FATCA Compliance And Data Protection

Author:Ms Margaret Tofalides
Profession:Clyde & Co

Complying with USA FATCA and UK/EU Data Protection Requirements

The US Foreign Account Tax Compliance Act (FATCA), passed by Congress in March 2010, was finally implemented in July 2014. The Act makes the US the only large economy to tax its nationals on all of their earnings anywhere in the world, although the Organisation for Economic Co-operation and Development (OECD) has developed a similar regime and the EU likely to follow suit. The anti-avoidance tax law requires financial institutions around the world to report on assets held by American clients. Initially this had raised serious privacy issues but with over 30 jurisdictions signed up to bilateral intergovernmental data sharing agreements with the US, financial institutions affected should make sure they are ready to comply with this extra-ordinary extra-territorial law.

A brief overview of FATCA

FATCA aims to stop US citizens (including those not resident in the US) avoiding paying tax by holding offshore investments. To this end, FATCA requires foreign financial institutions (FFIs), to provide information to the US Internal Revenue Service (IRS) on their US accountholders or accounts that are held by foreign entities in which a US tax payer holds a substantial ownership interest. The wide definition of FFIs includes not only banks, but also investment funds, hedge funds, private equity funds and other forms of financial intermediaries. Should a FFI fail to meet the disclosure obligations or refuse to produce the information, the IRS can sanction them by imposing a 30% tax on certain payments made to a FFI.

Implementing FATCA

FATCA's extra-territorial provisions require FFIs based outside the US to report client information to the IRS. However, due to data protection laws, the FFIs will instead provide this information to their national tax authorities, in the UK Her Majesty's Revenue and Customs (HMRC), which have individual agreements to share data with the IRS. Nearly 40 jurisdictions (including renowned tax havens such as the BVIs, Cayman Islands, Jersey and Luxembourg) have signed up to intergovernmental agreements (IGAs) that apply and enforce the provisions of FATCA locally, and almost the same number again have 'agreements in substance' with the US Treasury. The agreements mean that registered FFIs in these countries will not suffer the 30% withholding tax.

On 30 June 2014, the International Tax Compliance (United States of America) Regulations 2014 (UK Regulations) came...

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