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The governments of the UK and US have signed an agreement aimed at improving international tax compliance and implementing the US Foreign Account Tax Compliance Act (FATCA).
The new accord addresses legal barriers to financial institutions complying with FATCA, and ensures withholding tax will not be imposed on income received by UK financial institutions or on payments they make.
The document also ensures that burdens imposed on financial institutions are proportionate to the goal of combating tax evasion, and it establishes a reciprocal approach to FATCA implementation, boosting the UK’s ability to obtain information from the US to help in tackling tax evasion in this country.
News of the agreement follows July's joint statement by the administrations of France, Germany, Italy, Spain, the UK and the US to announce the publication of the model intergovernmental agreement to improve tax compliance and to implement FATCA.
The signing of the UK-US accord follows the conclusion of negotiations on the UK-specific annex II, which sets out institutions and products that are seen as presenting a low risk of being used to evade US tax and are therefore effectively exempt from FATCA requirements.
The new contract has been laid before Parliament and will undergo a 21-sitting day scrutiny period as part of the ratification process. Financial institutions and other interested parties will be consulted on implementation, and draft legislation will be published later this year.
David Treitel, director of the London-based American Tax Returns Ltd, noted the agreement treats several common products as being “deemed compliant”, which will eliminate reporting to the US Internal Revenu Service (IRS) by each financial institution on many investments, such as in most UK pension funds, ISAs and National Savings bonds.
He noted that insurance products are not being treated as deemed compliant as one might have hoped.
"Given that income or growth in all UK-based investments remains fully taxable or reportable by all US persons on their annual US tax returns, the changes will help only financial institutions, rather than individuals," said Treitel.
He added that the inter-governmental accord will create hurdles by putting the interpretation of the United States Internal Code directly for the first time into UK domestic law to be enforced by UK courts, and by being enforced by a tough penalty regime expected to be announced in this year’s autumn statement by the chancellor.
He went on to claim the contract lacks true reciprocity because the UK will send millions of bits of data to the States every year, but the US will send back less information.
It will also require every tax adviser in the UK with clients who are US citizens or green card-holders to think more seriously about whether the complicated forms the IRS already require every year are being filed, given that UK financial institutions will be providing extra data about clients to the tax authorities.
Finally, Treital said the UK-US document will make several UK financial institutions scared of having US persons as account holders because of extra compliance costs and the risk of recommending banking and investment products that are not “US tax friendly”.
