On 8 February 2012, HM Treasury announced that it had agreed on a government-to-government approach to improving international tax compliance and implementing the US Foreign Account Tax Compliance Act (FATCA), an act designed to tackle cross-border tax evasion. FATCA, scheduled to come into force from 1 January 2014, imposes reporting requirements on foreign financial institutions (FFIs) with regards to certain US accounts. In effect the law obliges all FFIs to become information gathering agents of the US Internal Revenue Service (IRS) by threatening an FFI’s own US source income and sale proceeds with a 30% withholding tax. The broad definition of FFI in the act means that its introduction will not only have an impact on banks, but also on many other forms of financial intermediary. As a consequence FATCA may be a factor in a number of different finance transactions including, for example, derivatives and syndicated loans.
The implementation of FATCA is a potential problem for FFIs who may not be able to comply with the reporting, withholding and account closure requirements without contravening their own domestic laws on data protection and customer confidentiality. However HM Treasury, in a joint statement with the governments of France, Germany, Italy, Spain and the United States, has sought to relieve these concerns. The statement published on the HM Treasury website stated its intentions to overcome the legal impediments to compliance through the use of existing bilateral tax treaties for information exchange between tax authorities. This is as opposed to direct reporting by FFIs to the US IRS.