Alternative Investment Management Association Representing the global hedge fund industry
As governments the world over negotiate and come to separate agreements with the US on the Foreign Account Tax Compliance Act (FATCA), a new level of tax information sharing is beginning to emerge. As administrations on a global scale struggle to reduce debt, rather than reducing their profligate spending, the so called “eradication of tax evasion” is proving a more popular political slogan. With the impending arrival of FATCA, it is clear that new agreements which demand automatic exchange of information between nations and penalise non-compliance will not be limited to the United States.
Tax information exchange agreements (TIEAs) have been a priority for certain Western governments for several years. Countries have entered into bilateral agreements with other nations in order to capture and share out the taxation on cross-border financial activity. The OECD released a model tax agreement in 2002 in order to encourage countries to share tax information through bilateral agreements. Currently, this type of tax agreement is the norm, whereby the agreement is non-binding and tax information is shared on a case by case basis at the request of a member nation.
In Europe, a system with FATCA-esque characteristics has been in effect since 2005, when the EU Savings Directive came into force. The Directive applies to interest earned on investments paid to individuals resident in an EU Member State, other than the one where the interest originates. The Directive applies only to individuals and requires either automatic direct reporting to relevant tax authorities, or withholding of taxation and subsequent remission to the state of residence of the beneficiary.
The principle of direct reporting to a designated tax authority is similar to the stipulations of FATCA, although FATCA will apply to all foreign financial assets of US taxable persons, as defined. The US Treasury Department and Internal Revenue Service (IRS) released on the 17th of January 2013, final regulations under the FATCA provisions, which can be found here.
Intergovernmental FATCA agreements
FATCA obliges US taxpayers to declare any financial assets above certain thresholds held overseas and Foreign Financial Institutions (FFIs) to report on assets owned by US taxpayers to the IRS.1 FATCA originally obliged all FFIs to enter into agreements with the IRS, under bilateral intergovernmental agreements with the US, however FFIs can now report to their own tax authorities, who will then provide the relevant information to the IRS (Model 1 agreement), or alternatively report directly to the IRS (Model 2 agreement). For FFIs which do not comply with this, the US Treasury plans to impose a thirty per cent levy on all payments from US sources to non-compliant FFIs.
The first Intergovernmental Agreement (IGA) that the US concluded was with the United Kingdom, an agreement now being used as something of a template for other nations. The US and the UK have reiterated that this is a reciprocal agreement and that it increases the UK’s ability to obtain information from the US to combat UK tax evasion as well as increasing the US’s information gathering. It has been suggested that although the respective governments have stressed the mutually beneficial nature of the UK-US IGA, certain critics of the agreement have deemed to be merely aspirational in its reciprocity, suggesting in imbalance in the level of automatic information sharing. The agreement also purports to address the legal concerns that many FFIs have about complying with FATCA, as a result of banking secrecy laws. Certain FFIs that have been deemed to carry low risk as vehicles of tax evasion are specified in this agreement and are thus more or less exempt from FATCA requirements.2
Ireland, Denmark and Mexico have now also concluded intergovernmental FATCA agreements with the US, also using the Model I agreement.
Growth of FATCA-esque regulation
As governments become more familiar with FATCA and negotiate mutually beneficial agreements, it appears that several governments are proposing their own legislation mirroring FATCA-esque demands. After signing the first FATCA agreement, the UK revealed that it has also drafted legislation which has earned the nickname ‘son of FATCA’. The son of FATCA requires all UK Crown Dependencies and British Overseas Territories to automatically exchange information with the UK on UK account holders on an annual basis. The Isle of Man is the first UK to territory to agree to comply with this and has already signed an enhanced tax information exchange agreement.3
If the British territories object to this legislation, the UK may force the jurisdictions to comply by threatening to veto the territories’ own FATCA agreements with the US, effectively cutting the territories off from the US. Thus it seems inevitable that the British territories will be entering automatic tax information exchange agreements with the UK in the coming years.
Even though the UK’s FATCA-esque legislation relates to British territories only, this is a significant break from the level of information sharing required by territories including Jersey, Guernsey, the Cayman Islands and Bermuda (who are not currently required to automatically provide information on UK account holders). The Cayman Islands has TIEAs with 30 countries, including one signed in December 2012 with Italy, however the Cayman Islands government does not track data on its residents, it is Cayman banks that are responsible for providing information on demand.
In addition to the UK’s son of FATCA, France also this year launched a so-called ‘mini FATCA’ which targets overseas trusts with French tax-resident settlors or beneficiaries. The legislation came into effect in July 2012, and includes a penalty of €10,000 or 5% of the trust corpus (whichever the larger) for non-compliance. The law requires that the French government receives a detailed inventory of the assets held by French tax residents,4 although there has been some confusion as to the necessary valuation methodologies when submitting this report. Further questions have been raised regarding France’s tax regime following the recent media flurry regarding French film star Gerard Depardieu’s renunciation of his French passport in exchange for Russian citizenship in order to benefit from Russia’s preferential tax regime.5
With France and Britain on the FATCA-esque bandwagon, other countries are researching their own options too. Brazil requires final beneficial owner information on any transaction on its stock market the BM&F Bovespa, specifically for international beneficiaries. Brazil is currently preparing legislation which has been likened to FATCA, aiming to strengthen the requirements for providing information on ultimate beneficial owners of assets held by Brazil tax residents in funds and companies outside of Brazil. Any FFI which works with Brazilian clients will be eager to hear the final proposals from the Brazilian government, when they become available.
Future of FATCA
Although several governments are moving toward legislation requiring automatic tax information sharing, the numbers of bilateral TIEAs also continue to rise, thus we are not going to see the demise of tax information sharing on a case by case basis. What we are seeing, is that governments are seeking to reach mutually beneficial agreements which will place greater even reporting demands on international financial institutions.
Countries which operate banking secrecy laws are, of course, highly concerned by the possibility of breaking these laws in order to comply. It remains to be seen how many countries will be able to introduce a system like FATCA. However, as the Chief Executive of Jersey Finance Geoff Cook said: “It is well known that the principles behind the US FACTA arrangements are being looked at by the OECD, EU and UK.”6 Thus, we can be assured that the financial industry and governments alike await the final outcome of FATCA with anticipation.
 Internal Revenue Service, 2012 http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)
 HM Treasury, 2012 http://www.hm-treasury.gov.uk/press_82_12.htm
 Financial Times, 2012 http://www.ft.com/intl/cms/s/0/01540570-4093-11e2-8f90-00144feabdc0.html#axzz2Eqn7gOLI
 Mondaq, 2012 http://www.mondaq.com/x/199116/wealth+management/French+Trust+Law+Reporting+Requirements
 NY Times, 2013 http://www.nytimes.com/2013/01/04/world/europe/putin-makes-gerard-depardieu-a-citizen-of-russia.html
 BlevinsFranks, 2012 http://www.blevinsfranks.com/EN/news/104/975?newsCategoryPK=