Goldman MF says Fatca to hurt its unit holders

Warns investors of 30% withholding tax in US; says take help from tax consultants

Goldman Sachs Asset Management (GSAM) has warned unit holders of its three actively managed schemes they could face tax liabilities of up to 30 per cent in the US if they fail to comply with the requirements under the US Foreign Account Tax Compliance Act (Fatca). Also, under the law, there could be circumstances under which the fund house might have to “mandatorily” redeem the units of a non-compliant unit holder, it added. Though the new law, which comes into effect on Tuesday, is targeted at US taxpayers, described as “specified US persons” and “US-owned foreign entities”, other unit holders of the scheme could see their returns pared in case of failure to comply at the scheme level.

“No assurances can be given that the scheme will be able to enter into and comply with an FFI (foreign financial institution) agreement and that the scheme will be exempt from this 30 per cent withholding tax,” Goldman Sachs cautioned in an addendum issued this week. Unit holders should consult the potential implications of the withholding tax with their tax advisors, it advised.

According to the addendum, ‘US-owned foreign entities’ include those in which a US taxpayer owns at least 10 per cent. This broad definition might bring many local institutions and companies under the ambit of the Fatca. Goldman Sachs’s India arm is among the first firms here to officially advise unit holders of the implications of the new US law. Other funds, especially US-headquartered ones, could follow suit.

Under Fatca, Goldman’s open-ended schemes such as Goldman Sachs India Equity fund, Goldman Sachs CNX 500 fund and Goldman Sachs short-term fund fall under the definition of FFIs. Together, these schemes manage assets of about Rs 160 crore.

Sanjiv Shah, chief executive of GSAM, declined to comment.

Distributors are yet to fully understand the implications of these provisions.

Niranjan Risbood, director (fund research) at Morningstar India, said, “This (Fatca) could impact the money coming from US-based non-resident Indians into Indian equities, as fund houses will probably stop accepting money from US account holders rather than trying to comply with the regulation of monitoring and reporting US account holders in their schemes.” “It is expected the scheme will be treated as a foreign financial institution for this purpose. As a foreign financial institution, to be relieved of this withholding tax, the scheme might have to register with the IRS (Indian Revenue Service) and enter into an agreement with it,” the firm said.

GSAM said under the FFI agreement, which applied to certain payments of annual or periodical incomes accruing after June 30, the scheme might directly or indirectly, through inter-government treaties, share information related to unit holders with tax authorities in the unit holder’s jurisdiction. The addendum pertaining to exchange-traded funds (ETFs) didn’t mention Fatca, suggesting these funds, which were more like stocks, might not fall under the definition of FFIs and might be exempt from the law’s purview. Goldman Sachs is the fund manager for the recently launched CPSE ETF.
WHAT THE FATCA ENTAILS

• Every foreign financial institution (FFI) has to sign an agreement with the US tax department
• The FFI has to obtain, verify information on unit holders
• The FFI has to determine if unit holders are specified US persons/US-owned foreign entities
• The FFI should report information regarding non-compliant unit holders annually
• Even unit holders holding investments on behalf of others may fall under the definition of FFI

Source: Goldman Sachs MF Addendum