Foreign Account Tax Compliance Act, the Common Reporting Standard and international automatic exchange of information

Key issues

In 2010, the US enacted the Foreign Account Tax Compliance Act (FATCA). FATCA is designed to take advantage of foreign financial institutions (FFIs) as a means of combating tax evasion by US taxpayers with offshore investments. The US Internal Revenue Service (IRS) have since issued final regulations that took effect from 28 January 2013. The FATCA rules are wide ranging and complex and have a significant impact on non US financial institutions and others.

The US FATCA rules have proved a catalyst for the development of a more wide-ranging move to automatic exchange of information on the international stage. In particular, the OECD has developed a similar template, the Common Reporting Standard (CRS), for the exchange of financial information on a multi-lateral basis. Nearly 60 jurisdictions are committed to implementing the CRS by the end of 2017.

Key measures

FATCA imposes a 30% withholding tax on US-related payments made to FFIs unless they enter into an agreement with the IRS to identify and annually report certain information to the IRS on “financial accounts” held directly or indirectly by specified US persons and foreign entities in which US persons hold a substantial or controlling interest. Non US financial institutions for these purposes include banks, securities brokers and dealers, custodians, clearing organisations, funds, asset managers, administrators and capital markets issuers.

The US Treasury and IRS have developed an alternative approach for FATCA implementation that will apply, on a mandatory basis, to FFIs located in a jurisdiction that enters into an intergovernmental agreement (IGA) with the US. The intention behind this approach is to address issues of local confidentiality and data protection laws that in many jurisdictions would otherwise prevent FFIs from being able to become “participating” FFIs, due to restrictions on their ability to report information on US account holders directly to the IRS.

The UK was the first jurisdiction to conclude a bilateral agreement with the US on 12 September 2012 (which has since been amended by an Exchange of Notes in June 2013 to replace Annex II “Non-reporting UK financial institutions and products”). To date, more than sixty other jurisdictions have entered into intergovernmental agreements with the US to implement FATCA, including Ireland, Switzerland, Spain, Germany, Japan, France, the Netherlands, Bermuda, the Cayman Islands, Jersey, Guernsey, the Isle of Man, Canada, the British Virgin Islands and Mauritius. In all, the US has engaged with over 100 jurisdictions.

Financial institutions in jurisdictions that have signed an IGA with the US or appear on the IRS list of jurisdictions that are treated as having an IGA agreed in substance with the US should have registered as a “registered deemed compliant FFI” or “participating FFI” (depending on the model of IGA signed) on the IRS FATCA Registration Portal.

The UK-US IGA

Following the conclusion of the US-UK IGA, UK implementing regulations were made and HMRC guidance notes issued, the latest version having being issued on 14 September 2015.

Compliance with FATCA is mandatory for UK financial institutions under the UK implementing legislation. UK financial institutions (subject to compliance) will not be subject to FATCA withholding rules (ie they will generally not suffer or need to make any FATCA withholdings unless they are a US qualified intermediary or equivalent).

The UK implementing regulations and guidance make it clear that non-UK branches and subsidiaries of UK financial institutions are excluded from the scope of the UK IGA and implementing legislation, although they will be covered by the relevant rules applicable in their own jurisdiction, assuming an IGA is in place.

The UK IGA brought fund managers, investment managers and fund administrators/transfer agents within the scope of FATCA by including them within the definition of “Investment Entity”. HMRC has since confirmed that UK investment managers/advisers that are FFIs solely because of their investment management/advisory activities (ie they do not, for example, also act as a custodial institution) will be treated as “certified deemed compliant” FFIs and therefore do not need to register with the IRS for FATCA purposes. This is in line with amended US FATCA regulations and the position agreed in a number of later IGAs, which should mean that the position will be similar for most investment managers/advisers established or resident elsewhere. In addition, HMRC has recently clarified the position of holding companies and treasury companies. They will not be treated as financial institutions for FATCA purposes, though any which have previously registered may remain as the registered lead financial institution for reporting purposes if to do otherwise would be onerous.

The UK guidance adopts the “sponsoring entity” regime set out in the US FATCA regulations which enables an investment manager to agree to act as a “sponsoring entity” that will undertake FATCA compliance obligations on behalf of one or more UK funds it manages (so-called Sponsored FFIs). That regime is, however, not available in relation to the UK fund’s compliance with the UK equivalent to FATCA (Son of FATCA) or the Common Reporting Standard discussed below.

UK financial institutions will need to report annually to HMRC in relation to their US accounts, for 2014 and later calendar years, by 31 May of the year following the calendar year to which the return relates. However, HMRC has announced that it will not require nil returns where UK financial institutions have no reportable accounts. Certain payments made by reporting UK financial institutions to financial account holders who are non-participating FFIs in 2015 and 2016 also need to be reported to HMRC before 31 May of the year following the calendar year to which the return relates.

“Son of FATCA”

The US FATCA rules have led to more wide-ranging automatic exchange of information developments. These include the conclusion by the UK of a number of bilateral FATCA style IGAs with British Crown Dependencies (the Isle of Man, Guernsey and Jersey) and Overseas Territories with financial centres (Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands).  The UK IGAs with the British Crown Dependencies and Gibraltar are reciprocal. The IGAs with other Overseas Territories are non-reciprocal.

At an international level, the OECD responded to calls by the G20 by presenting proposals for a global model for automatic exchange of information (the CRS). The CRS will require participating jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. The Standard has been widely welcomed, and, as at July 2016, 54 jurisdictions had committed to a timetable for implementing the Standard involving first exchange of information by the end of September 2017 and a total of 101 jurisdictions had committed themselves to reciprocal exchange of information on financial accounts on an automatic basis.

A consolidated version of the Common Reporting Standard was released on 21 July 2014 and includes commentary and guidance for implementation by governments and financial institutions, detailed model Competent Authority Agreements (similar to the FATCA Model 1 intergovernmental agreements), as well as standards for harmonised technical and information technology solutions, including a standard format and requirements for secure transmission of data. As at 19 August 2016, 84 jurisdictions had signed a multilateral Competent Authority Agreement, designating the local authority that will be responsible for carrying out automatic exchange of information under the terms of the CRS. The UK is amongst those 84 jurisdictions and laid regulations in March 2015 to implement the Common Reporting Standard in the UK with effect from 01 January 2016. G20 governments have mandated the OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes to monitor and review implementation of the standard.

On 09 December 2014, the EU Council formally adopted a directive extending the scope for the mandatory automatic exchange of information between EU tax authorities under the existing Administrative Cooperation Directive. The amendments require the implementation of CRS by the Member States of the EU with effect from 01 January 2016, although Austria will be allowed a further year to implement the changes. These changes replace the existing EU Savings Directive, subject to transitional provisions covering Austria.

More information

The text of the UK-US bilateral agreement can be found on HM Treasury website (the revised Annex II “Non-reporting UK financial institutions and products” can be found in the June 2013 amending Exchange of Notes). New consolidated implementing regulations, covering both FATCA and the Common Reporting Standard, were published in March 2015 (replacing the original implementing regulations of June 2014) and HMRC guidance has also been published. In September 2015, HMRC released an informal consultation on additional draft guidance covering automatic exchange of information of financial information under FATCA, the Common Reporting Standard and in relation to Crown Dependencies and Overseas Territories.

Further information in relation to FATCA, including the forms of Model Agreements and text of the IGAs signed with the US to date can be found on the US Treasury website.

The UK IGAs, guidance and regulations on implementing the UK’s agreements with Crown Dependencies and other useful materials can be found on the FATCA pages of the HM Treasury website. 

The OECD’s Common Reporting Standard is available on the OECD website together with the Declaration on Automatic Exchange of Information in Tax Matters and the “early adopters group” commitment to take forward the Standard was made in a joint statement on 19 March 2014. Other useful OECD materials can be found on the OECD Automatic Exchange Portal page.

The EU Directive adopted on 09 December 2014 to extend the scope of the Administrative Cooperation Directive is published here.