Foreign fund houses first-movers on FATCA compliance

Indian ones adopting a wait-and-watch approach

Some parts of the mutual fund industry seem to be keeping a closer watch on the Foreign Account Tax Compliance Act (FATCA) than others.

Foreign fund houses are have taken a head-start on the new regulations, which seeks to track the assets of American citizens abroad including through investments in financial institutions such as mutual funds in India, according to industry sources.

Vijai Mantri, Managing Director & Chief Executive Officer at Pramerica Asset Managers said that it has already put the necessary systems in place.

“We are already compliant since we are owned by a US entity,” he said.

Mutual funds with an overseas partner are more keen on the implementation of the new processes, according to a consultant who advises asset management companies on such issues.

“Some of the foreign fund houses, many of which would also have some operations in the United States, have already begun to prepare for its implementation. My sense is that the pure Indian mutual funds may take some time to decide on how best to tackle the new norms,” said the person.

The act requires foreign financial institutions, including mutual funds,  to register with the American tax authorities and provide details on any assets held by American citizens. The new norms require more stringent compliance practices and is likely to increase costs for the mutual fund industry, roughly half of whom are currently running losses.

The new rules are expected to be in place by the middle of next year.

“Under FATCA...foreign financial institutions (FFIs) may register with the IRS (Internal Revenue Service-the American tax department) and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners,”   according to the American tax authority's  website.

The chief executive officer of a domestic mutual fund house also said that Indian fund houses are taking a wait and watch approach to the regulation.

“We are pacing ourselves when it comes to FATCA. We are not directly impacted. It has more of an impact for fund houses which would have US citizens as investors,” he said.

Meanwhile, the mutual fund industry is already groaning about the increase in costs.

“Compliance costs are going to increase once FATCA comes into play. Margins are already squeezed for the main business and a lot of the profits are coming from advisory and offshore businesses,” said a senior mutual fund industry official.