On 12 September 2012, the Governments of the United States and the United Kingdom signed the first bilateral agreement (the 'Agreement') to implement the US Foreign Account Tax Compliance Act ('FATCA'). Among other things, the Agreement exempts certain types of UK accounts from reporting and treats certain non-profit organizations, retirement plans and other organizations as deemed-compliant 'foreign financial institutions' ('FFIs') or exempt beneficial owners. Most importantly, it means that UK financial institutions covered by the Agreement can report directly to HMRC and are not required either to enter into an agreement with the IRS or to report directly to the IRS.
The Agreement is the culmination of negotiations between the US and the UK, as first announced in Joint Statements issued by the Governments of the United States, the United Kingdom, France, Germany, Italy and Spain in February and July 2012. It is anticipated that other bilateral agreements will be signed in the near future.
The Agreement is predicated on the Exchange of Information provision under Article 27 of the US-UK Income Tax Treaty of 2001 (the 'Treaty') and applies the 'reciprocal' model, providing for automatic exchange of specified information with respect to accounts in both jurisdictions. Many provisions of the Agreement are similar to the Proposed FATCA Regulations that were published in February 2012, including with respect to identification procedures for US account holders. Similarly, the timetable for complying with reporting and identification procedures is similar to the one in the Proposed FATCA Regulations.
However, the Agreement differs from the Proposed FATCA Regulations in a number of important respects. First, several of the key definitions in the Agreement are based on definitions in the latest Foreign Account Task Force ('FATF') Recommendations and are intended to be interpreted consistently with the FATF interpretations. Examples include determining who constitutes the 'Controlling Persons' of trusts or other legal entities and defining an 'Investment Entity' as one that engages in certain activities 'for or on behalf of a customer'. In addition, some of the reporting requirements are more lenient; for example, the Agreement does not require certification of a 'responsible officer' as the Proposed FATCA Regulations do.
Another welcome change is that the Agreement excepts certain organizations from complying with FATCA. For example, the UK government, the devolved administrations, certain local government authorities, the Central Bank, any UK office of a list of international organizations, and certain pension plans described in Article 3 of the Treaty are 'exempt beneficial owners'. In addition, non-profit organizations that meet certain UK registration requirements and specified financial institutions (such as credit unions and building societies) with a 'local client base' are 'deemed compliant'.
Similarly, reporting is not required with respect to certain accounts, including certain retirement accounts, Individual Savings Accounts ('ISA'), and specified share incentive and company share option plans, among others. As specifically anticipated by the Joint Statements, UK financial institutions that provide the required information are not required to close the accounts of recalcitrant account holders.
Finally, the countries agree to work together to develop a 'practical and effective alternative approach' to 'foreign passthru payments' and to work together with other partners, the Organization for Economic Cooperation and Development and the European Union to adapt the terms of the Agreement to create a common model for automatic exchange of information, including developing reporting and due diligence standards.
On 18 September 2012, HMRC issued a consultation document on implementing the Agreement. This consultation document provides interpretations of the Agreement from the UK perspective and includes a discussion of a number of key concepts in the Agreement.
The consultation document clarifies that because the definition of an Investment Entity is interpreted consistently with the FATF Recommendations, it is expected that many family trusts will be exempt, so that only professionally managed trusts should be within the scope of the Agreement. While funds are still covered by these rules, the consultation document indicates that the investment manager may be the most appropriate party to centralize fund compliance, although the fund would remain responsible for ensuring its compliance requirements are met.
The consultation document further clarifies that the definition of a Controlling Person should be interpreted consistently with UK anti-money laundering rules. The Controlling Person concept is not part of the Proposed FATCA Regulations and its inclusion in the Agreement may have several potentially significant consequences. On one hand, it is possible this test may increase the required US ownership threshold for certain entities from 10% to 25% in some cases, while on the other hand, may require identification of anyone who exercises ultimate management control over an entity. Similarly, the Controlling Person test requires identifying who has ultimate effective control over a trust, which may be different for each trust depending on its term.
The Agreement enters into force once both countries enact the necessary legislation to implement their respective obligations under the Agreement. It is understood that the United Kingdom will propose draft implementing legislation later in 2012 and it is intended to be effective from 2013.