On September 12, the United States and the United Kingdom governments announced the signing of a bilateral agreement to implement the information reporting and withholding tax provisions within the Foreign Account Tax Compliance Act (FATCA).
Enacted by Congress in March 2010, FATCA’s provisions are intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, with foreign financial institutions (FFIs). Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.
While FFIs will be able to register through an online system that will become available by January 1, 2013, and institutions with US clients will be required to report basic account details for 2013 and 2014 by January 1, 2015, it is currently envisaged that the income of those clients will not need to be reported until January 1, 2016, with respect to calendar year 2015.
However, FFIs across the world (including banks, investment funds and insurance companies) have all expressed concern about the legislation, in particular the costs of compliance and penalties that will ensue in cases of non-compliance.
In order to address these issues, the governments of France, Germany, Italy, Spain and the UK, with the support of the European Commission, took part in joint discussions with the US government to explore a practical way forward that supports the overall aim to combat tax evasion, while reducing the risks and burdens on FFIs.
In July this year, following those discussions, the governments published a model intergovernmental agreement to implement FATCA. No exemption from FATCA is contemplated for any jurisdiction, but instead a model for information sharing is offered based on existing bilateral tax treaties and allowing FFIs to report the necessary information to their respective governments rather than to the IRS.
The UK-US agreement is based on that model, and is thereby said to mark an important step in establishing a common approach to combatting tax evasion based on the automatic exchange of information. A wider scope of information than before will be exchanged and on an automatic basis.
The agreement is also reciprocal. The US Treasury has recently issued final regulations that will require US banks to report interest paid on deposits to non-residents and substantially increase the amount of information the US collects. The agreement contains a commitment by the US government to pursue in the future equivalent levels of information exchange, as can already be provided by the UK.
In addition, the agreement ensures that the burdens imposed on UK FFIs are proportionate to the goal of combating tax evasion. It sets out UK institutions and products which are seen as presenting a low risk of being used to evade US tax, such as retirement funds and charities, and therefore effectively exempt from FATCA requirements.
“Today’s announcement marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion,” said US Treasury Assistant Secretary for Tax Policy Mark Mazur. “We are pleased that the UK, one of our closest allies, is the first jurisdiction to sign a bilateral agreement with us and we look forward to quickly concluding agreements based on this model with other jurisdictions.”
David Gauke, UK Exchequer Secretary to the Treasury, added that “this agreement demonstrates our commitment to working internationally to tackle tax evasion. It is the first of its kind and represents a significant step forward in the scope and nature of information exchange between governments. Furthermore, the changes we have achieved to FATCA implementation will provide significant benefits to UK financial institutions.”
The agreement has been laid before the UK parliament and will undergo a 21 day scrutiny period as part of the ratification process. FFIs and other interested parties will now be consulted on the implementation of the agreement in the UK, with draft legislation to be published later this year..
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