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Digital Subscriptions > The Hedge Fund Journal > Issue 109 - November 2015 > Automatic Exchange of Information

Automatic Exchange of Information

FATCA, CDOT & CRS – What should you be doing now?

Hedge funds and hedge fund managers, like much of financial services sector, have been firmly swept into the global battle against tax evasion. The introduction of the Foreign Account Tax Compliance Act (“FATCA”) by the US, UK FATCA for the UK’s Crown Dependencies and Overseas Territories (“CDOT”) and the Organization for Economic Cooperation and Development’s (OECD) Common Reporting Standard (“CRS”) are the key driving force behind this.

The regimes require in scope organisations to collect, validate and report the financial account information of their customers to tax authorities as a pre-cursor to automatic information exchange between tax authorities worldwide. In doing so, tax authorities will be better equipped to detect instances of tax evasion as they seek to validate such data against tax filings made by individuals and entities tax resident in their jurisdictions. With over 90 jurisdictions having committed to adoption of the CRS (59 of which have committed to undertake first exchanges by 2017), we will see a vast increase in the volume of reporting required as compared to FATCA.

Although compliance is a legal obligation, given the nature of the data being reported and what tax authorities will be doing with it, the more pressing concern for many organisations is the significant impact burdensome compliance processes or inaccurate reporting could have on customer relationships and customer experience.

Operationalising such Automatic Exchange of Information (“AEOI”) regimes in the hedge funds industry has posed a number of challenges, not least due to the breadth of stakeholders typically involved.

Ultimately it is the fund’s obligation, as the Financial Institution in the context of the AEOI regimes, to ensure compliance with AEOI requirements in respect of its investors. In reality for FATCA, as is expected to be the case for CDOT and CRS, achieving compliance has required funds to determine how best to engage with a range of stakeholders from fund managers, fund boards of directors, fund administrators, advisors, counterparties, distributors and of course investors themselves. The relationship between the fund manager and fund board of directors is of particular interest with the manager often having to determine how best to provide comfort to fund boards that all appropriate processes will be in place.

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