Over the last year there has been unprecedented press coverage on the global exchange of tax information. In many cases this is a response by governments in the developed world to the global financial crisis and the subsequent fiscal deficits. Governments need to increase tax revenues – targeting those individuals who are under declaring their taxes is an attractive message for governments to send to their electorate.
The trend started in the US with the enactment, as part of the March 2010 HIRE Act, of US FATCA. Even at this early stage there were people within the EU Commission with a similar agenda. Whilst many believed that Global FATCA would ultimately emerge, few thought that global tax information exchange would become a reality so quickly.
The first indication of this was the announcement on 26 July 2012 between the US and the G5 of the intergovernmental approach to the implementation of US FATCA. Whilst this was initially said to be the solution to impediments to the implementation of FATCA and more specifically data protection law, it meant that FATCA would be enacted into the domestic law of these countries and in reality many more countries around the globe.
This was quickly followed up by the UK in November 2012 when a formal announcement was made that it was seeking to enter into FATCA style agreements with the Crown Dependencies and Offshore Centres and by the announcement in April 2013 of a pilot for multi-lateral information exchange.
The current position is that the OECD is working with G20 countries with the aim of presenting a new single global standard for automatic exchange of information by February 2014. In parallel, they expect to begin to exchange information automatically on tax matters among G20 members by the end of 2015.
Whilst US FATCA and its UK counterpart may be the most immediate issue faced by the financial services industry, any decisions around changes in procedures and systems should take account, as far as possible, of the expected future developments to avoid additional cost and duplication of effort.
Overview of US FATCA
US FATCA requires foreign financial institutions (FFI’s) to identify US account holders and report the related account information either to their local tax authority or in some territories, directly to the IRS.
This reporting and on-going compliance is required from 1 July 2014. To be included on the first list published by the IRS on 2 June 2014, FFI’s have to be registered on the IRS database by 25 April 2014. The portal for registration was opened on 19 August 2013 and therefore businesses are able to test the portal but registrations cannot be finalised until January 2014.
Overview of UK FATCA
UK FATCA follows as far as possible the US model except that there is no requirement to register. UK FATCA will require Jersey/Guernsey Financial Institutions to report on UK taxpayers which hold/have an interest in a relevant account to which the legislation applies.
The UK IGA will set out the relevant information that would need to be automatically exchanged with the UK, via the local tax office, on an annual basis. With the exception of modified reporting for UK resident non domiciled individuals the information is the same as for US FATCA.
Part of the package that has been agreed with the UK includes a disclosure facility. This facility allows relevant eligible investors with assets in Jersey/Guernsey to come forward and regularise their past tax affairs prior to information on their accounts being automatically exchanged. The disclosure facility will be made available from 6 April 2013 until 30 September 2016 and financial intermediaries are required to inform their relevant clients of the existence of the disclosure facility by 31 December 2013.
Current Position in the Crown Dependencies
The Crown Dependencies have been working together on both the US IGA and the UK IGA to ensure there is a consistent approach to implementing these new regulations across these jurisdictions. The local governments of the Crown Dependencies have agreed that a consistent approach is vital to successfully implementing these regulatory changes and have, where possible, attempted to keep the differences between the two IGAs to a minimum.
The consistent approach has been further demonstrated through their joint contribution to drafting one set of Guidance Notes. These Guidance Notes are expected to closely follow the UK Guidance Notes that were re-issued on 14 August 2013, with additional detail focusing on key business sectors such as trust companies. There will be one set of Guidance Notes covering both US and UK FATCA.
Final negotiations have recently been completed and it is anticipated that both the US IGA and UK IGA will be signed in October. The intention is to issue the Guidance Notes alongside these new regulations to assist businesses in understanding the key implications to incorporating these requirements within their day to day business operations and processes.
The key dates for both US and UK FATCA are as follows:
- 19 August 2013 IRS registration portal opened. Registrations can be finalised from January 2014
- 1 July 2014 commencement data. FATCA compliant procedures for opening new accounts must be in place.
- 1 January 2015 first date on which you are required to verify global investor identification numbers for payees which are Model 1 reporting FFI’s.
- 30 June 2015 complete review procedures for high value accounts
What Should Businesses Be Doing Now?
With the implementation date less than a year away and further delays seeming unlikely what should businesses in Jersey and Guernsey be focusing on over the next few months?
- Compile a complete list of all legal entities and determine the FATCA status of each entity. For these purposes partnerships and trust are entities.
- Collect all the information required to register the legal entities on the IRS database. There is no registration process for UK FATCA.
- For UK FATCA reviewing your client base to determine which clients you are required to contact and give careful consideration to the wording of the communication. For these purposes HMRC have confirmed that posting a notice on a website is not sufficient to comply with the terms of the agreement reached between the UK and Jersey/Guernsey.
- Consideration needs to be given to training customer relations teams who will inevitably be required to answer questions from clients once the communications on UK FATCA have been sent.
- Review your existing client base using the procedures set out in the legislation and guidance to identify any clients that you need to report under either US or UK FATCA. Whilst reliance can be placed on your KYC files and publicly available information, many organisations, with the exception of the banking sector and retail funds, are writing to investors seeking confirmation of their FATCA status.
- Consider whether to request details of the tax residency of investors through some form of self-certification so that you have the information for when the next country implements similar requirements.
- For the vast majority of businesses these new regulations require significant changes to systems and processes used to effect client take on and ensure on-going FATCA compliance. Businesses need to set up a project team, identify the changes required and the time needed to implement any changes to ensure that new accounts opened from 1 July 2014 are FATCA compliant.
- Provide training to your staff on the new processes and procedures.
- Develop a framework to document all the conclusions reached to ensure you have an audit trail in the event of questions being raised by tax authorities.
- Implement an efficient, sustainable governance and controls framework that can also be tested to provide on-going assurance that controls are working appropriately to ensure FATCA compliance.