FATCA Offspring

By Louise Gonçalves & Eran Shay, Deloitte Limited, Gibraltar (01/05/2014)

The term FATCA has been circulating for a while now, however, not everyone is aware of what this means other than perhaps what the acronym stands for.

It all began in March 2010 when the United States created new withholding and reporting rules under the Foreign Account Tax Compliance Act (FATCA). The driver for this significant change was the number of high profile failures to prevent tax evasion by US persons through existing US information reporting systems. These measures have been implemented to address the US IRS’s concerns about US persons escaping their US tax obligations via the use of non-US structures and products.

Under FATCA, foreign financial Institutions (FFIs) and other financial intermediaries such as funds, trusts, custodians and wealth managers, will be required to comply with a number of obligations, including reporting on accounts held by specified US persons. To encourage compliance FATCA introduced a 30 per cent withholding tax on US source payments to non-compliant institutions (although this has now been superseded through Inter-Governmental Agreements (or ’IGAs’, see below). It should be noted, however, that this not only affects FFIs and financial intermediaries with US clients but also those with non-US clients as other third party FFIs may require that these institutions be participating in FATCA in order to transact with them. A monthly list of all registered FFIs will be made publically available from June 2014.

The key issues for businesses affected by this are primarily interpreting the FATCA legislation and what this means to their own internal compliance procedures as well as the interaction with their own customers. Operational processes and internal controls will need to be reviewed and adjusted to factor in the additional requirements introduced by FATCA both from an initial implementation perspective as well as a continuing perspective.

The main elements of FATCA commence from 1 July 2014 and there are a number of steps that FFIs need to take before this date to ensure compliance. The FATCA compliance journey for most firms is illustrated by the following diagram:

FATCA Obligations

A number of governments, including the UK, have signed IGAs with the US with the intention of facilitating compliance. The UK has signed a Model 1 IGA with the US, which means that compliance with FATCA will take place under UK domestic legislation instead of under US regulations. The IGA enables entities within said jurisdiction to comply with the FATCA requirements without contravening local legislation. By complying with these rules, the entity would not be subject to the 30 per cent withholding tax for non-compliance. There are still a number of significant steps that an entity needs to complete in order to achieve compliance and, due to the specific local legislation, the FATCA obligations for some FFIs may differ depending on the location. This variation may make compliance more complex for multinational organisations where they operate under several different agreements.

UK FATCA or the ‘Son of FATCA’

FATCA has proved to be a watershed moment for international information exchange policy. As noted above, a number of jurisdictions have entered agreements with the US and some of these have announced their intention to develop their own ‘FATCA-like agreements’.

In June 2013 UK HMRC released a draft model agreement which is intended to facilitate information exchange with the Crown Dependencies and British Overseas Territories. This agreement, sometimes referred to as ‘Son of FATCA’, seeks to gather information on UK persons investing in and/or through those jurisdictions.  The wording of the draft agreement is very similar to that of the US FATCA IGA and is intended to be implemented on a similar timescale. Nevertheless, the key differences between US and UK FATCA are as follows:

·         UK FATCA is not global like US FATCA and so potentially may face greater international issues.

·         Difference in taxation of the UK, ie, by residence v citizenship in the US also potentially problematic.

·         There is no withholding tax under UK FATCA.

·         It offers an alternative reporting regime for UK non-domiciles.

With regard to the US FATCA, it is anticipated that the UK Crown Dependencies and Overseas Territories will enter into IGAs with the US.  FFIs based in the Crown Dependencies and Overseas Territories should start to familiarise themselves with FATCA requirements if they have not done so already, register themselves on the US ‘FATCA Registration Portal’, and begin looking through their client accounts and portfolios to identify US client accounts as well as consider their internal controls and compliance procedures going forward.   

As part of the UK FATCA package, it is expected that British Overseas Territories will be allowed to participate in a disclosure facility available to UK resident clients of structures run by financial intermediaries in these territories.