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HM Revenue and Customs Issues FATCA Guidance

By Amanda Banks,, London

27 December 2012

The UK has published draft regulations and guidance relating to the US Foreign Account Tax Compliance Act, known as FATCA, following an agreement signed in September to implement information reporting and withholding tax measures.

Financial institutions will have an obligation under FATCA to transfer information to HM Revenue and Customs (HMRC) about accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. HMRC will then pass this information on automatically to authorities in the USA. A 30% withholding tax is imposed on the US source income of any financial institution that fails to comply.

The new regulations categorise different kinds of financial institutions, distinguishing between custodial institutions (such as brokers, custodial banks, trust companies, clearing organisations and nominees), depositary institutions, investment entities, and specified insurance companies. The regulations also list a number of exemptions that include UK governmental organisations, the Bank of England, international organisations with offices in the UK such as the World Bank, retirement funds, charities, and financial institutions with a "local client base."

To qualify as a local client base financial institution, an institution must be based solely in the UK and must not market services to non-UK customers, although the mere existence of a website will not in itself be seen as soliciting US customers. Further, at least 98% of the accounts by value provided by the financial institution must be held by residents (including residents that are entities) of the UK or another member of the European Union. US citizens resident in the UK can also be included. Local client base institutions must not provide accounts for a non-participating financial institution, or for any passive investment entity with controlling persons who are US citizens or residents. Monitoring policies must also be in place.

Due diligence under the regulations will be based on self-certification by the customer.

Pre-existing accounts, defined as those opened on or before December 31, 2013, become reportable at a threshold of USD50,000, or USD250,000 in the case of cash value insurance contracts or annuity contracts. Reporting requirements will be phased in over a three year period starting from 2013.

A second statement published by HMRC explains that the transfer of information will not breach the UK's Data Protection Act, as it will comply with a legal obligation created by a Statutory Instrument (secondary legislation passed by Parliament). However, the Act’s fairness requirements mean that account holders should be told that details have been or may be passed on.

TAGS: tax | investment | interest | insurance | retirement | legislation | withholding tax | HM Revenue and Customs (HMRC) | charities | regulation | HM Revenue and Customs (HMRC) | services | Compliance

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