The Treasury said that the agreement (48-page / 1MB PDF) established a "reciprocal approach", boosting the ability of HM Revenue and Customs (HMRC) to obtain information from the US to help tackle UK tax evasion in addition to preventing evasion by US taxpayers with accounts in the UK. The UK is the first country to enter into an agreement to implement FATCA and its agreement closely follows the model issued in conjunction with the governments of France, Germany, Italy, Spain and the US at the end of July.
"This agreement demonstrates our commitment to working internationally to tackle tax evasion," said Exchequer Secretary to the Treasury David Gauke, who signed the agreement on behalf of the UK. "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."
He added that financial institutions and other interested parties would now be consulted on the implementation of the agreement to enable draft legislation to be published later this year. The agreement itself is subject to ratification by Parliament after a 21-day scrutiny period.
FATCA is aimed at preventing tax evasion by US residents using foreign accounts. It introduces reporting requirements for foreign financial institutions (FFI) with respect to accounts held by US residents, irrespective of national privacy laws. Institutions which do not collect and report this information can be subject to a 30% 'withholding tax' on their own US source income and sales proceeds, however, as part of the final agreement with the UK withholding tax will not be imposed on income received or payments made by UK financial institutions.
For FATCA's purposes, FFI include any foreign entities whose principle business is accepting, holding, investing or trading in securities or commodities. This can include banks, investment funds, hedge funds, private equity funds and pension funds. However "pension schemes or other retirement arrangements" established in the UK will be exempt from the reporting requirements as they present "a low risk of being used to evade US tax", according to the Treasury, while individual savings accounts (ISAs), save as you earn (SAYE) schemes and premium bonds will also be exempt.
Exemptions also apply to public institutions including governmental organisations, the central bank and the UK offices of certain specified international organisations. Non-profit organisations, "locally based" financial organisations such as credit unions and friendly societies which meet certain conditions will also be treated as "deemed compliant FFIs", according to the terms of the agreement.
Tax law expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement appeared to be "good news" for UK financial institutions; however, she added that uncertainty over the impact of the arrangements in practice would continue until the Government published its draft legislation.
The agreement contains a commitment by the US Government to pursue "equivalent levels of information exchange" to those that the UK must provide under FATCA. Although tax authorities in the US are unable to collect certain information, most notably with regards to "entities", the UK Treasury said that it would be provided with "a wider scope of information on individual accounts than we are providing [the US]".