Sunday, September 16, 2012

US and UK Sign First FATCA Inter-Goverenmental Implementation Reciprocal Agreement

The UK Government and the US treasury haved signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA) establishing a reciprocal approach to FATCA implementation. This is the first agreement of its kind, benefiting UK financial institutions by addressing their legal concerns with complying with FATCA and reducing the burdens imposed on them. It also boosts the  UK's ability to obtain information from the US to help in tackling UK tax evasion.

The UK-US agreement follows the Joint Statement made in July 2012 by the governments of France, Germany, Italy, Spain, the United Kingdom and the United States, announcing the publication of the Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA. The signing of the agreement follows the conclusion of negotiations on the UK-specific Annex II. This sets out UK institutions and products which are seen as presenting a low risk of being used to evade US tax and are therefore effectively exempt from FATCA requirements.

The UK-US agreement is closely based on the Model Agreement, and addresses legal barriers to financial institutions complying with FATCA. It also ensures that withholding tax will not be imposed on income received by UK financial institutions or on payments they make and that the burdens imposed on financial institutions are proportionate to the goal of combating tax evasion.

The agreement has been laid before the Houses of Parliament and will undergo a 21 sitting day scrutiny period as part of the ratification process. Financial institutions and other interested parties will now be consulted on the implementation of the Agreement in the UK and draft legislation will be published later in 2012.

FATCA, which is part of the Hiring Incentives to Restore Employment Act of 2010, aims to combat tax evasion by US tax residents using foreign accounts.  It includes certain provisions on withholding taxes and on the reporting of information by foreign financial institutions for US tax compliance purposes. These give rise to certain legal difficulties and administrative burdens for financial institutions