The recently announced bi-lateral treaty between the US and UK on controversial legislation to prevent expats from dodging US taxes is a welcome step in clarifying the impact of these rules, says Withers, the law firm.

On 12 September, the UK became the first country to sign such an agreement with the US Treasury on how to enforce the US Foreign Accounts Tax Compliance Act, or FATCA. Getting ready for this act is still a serious challenge for the global financial services industry, as reported by this publication and others. The act highlights how the US's "worldwide" system of tax stands in stark contrast to the territorial approach adopted by most other jurisdictions, such as the UK, Singapore or Switzerland. 

In particular, foreign financial institutions that do not comply with FATCA requirements for reporting to the IRS on their US account holders will be hit with a 30 per cent withholding tax. The scope of the act has already prompted some international banks, such as DBS in Singapore and HSBC, for example, to not take on US clients. 

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Under the US-UK agreement, UK institutions can report directly to the UK’s domestic tax collection agency, HM Revenue & Customs, rather than have to file with the IRS. The agreement also clarifies which organizations will be excluded from reporting requirements or be treated as deemed-compliant foreign financial institutions.

“FATCA may be one of the most remarkable pieces of tax legislation ever enacted; its impact is severe, wide-ranging and by no means limited to the US. FATCA readiness and FATCA compliance will remain a hot topic for the global financial services industry for the foreseeable future but the US/UK agreement provides some welcome news for UK firms,” Kristin Konschnik, partner at international law firm Withers, said.

“UK banks and institutions will breathe a collective sigh of relief at the news that certain types of accounts such as ISAs [individual savings accounts] will be exempt from reporting requirements. The agreement also brings good news for a raft of UK organizations, from devolved administrations to certain pension plans, which will be exempt from FATCA reporting requirements,” she said.

“US and UK authorities are also planning to collaborate with other partners, from the EU to the OECD, to create common model agreements for automatic tax information exchange. Whilst details of implementing legislation and any new model agreements are yet to be announced, the key message is clear. In this brave new world of increasing transparency and information sharing, it will take ever more courage to bet against the IRS,” she said.

The following organizations are exempt from FATCA’s reach:  

-- The UK government; devolved administrations; certain local government authorities; the central bank; any UK office of a list of international organizations and certain pension plans.

-- Non-profit organisations that meet certain UK registration requirements and specified financial institutions – for instance credit unions and building societies – with a "local client base" will be deemed compliant.

Exempt accounts:

Reporting is not required with respect to certain accounts, including ISAs, certain retirement accounts and specified share incentive and company share option plans, among others.

The bi-lateral agreement, once enacted in parliament, is expected to take effect from 2013.

Withers also argued that the deal clarifies the potential impact on trusts. “It is expected that many family trusts will be exempt, so that only professionally managed trusts should be within the scope of the agreement. While funds are still covered by these rules, the consultation document indicates that the investment manager may be the most appropriate party to centralize fund compliance, although the fund would remain responsible for ensuring its compliance requirements are met,” the firm said.

The law firm added that the act also spells out what is meant as a “controlling person” for the purpose of the act, making it clear that such a definition should fit with existing UK anti-money laundering rules.

“On one hand, it is possible this test may increase the required US ownership threshold for certain entities from 10 per cent to 25 per cent in some cases, while on the other hand, may require identification of anyone who exercises ultimate management control over an entity. Similarly, the controlling person test requires identifying who has ultimate effective control over a trust, which may be different for each trust depending on its term,” Withers added.