Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.
The US' Foreign Account Tax Compliance Act (FATCA), an anti tax evasion law, is proving a costly headache for UK financial institutions, but with the closure of HM Revenue & Customs' (HMRC's) consultation on the law they can at least soon expect some clarity.
HMRC's consultation on the implementation of a US-UK inter-governmental agreement (IGA) in respect of FATCA has now closed and we are waiting to see how it will be incorporated into UK law.
As most will be aware, FATCA is a US law designed to prevent tax evasion by US citizens using offshore banking facilities. FATCA creates a new tax information and reporting and withholding regime, designed to gain information about US persons. It imposes a 30% withholding tax on payments of US source income made to non-US financial institutions unless they enter into an agreement with the US Internal Revenue Service (IRS) and disclose information about their US account holders.
FATCA caused considerable consternation for non-US financial institutions because the information disclosure requirements under FATCA would not necessarily be permitted under data protection, confidentiality and bank secrecy laws. To counter some of these issues, the UK Government, along with those of Germany, Spain, France and Italy agreed to enter into bilateral arrangements with the US to allow FATCA compliance to take place at national level.
The UK Government has been commendably proactive on this and the US and the UK have now entered into an IGA, the first of its kind, which will mean that UK financial institutions will be able to meet their FATCA obligations without having to enter into an agreement with the IRS, by reporting information to HMRC.
The British Bankers' Association (BBA) has responded to the consultation and made some important practical points. For one, the BBA highlights the need for the final FATCA regulations and the IGAs concluded with other countries to be consistent with one another.
Financial institutions operating in multiple jurisdictions must be able to set up systems and processes to deal with FATCA, which will enable them to fulfil their FATCA obligations in all the jurisdictions where they operate. It will be simply too costly and confusing to have different requirements in different jurisdictions.
FATCA has been and continues to be a massive and very costly headache for the financial services industry. In a way, you really do have to admire the US's approach of introducing a process to find out about US people evading US tax, which puts the obligation to collect information and the cost of collecting it onto financial institutions throughout the world, rather than on the US Internal Revenue Service. It really is a "win win" situation for the US.
This has not been lost on the UK Government and HMRC. They have made the US-UK IGA reciprocal so that the UK can get information on UK citizens with US accounts.
In addition an announcement by George Osborne and Danny Alexander earlier this week on clamping down on tax dodgers evasion suggests that the UK might enter into agreements like the US-UK IGA with other jurisdictions. Reports suggest that the UK is in negotiations with Jersey and Guernsey about entering into similar agreements which would provide for the automatic exchange of information in relation to UK citizens with offshore bank accounts.
Despite the past amnesties enabling those with offshore bank accounts to come forward and settle their affairs and the series of leaks of lists of account holders at specific banks, HMRC clearly believes that there are still a considerable number of UK taxpayers who are evading tax through the use of offshore accounts.
Clearly in these difficult financial conditions we all want HMRC to collect tax which is due to them, but what will be the implications of these FATCA-like obligations for financial institutions? Will they require the same procedures as FATCA proper? Will they result in yet more cost for financial institutions?
The BBA has also highlighted that while UK financial institutions will still be required to register with the IRS, how the registration process will work in practice in relation to the US-UK IGA is far from clear.
The entity classifications in the US-UK IGA are different to those for FATCA proper and therefore registration processes need to reflect this. This issue needs to be sorted out by the US as a matter of urgency as the last thing we want is for US tax agents to withhold from payments to UK financial institutions because they cannot verify the status of UK institutions.