Since the height of the recent financial crisis, both governments and international organizations have increased their focus on, and scrutiny of, international structures and other arrangements. Although this has prompted a wider discussion of the suitability of the international tax system for modern-day business practices, it has also given greater impetus to the on-going international efforts to extend the application of international exchange of information.
The development which has garnered the greatest attention has been the introduction by the United States of the Foreign Account Tax Compliance Act (FATCA) (for which, see further below). However, FATCA is but one part of an ever increasing range of international agreements, treaties and legislation which are all, broadly, intended to facilitate a more fluid and prompt exchange of information between fiscal authorities.
The purpose of this update is to provide a general overview of certain of these international agreements, treaties and legislation in force, or having effect, in the United Kingdom and the European Union, and how they may impact your business and operations.
U.S. FATCA: UK-U.S. inter-governmental agreement
FATCA addresses tax evasion by U.S. tax residents through the use of offshore financial accounts. It includes, amongst others, certain provisions on withholding taxes and requires certain financial institutions outside the United States to provide information in connection with accounts held by U.S. customers to the U.S. tax authority, the Internal Revenue Service (IRS). Failure to meet these reporting obligations results in the imposition of a 30% gross withholding tax on payments of specified categories of U.S. source and other income to certain types of non-U.S. entities.
On September 12, 2012 the governments of the United Kingdom and the United States signed an inter-governmental agreement (IGA), which provides, broadly, a mechanism for UK financial institutions to comply with their obligations under FATCA, without breaching applicable UK data protection and confidentiality laws. Pursuant to the IGA, UK financial institutions are required to pass information sought under FATCA, to the UK tax authority (HMRC) which, in turn, automatically exchanges such information with the IRS. The IGA was implemented into UK domestic legislation by The International Tax Compliance (United States of America) Regulations 2014 (Regulations).
Broadly, the effect of the Regulations is that:
- UK financial institutions are under an obligation to register with the IRS and obtain a Global Intermediary Identity Number and identify and submit information reports on their U.S. account holders to HMRC;
- Certain UK entities outside the scope of FATCA are nevertheless required to register and complete identification and comply with HMRC reporting procedures; and
- UK financial institutions are also required to establish and maintain arrangements which enable identification of, and reporting in connection with, payments made to financial institutions that are located in jurisdictions which have not concluded agreements with the United States in respect of FATCA.
Whilst HMRC has issued guidance on the application of the Regulations, the Regulations are nevertheless complex. Accordingly, it is important to assess on a case-by-case basis whether the Regulations apply in respect of both: (i) the financial institution concerned; and (ii) the account held. Where the Regulations apply, consideration should be given to the applicable due diligence and reporting obligations imposed by the Regulations.
UK FATCA: Bilateral automatic exchange of information agreements
Separately, the United Kingdom has also entered into a series of agreements (each an ITC) providing for the automatic exchange of information between the United Kingdom and: (i) Jersey, Guernsey, the Isle of Man, and Gibraltar (the Reciprocal ITCs); and (ii) the Cayman Islands, Bermuda, Montserrat, the Turks and Caicos Islands, the British Virgin Islands and Anguilla (the Non-Reciprocal ITCs). The ITCs are commonly referred to as "UK FATCA".
Broadly, the ITCs have the same effect as the IGA, and certain aspects of FATCA, in that they require certain financial institutions to report specific information with respect to certain accounts to HMRC or the relevant local tax authority. If applicable, a financial institution is required to undertake prescribed due diligence with respect to accounts maintained by it on or after June 30, 2014 to determine whether the reporting obligations are triggered.
The Reciprocal ITCs provide for the exchange of information on a reciprocal basis, whereas the Non-Reciprocal ITCs do not. Accordingly, with respect to the Non-Reciprocal ITCs, UK financial institutions are not required to provide data on financial accounts held by a resident of a relevant jurisdiction. This may, therefore, reduce the compliance burden on a UK financial institution.
EU automatic exchange of information legislation
The EU Savings Directive (EUSD)
The EUSD was introduced to address certain types of cross-border tax evasion within the European Union. In broad terms, the EUSD provides for the automatic exchange of information between the majority of EU Member States in relation to certain cross-border payments of interest (and similar interest-bearing income).
On March 24, 2014, the Council of the European Union adopted a new directive which extends the scope of the EUSD. In short, the revised EUSD will cover new types of savings income and products that generate interest or equivalent income, which will include life insurance contracts, as well as a broader range of investment funds. Further, a new "look through" procedure will be established in order to limit the opportunities for circumventing the application of the EUSD through the use of certain intermediaries. Member States are required to introduce domestic legislation to give effect to the revised EUSD by January 1, 2016.
EU Directive on Administrative Cooperation (DAC)
In addition to the EUSD, in January 2013 the DAC came into force which provides, amongst others, for the automatic exchange of available information on the following five categories of income as from January 1, 2015: income from employment; director's fees; life insurance products; pensions; and immoveable property. As described in more detail in a previous Tax Update1, in June 2013 the European Commission announced a proposal to extend the DAC to include dividends, capital gains and other forms of financial income and account balances; there is currently no indication when the proposed extension will be adopted.
Double taxation agreements and tax information exchange agreements
Tax information exchange agreements and, typically, double taxation agreements allow for the exchange of certain information on request for the purpose of, amongst others, the administration or enforcement of domestic tax laws. Upon request the relevant tax authority is required to use all relevant information gathering measures to allow it to respond to such request, which may include asking financial institutions located in its jurisdiction to provide the requested information to it.
It is an important year for tax information exchange. Not only will the IGA and the ITCs become operational, by September 2014 the Organisation for Economic Co-operation and Development is due to publish, amongst other materials, a detailed commentary with respect to the development of its global standard for automatic exchange of information. Given the growing political support for the exchange of information, it seems that the scope, and likely complexity, of international arrangements for the exchange of information will only expand and increase over the coming years. This creates practical challenges for tax compliance teams at affected institutions, and it will be necessary to carefully consider, and keep under review, tax compliance procedures to determine whether any applicable due diligence and reporting obligations are being met.