International agreements to improve tax compliance

The Foreign Account Tax Compliance Act (FATCA), which is part of the US Hiring Incentives to Restore Employment Act of 2010, aims to combat tax evasion by US tax residents using foreign accounts. It includes certain provisions on withholding taxes and requires financial institutions outside the US to pass information about their US customers to the US tax authorities, the Internal Revenue Services (IRS). Failure to meet these new reporting obligations would result in a 30% withholding tax on the financial institutions.

Draft US regulations setting out the implementation details were published in February 2012.

The FATCA provisions impose new and substantial burdens on UK businesses in identifying US taxpayers, and registering and reporting information to the IRS. Significantly for UK institutions the Data Protection Act precludes UK businesses from passing the required information to the US.

The UK-US Agreement

The government (along with France, Germany, Italy, and Spain) and with the support of the European Commission took part in joint discussions with the US government to explore an intergovernmental approach to FATCA, supporting the overall aim to combat tax evasion, while reducing risks and burdens on financial institutions. A model intergovernmental agreement (IGA) was developed and published in July 2012.

The UK and the US subsequently signed an IGA – the ‘UK-US Agreement to Improve International Tax Compliance and to Implement FATCA’ – in September 2012 (see the ‘Current documents’ section below).

The IGA reduces some of the administrative burden of complying with the US regulations, and provides a mechanism for UK financial institutions to comply with their obligations without breaching the data protection laws. Under the IGA, financial institutions pass information to HM Revenue & Customs (HMRC) who will then automatically exchange this information with the IRS.

The IGA has changed since it was signed, in that Annex II has been updated by a mutual agreement entered into between the competent authorities of the UK and the US. The changes result in a wider scope of institutions and products effectively exempt from the FATCA requirements, and provide greater clarity on the categories of institutions which will be non-reporting UK financial institutions that are treated as deemed-compliant under the IGA.

Annex II of the IGA was amended by an Exchange of Notes between the two governments dated 3 June and 7 June 2013 (see the ‘Current documents’ section below).

On 12 July 2013 the US announced a delay of 6 months before the commencement of FATCA. The effect of this delay is that there will be no reporting with regard to 2013, and all current deadlines for undertaking due diligence etc will be pushed back by 6 months.

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