Mutual funds begin to gear up for FATCA

Foreign fund houses are first-movers

The mutual fund industry is keeping a close watch on the Foreign Account Tax Compliance Act or FATCA.

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 US accounts, including accounts of certain foreign entities with substantial US owners," according to the American tax authority's website.

Certain sections of the industry are already gearing up for the implementation process, 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," he said.

"Compliance costs are going to increase once FATCA comes into play," said a senior mutual fund industry official.