Withers: What the US-UK FATCA agreement means for HNWs - Spear's Magazine

Withers: What the US-UK FATCA agreement means for HNWs

On 12 September 2012, the UK became the first country to sign a bilateral agreement with the US Treasury on implementation of the US Foreign Accounts Tax Compliance Act (FATCA). FATCA readiness remains a key concern across the global financial services industry as institutions that do not comply with its extensive requirements for reporting to the IRS on their US account holders are set to be hit with a swingeing 30% withholding tax.
 
This month’s agreement provides welcome news to UK institutions as it allows them to report directly to HMRC rather than being required to enter into an agreement with the American Internal Revenue Service (IRS) or report directly to them. It also provides clarity on organisations to be exempt from reporting requirements or treated as deemed-compliant foreign financial institutions (FFIs).
 
Crucially, the Agreement heralds greater US/UK cooperation in the development of model agreements for pan-European and global tax information exchange – a new phase in the international crackdown on tax evasion.
 
Commenting on the developments, Kristin Konschnik, partner at international law firm Withers, said:
 
“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.
 
“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 organisations, from devolved administrations to certain pension plans, which will be exempt from FATCA reporting requirements.
 
“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.” 
 
US/UK bilateral agreement: key announcements and next steps.
 
Exempt organisations
 
The Agreement exempts certain organisations from complying with FATCA. This includes the UK government, devolved administrations, certain local government authorities, the Central Bank, any UK office of a list of international organisations and certain pension plans. In addition, 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.
 
A new standard for information exchange agreements
 
Under the Agreement, US and UK authorities will work together with other parties, the OECD and the EU to adapt the terms of the Agreement to create a common model for automatic exchange of information globally. This will involve developing reporting and due diligence standards.
 
Where next? HMRC consultation

On 18 September 2012, HMRC issued a consultation document on implementing the Agreement. This consultation document provides interpretations of the Agreement from the UK perspective and includes a discussion of a number of key concepts in the Agreement. The Agreement enters into force once both countries enact the necessary legislation to implement their respective obligations under the Agreement. It is understood that the United Kingdom will propose draft implementing legislation later in 2012 and it is intended to be effective from 2013.

Effect on trusts

The consultation document clarifies that because the definition of an Investment Entity is interpreted consistently with the Foreign Account Task Force (FATF) Recommendations, 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 centralise fund compliance, although the fund would remain responsible for ensuring its compliance requirements are met.

Who is a Controlling Person?

The consultation document further clarifies that the definition of a Controlling Person should be interpreted consistently with UK anti-money laundering rules. The Controlling Person concept is not part of the Proposed FATCA Regulations and its inclusion in the Agreement may have several potentially significant consequences. On one hand, it is possible this test may increase the required US ownership threshold for certain entities from 10% to 25% 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.



 

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