The US government has significantly watered down its Foreign Account Tax Compliance Act requirements.
Alongside new draft Fatca proposals, the US Treasury has released a joint statement with the UK, France, Germany, Italy and Spain expressing mutual intent to pursue a government-to-government framework for implementing the act.
As part of the agreement, firms which only deal with local clients or institutions that comply with the act will be exempt. Previously, even firms that did not have any US taxpayers as clients had to prove that fact in order to avoid a withholding tax.
Under the new framework, the UK Government will collect US client information from UK financial institutions and forward this information to the IRS. Previously, financial institutions had to collect and report the data directly to the IRS. This means that UK firms and funds will not have to sign up to an agreement with the IRS.
Previously, Fatca required foreign financial institutions to sign an agreement that they will provide the IRS with information on any US taxpayers they deal with.
A 30 per cent penalty withholding tax will be levied on the gross proceeds of any US assets for non-compliance.
The draft rules also permit financial institutions to rely on information they have already collected to assess whether they deal with US taxpayers, including information received to comply with anti-money laundering or “know your customer” rules.
Firms with US clients will be required to report basic details like name, address, account number and balance for the calendar years 2013 and 2014 by 2015.
By 2016, in addition to the above information, income associated with US clients must be reported with respect to calendar year 2015.
By 2017, full reporting, including the gross proceeds from broker transactions will be required with respect to calendar year 2016.
IMA director of authorised funds and tax Julie Patterson says: “The approach envisages firms reporting to their domestic authorities and governments sharing that information. In practice, this would mean that UK firms and funds would not have to sign up to an agreement with the IRS, reducing many of the industry’s legal concerns with the original proposals.”
She adds: “On initial review the draft regulations take into account the IMA’s lobbying by providing a special exemption for regulated investment funds where the distributors of the fund comply with certain criteria. We have yet to work through the technical details of this exemption, but we welcome this positive development.It is not clear whether the draft wording provides the exemption we are seeking for pension funds.”