UK & US sign first bilateral FATCA agreement

Last week, the US and UK governments signed the first bilateral agreement to implement the information reporting and withholding tax provisions within FATCA.

FATCA is designed to ensure that the US tax authorities obtain information on accounts held by US persons overseas, or by foreign entities in which US taxpayers hold a substantial ownership interest, with foreign financial institutions (FFIs).  Controversially, FATCA puts the reporting burden on the FFI rather than on the US person, something which has caused an outcry from financial institutions which face a huge operational challenge (and considerable associated costs) to comply with the legislation, and draconian sanctions if they do not - failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.

In an attempt to reduce the complexity of the reporting task somewhat, the governments of France, Germany, Italy, Spain and the UK agreed a model intergovernmental agreement to implement FATCA, which will permit FFIs to report the information to their respective governments rather than directly to the IRS. The UK has become the first of the 5 jurisdictions to take the next step, and to sign an agreement based on that model.

The agreement is reciprocal in that the US has committed to providing future equivalent levels of information exchange to the UK regarding UK persons who having financial arrangements in the US in the future if required.  There has been talk in the UK in recent weeks of the UK introducing FATCA-equivalent legislation and this provision would assist in the facilitation of that if indeed the UK government decides to go down that path (see previous blog postings on the issue).

An attempt has also been made in the agreement to ensure that the burdens imposed on UK FFIs are proportionate to the goal of combating tax evasion. It specifies certain UK institutions and types of products which are at low risk of being used to evade US tax, such as retirement funds and charities, and exempts them from FATCA requirements.  The nature of the exemptions is such that it will make little difference to most FFIs, but it will come as a relief to those small number who do fall within their scope.

The agreement needs to be ratified by the UK parliament before it becomes effective, but politically it is difficult to see this particular train being stopped.