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Is FATCA setting the standard for tax information exchanges?

Gregor Watt reports on the growing harmonisation of global tax information via a US act

Is Fatca the starting point for harmonisation of the global tax treatment for offshore investments?

The Foreign Account Tax Compliance Act is due to come into effect this year and is an attempt by the US government to crack down on tax avoidance by US citizens.

The act requires any financial company dealing with the US to identify and notify any US citizens among its investors or account holders and report them to the US tax service, the Internal Revenue Service.

Foreign Financial Institutions that sign up to Fatca in advance of 31 December 2013 will see up to 30 per cent of payments to them from US based companies will have to be withheld if the FFIs fail to meet their disclosure requirements from 1 January 2014.

In December, HMRC released details of how UK institutions will be able to facilitate their disclosure requirements by reporting through UK authorities.

Deloitte tax partner Chris Tragheim says: “The next six months will be a critical period for organisations to tackle their Fatca obligations if they are to meet the compliance deadlines.

“In particular, the draft guidance has crystallised the breadth of organisations impacted by Fatca, including banks, brokers, insurers, funds, trust and corporate service providers, lawyers and clearing organisations. But despite the additional information released today there are still unanswered questions, not least around the registration requirements, that continue to cause uncertainty.”

Although some details are still needed, the US is allowing firms to make their Fatca disclosure through overseas governments, including the UK, Germany, Italy, Spain and France by introducing a formal intragovernmental deal to set up bilateral agreements with each of the countries to exchange tax information.

The US has since signed deals to extend the exchange of tax information with Japan and Switzerland and this has been followed by announcements from Jersey, Guernsey and the Isle of Man that they are also seeking intergovernmental agreements with the US to provide bilateral exchange of tax information to satisfy the Fatca rules.

Last year Jim Muir, director of financial reconciliation specialist AutoRek, predicted that more countries would start to look at setting up similar agreements in order to retain their ability to deal with the US on a level playing field.

Muir said: “We had predicted back in June – when it came to the US allowing for the use of a new model to boost Fatca implementation and international tax compliance with Japan and Switzerland – that many more countries would start to enter into formal agreements with the US over the coming months.

“Back then we pointed to the fact that governments were willing to provide the IRS with tax information because they were hoping for reciprocity.

“The US government at the time indicated that if this approach worked with these first few countries, the IRS would consider rolling it out to the rest of the world. This now seems to be happening.”

But it seems that Fatca is not just being used to boost the level of information exchanged between the US and countries on a bilateral basis. In December, the Isle of Man announced that it is going to adopt a similar standard of information exchange with the UK outside of any requirements to satisfy Fatca.

Chief minister Allan Bell said: “The nature of tax cooperation is changing and automatic exchange is becoming the global standard.

“The Island already shares tax information automatically under the EU Savings Directive and has recently announced that it will do so on a wider basis with the USA.

“Continuing with this approach, it is logical for the Isle of Man to embrace new forms of tax cooperation with our largest trading partner, the UK.”

Chris Tragheim, tax partner at Deloitte, says: “This is a significant step. While other jurisdictions will consider their position, this is the first time that a Fatca-style agreement has been proposed that does not involve the US.”

Gregor Watt is features editor of Money Marketing

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  1. I have to correct several wrong assumptions in this article.

    First: “Although some details are still needed, the US is allowing firms to make their Fatca disclosure through overseas governments, including the UK, Germany, Italy, Spain and France by introducing a formal intragovernmental deal to set up bilateral agreements with each of the countries to exchange tax information.”

    Germany, Italy, Spain and France have NOT signed up to any sort of IGA with the US at this point. The UK is the only country out of those listed who have signed an IGA. Other countries may be in negotiations, but to imply that IGAs have been signed is disingenuous.

    Secondly: Muir said: “We had predicted back in June – when it came to the US allowing for the use of a new model to boost Fatca implementation and international tax compliance with Japan and Switzerland – that many more countries would start to enter into formal agreements with the US over the coming months.”

    The reality is that here we are seven months later and this simply has not happened. The US has only formalized four agreements at this point – Mexico, the UK, Denmark and Ireland. Hardly a plethora of countries as was expected. This is probably due to the fact that most countries see the US as over reaching and overbearing, as well as the fact that most countries have privacy laws that FATCA is simply trying to override. In fact, I’m guessing that trying to negotiate an IGA with every country on the planet is simply not going to happen either smoothly or quickly.

    Lastly: “Back then we pointed to the fact that governments were willing to provide the IRS with tax information because they were hoping for reciprocity.”

    And they will most likely never get it. The IRS does not have the mandate to promise nor delivery reciprocity when it comes to reporting tax information to other countries. In fact, in this article: http://about.bloomberglaw.com/2013/01/28/full-reciprocity-under-fatca-is-a-work-in-progress-irs-official-says/
    it states: “According to Ted Setzer, manager of IRS’s Large Business & International Division, although existing requirements on U.S. banks will provide other governments with similar information required of foreign banks under FATCA, “clearly existing U.S. rules don’t require U.S. financial institutions to provide the exact same information that a foreign institution has to under FATCA.”

    So I think reciprocity will be a very long time in coming. Hope other countries don’t mind (but I think they will).

    While sharing tax information in order to reduce global tax evasion is a worthy and noble cause, forcing imperialistic laws down the throats of every country in the world is not the way to go about it. There are many who are predicting that FATCA is going to have far reaching economic implications for the US in the years to come – and not in a good way.

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