HMRC has published draft regulations for compliance with the US Foreign Account Tax Compliance Act (FATCA). The draft regulations are published alongside guidance notes, a tax information and impact note, and an explanatory webpage. The regulations are expected to come into force in mid August and will have effect for financial accounts (as defined in the legislation) held at 31 December 2013.
Although the steps taken by the Government, including changes to the original US regulations, have produced a significant, comparative, reduction in the costs for business in complying with FATCA, and removed the threat of withholding being applied to UK businesses, the cost burden for the UK is not insignificant: HMRC estimates the cost for UK business over the first 5 years to be £1.1bn-£2bn, running thereafter at an annual cost of £50m-£90m. HMRC’ estimates its own one-off IT and staff project costs at approximately £5m, with ongoing annual costs of £1.4m from 2016.
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 Internal Revenue Services (IRS). A 30% withholding tax is imposed on the US source income of any Financial Institution that fails to comply with this requirement. Draft US regulations setting out the implementation details were published in February 2012.
FATCA imposes new and significant burdens on UK businesses in identifying US taxpayers, registering and reporting information to the IRS. However, the current law does not allow financial institutions to pass FATCA information either directly to the US or to HMRC on a voluntary basis, nor does it enable HMRC to require it.
Brokering a workable solution
The UK Government, 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, to support the overall aim of combatting 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 signed an IGA, the “UK-US Agreement to Improve International Tax Compliance and to Implement FATCA” (“the Agreement”), in September 2012. The Agreement, together with the legislation introduced to enact it, will remove some of the implementation problems faced by UK Financial Institutions, and will enable UK Financial Institutions to provide the required information without breaching data protection legislation to HMRC, wh0 will then forward it to the US Internal Revenue Service.
The UK approach
Clause 219 of the 2013 Finance Bill empowers HM Treasury to make Regulations to give effect to the Agreement (and other similar Agreements). The final Regulations – The International Tax Compliance (United States of America) Regulations 2013 – will be available on HMRC’s website.
The Regulations define the key terms, such as financial institution and reportable account, included in the Agreement and also sets out the required due diligence and reporting requirements of UK financial institutions. They also introduce certain beneficial changes included in the final US regulations to enable UK business to benefit from these, and include a targeted anti-avoidance provision as well as provisions relating to penalties for non-compliance, along with an appeals process.
The published Guidance applies to:
- UK Financial Institutions
- UK entities that will need to certify their entity “classification” for the purposes of FATCA; and
- Entities that undertake FATCA obligations on behalf of Financial Institutions.
Complying with the UK Regulations in force at the time (with reference to the published HMRC Guidance) should not place UK Financial Institutions at a disadvantage by comparison with the position they would have been in if applying the US Regulations. Where a Financial Institution identifies an alternative element of the US Regulations or alternative element of a different Intergovernmental Agreement that it feels it would like to apply then it should contact HMRC to discuss the issue.
HMRC suggests that a significantly lower number (about 75,000 UK entities) will now be affected by this measure: the original draft US regulations published in February 2012 could have affected around 300,000 UK entities. The HMRC currently that the one off cost under the IGA could be around £0.9bn – £1.6bn, with an ongoing cost of £50 million – £90 million a year; one-off costs of compliance with the original draft US regulations to UK businesses were estimated in the region of £2-3billion, with ongoing costs in the region of £100m – £170m a year. These costs include businesses acquiring and running new IT systems, setting up internal systems to allow them to comply with their new obligations, training their staff and time spent on familiarisation with the new rules, as well as undertaking a detailed risk assessment.
Collection, exchange and processing of tax information will also impose additional costs on HMRC, currently estimated as one-off IT and staff project costs of approximately £5m, with ongoing annual costs of £1.4m from 2016. However, a full analysis of the ongoing impacts to the business population will be established once the policy has been finalised.
Other similar anti tax evasion measures to follow
The Government has said that it will look to sign further Agreements with other jurisdictions as part of their commitment to combat tax evasion. The Crown Dependencies (Isle of Man, Guernsey and Jersey) and the British Overseas Territories (the Cayman Islands, the British Virgin Islands, Bermuda, Anguilla, Turks and Caicos Islands, Montserrat and Gibraltar) have all agreed to enter into automatic tax information exchange agreements with the UK.
On 9 April 2013 the Government – along with France, Germany, Italy and Spain – also announced an agreement to develop and pilot multilateral tax information exchange based on the Model IGA.
The application of the provisions in any further similar Agreements entered into by the UK will be covered in separate guidance.