The FATCA effect

Tuesday, 01 April 2014
Fiona Fernie explains the latest developments in international tax reporting agreements.

Since the 2010 bombshell of the US Foreign Account Tax Compliance Act (FATCA), the goalposts in international tax reporting have been moving rapidly. The days of governments relying on double taxation agreements, or the more specific tax information exchange agreements (TIEAs), seem numbered.

Timeline

The UK was the first jurisdiction to strike an agreement with the US to implement FATCA, chiefly so UK financial institutions need not register directly with the Internal Revenue Service (IRS). This has served as a template for agreements between the US and other jurisdictions, albeit with some variations: around 30 are expected to be in place by FATCA’s 1 July 2014 start date.

The UK had already signed ground-breaking tax agreements with Liechtenstein and Switzerland, but neither allowed for comprehensive automatic information exchange. However, as many jurisdictions were to sign identical agreements with the US, the obvious question then was: why not have similar agreements with each other to protect each jurisdiction’s own tax revenues? In July 2012, the US, UK, France, Germany and Italy formed a pilot group for automatic exchange of tax information (AEOI), using the FATCA implementation agreement as a template for bilateral intergovernmental agreements (IGAs).

The OECD has worked on information exchange for many years through its Convention on Mutual Administrative Assistance in Tax Matters and work on TIEAs. So it was the natural forum for a new working group on AEOI. After a meeting in November 2013, 40 territories signed a joint commitment to take part in AEOI when common reporting standards are adopted; the OECD has recently published a draft standard.

Meanwhile, the UK has been pressing ahead with bilateral IGAs with the Crown Dependencies and the British Overseas Territories. The Netherlands is taking a similar approach; its new tax agreement with Curaçao will include AEOI from 2015.

Under TIEAs, the jurisdiction that wants the data must request it, and identify the person concerned and the tax purpose for which the data is sought. The UK already has TIEAs with the Crown Dependencies and British Overseas Territories, as well as other former low-tax jurisdictions, from Aruba to Liechtenstein: it is expected to upgrade all these to IGAs.

IGAs

The template IGA requires automatic and blanket exchange of data for all individuals identified as possibly resident in the other jurisdiction. There is no need for a jurisdiction to request data for a specific individual, and financial institutions and paying agents report to their local tax authority, with the data sent on securely to the other state.

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The IGAs are not always reciprocal (i.e. placing reporting obligations on both countries), and the US has developed a Model 2 approach under which exchange of information is not automatic. It still requires financial institutions to register with the IRS and obtain a global intermediary identification number but the duties placed on them are less onerous. However, the Model 2 IGA allows the IRS to make bulk information requests: both Japan and Switzerland have signed up to it.

The OECD is investigating ways to implement widespread AEOI speedily – possibly via the Convention on Mutual Administrative Assistance in Tax Matters. It is expected to follow the Model 1 approach, but may also strengthen the TIEA template to include bulk information requests. It was also announced recently that the OECD has agreed an XML schema (version 1.1), a standard format for data transmission, for reporting the FATCA information, and this will no doubt be adopted for other IGAs. The EU also has plans for AEOI between member states, building on the existing EU Savings Directive.

Moving goalposts

The Caribbean aptly illustrates the current state of flux. Bermuda and the Cayman Islands have signed IGAs with both the US and UK, and signed up for the wider OECD proposals. Curaçao will soon implement AEOI with the Netherlands and is negotiating with the US. The Bahamas is negotiating with the US, while Costa Rica has already signed an IGA with the US. However, the Dominican Republic is likely to leave its financial institutions to deal with FATCA on their own.

Wherever they are based, financial institutions clearly need to sort out their procedures for US residents quickly. However, with so many jurisdictions embracing transparency, reporting data on clients resident in other jurisdictions may quickly become the norm. Financial institutions in offshore financial centres may find it simpler to implement rigorous identification and reporting regimes for all overseas clients rather than to focus solely on US residents. Naturally, where information exchange is to take place, helping overseas clients tidy up their tax affairs efficiently will be key to retaining their business in the long term. 

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Fiona Fernie

Fiona Fernie TEP is a Tax Investigations Partner at BDO LLP.

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