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US-UK Treaty Clarifies Scope Of FATCA Act, Allays Some Industry Nerves - Withers
Tom Burroughes
20 September 2012
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. Local reporting 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 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.