Tax

US Crackdown On Tax Dodgers Spawns FATCA Copycats

Tom Burroughes, Group Editor, 6 June 2014

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As Group of Seven countries gathered in Belgium yesterday to thrash out economic and policy wangles, such as what to do about Russia, the issue of how they will push reforms to beat tax evaders has been set out by financial industry experts.

As Group of Seven countries gathered in Belgium yesterday to thrash out economic and policy wangles, such as what to do about Russia, the issue of how they will push reforms to beat tax evaders has been set out by financial industry experts.

With the US FATCA Act (Foreign Account Taxation Compliance Act) due to take effect initially from 1 July, momentum is building for many leading nations to co-operate more in cracking down on tax cheats, pointed out figures from BNY Mellon, BlackRock and the Investment Management Association. They briefed journalists about developments in a seminar in London.

“This co-ordinated action by governments to crack down on tax evasion is unprecedented in terms of transparency and disclosure,” Lorraine White, head of EMEA Securities Tax and US Tax Services, at BNY Mellon, said.

FATCA requires what are deemed foreign financial institutions, ranging from banks to hedge funds, to pass information about US clients to the US tax authorities, or local bodies where an international agreement is in place. If they don’t comply, they face a 30 per cent withholding tax on US-sourced income. The threat of such a penalty has led banks such as HSBC and Deutsche Bank, among others, to stop serving expat US citizens; it has also imposed a multi-billion dollar compliance burden on institutions.

The US has discovered, experts said, that imposing FATCA unilaterally is difficult and has needed cooperation from other nations; it also would not want a situation where US-sourced income was taxed in such a way that those affected could remain anonymous. “The US has always said it does not want anonymous withholding,” White said. She spoke alongside Mariano Giralt, head of EMEA Tax Services, BNY Mellon; Roger Exwood, head of Product Tax, BlackRock; Jorge Morley-Smith, Tax Director, IMA, and Chris Mitchell, head of UK Tax Services, BNY Mellon.

Although the US is almost unique in its approach to taxing US citizens on worldwide income, rather than on a territorial basis, other countries have increasingly tried to copy the extra-territorial reach of the US, enacting similar rules and agreeing that tax data should be automatically exchanged. The UK has introduced a version of FATCA through agreements with various UK Overseas Territories and Crown Dependencies – such as the Isle of Man and the Cayman Islands. And dozens of nations under the umbrella of the Organisation for Economic Cooperation and Development have agreed to set a Common Reporting Standard spelling out reporting and due diligence rules for local financial institutions. In February, the OECD released a standard for automatic exchange of financial account information, made up of rules on how data is exchanged, and common reporting standard. Last month, countries meeting in Paris issued a declaration on automatic information exchange. The move is seen, for example, as a serious blow to Swiss bank secrecy.

From 5 May, foreign financial institutions have had to register with the IRS in the US; from 1 July, the US FATCA Act’s onboard requirements must be in place, and the same date sees the UK requirements take effect. On 1 January next year, the US withholding tax arrangement kicks in for undocumented US accounts and what, on the face of it, are undocumented foreign financial institutions. The various US, global and UK measures are designed to roll out in a series of steps leading up to the autumn of 2017.

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