financial institutions may register with the Internal Revenue Service, or IRS (the US tax department), and agree to report to the IRS certain information about their US accounts, including accounts of certain foreign entities with substantial US owners,” says the US tax authority's website.

The chief executive officer of a domestic mutual fund house said Indian fund houses were adopting a wait-and-watch approach on the matter. “On Fatca, we are pacing ourselves. We are not directly impacted. It has more of an impact for fund houses that have US citizens as investors,” he said.

Meanwhile, the mutual fund industry is already complaining about the increase in costs. “Compliance costs are going to increase once Fatca comes into play. Margins are already squeezed for the primary business; a lot of profits are coming from advisory and offshore businesses,” said a senior mutual fund industry official.

GEARING UP FOR NEW US RULES

* Fatca is a regulation that allows the US tax department to keep a tab on the assets of its citizens in foreign countries

* It requires foreign financial institutions such as mutual funds to submit details to the US tax department

* Fund houses with connections with the US have already put systems in place for the implementation of Fatca

* Indian funds are taking longer to adopt the required practices

* MFs say compliance costs will go up