US backs down on Fatca requirements

A joint statement released today (February 8) by HM Treasury and the governments of France, Spain, Germany, Italy and the US has relieved the burden of financial institutions having to report directly to the US Internal Revenue Service (IRS).

Under proposals introduced by the US government in 2010, known as the Foreign Account Tax Compliance Act (Fatca), financial companies were to be forced to enter into agreements with the IRS to provide information on the US tax status of their clients.

In addition, they were required to withhold 30 per cent of any US-sourced income - or even close entire accounts - if clients did not comply.

However, the joint statement said companies would now not have to implement these measures. Instead, the US has proposed that tax information should be reported to governments and will then be automatically shared with the US under existing tax agreements.

This will mean that all financial institutions based in the UK and reporting to HM Treasury for tax purposes will automatically be compliant with Fatca without having to sign individual agreements. This also makes it less likely that the 30 per cent tax on non-compliant clients will apply if they are also within a compliant jurisdiction.

The six governments will now discuss how to collect and exchange information automatically, as well as other options for implementing the 30 per cent tax when applicable.

Angela Foyle, tax partner at BDO Financial Services, said: “This should serve to overcome some of the issues around data privacy and will reduce the administrative overhead to some extent.

“However, firms will still have to invest in client identification and will most likely still need to amend their existing onboard processes.”

HM Treasury said: “An intergovernmental approach to Fatca implementation would address legal impediments to compliance, simplify practical implementation, and reduce costs to financial institutions.”

Julie Patterson, director of authorised funds and tax at the IMA, said: “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.”

Advisory firms are unlikely to be affected by the proposals as most UK investment companies will be compliant with Fatca under the new arrangement. In addition, the IRS has set a minimum account size of $50,000 (£31,600), below which clients will not be affected. However, until the proposals are finalised it is not clear what the full impact of Fatca will be, and some tax experts have warned that advisers may still face additional paperwork when investing in new funds.