The US has reached a
landmark agreement with France, Germany, Italy, Spain and the
United Kingdom on the exchange of tax information that will help
simplify the collection of compliance data for the Foreign Account
Tax Compliance Act (FATCA).
One of the key parts of the
agreement is to allow foreign financial institutions (FFIs)
established in the five European countries to comply with FATCA
reporting obligations by giving tax information to the authorities
in that country, rather than directly to the Internal Revenue
Service (IRS).
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The same will reply in
reverse, so that the IRS will automatically collect and report
similar information to the other countries with respect to accounts
held by residents of those countries in the United
States.
There has been widespread
resistance to FATCA by the banking industry outside the US due to
the legal impediments to compliance and onerous practical
implementation FFIs were facing.
Importantly, Switzerland has
not been included in the agreement, suggesting negotiations on the
exchange of Swiss tax information to US authorities is being dealt
with separately.
Kristin Konschnik, a partner
at international law firm Withers, said: “If the steps in the joint
statement are implemented, they could be the first steps towards a
coordinated, multi-jurisdictional approach to tackling global tax
avoidance.”
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By GlobalData“More immediately, a primary
benefit of the implementation of the framework is that FFI
agreement and reporting requirements under FATCA will not apply to
FFIs in these jurisdictions provided they properly report to the
authorities in that jurisdiction,” she said.
FATCA changes could
save $10bn: KPMG
The agreement comes at the same time as the US Treasury
and the IRS released their 388-page proposal outlining a more
detailed plan of how FATCA will be implemented.
The proposal lays out a
step-by-step process for US account identification, information
reporting, and withholding requirements for FFIs, other foreign
entities, and US withholding agents.
Adrian Harkin, global FATCA
leader at KPMG, said his firm estimated that these measures could
reduce the implementation cost of FATCA by more than
$10bn.
“On the other hand, FATCA
will still cost the industry much more than it is likely to raise
for the IRS. Plus, the introduction of bilateral FATCA agreements
between countries will add more complexity into the mix for the
biggest global financial institutions,” he said.
“The bottom line is FATCA
continues to present a major challenge to the industry at a
difficult time,” Harkin added.
Konschnik said the proposal
makes a number of welcome changes. The first is the increase in
value of accounts subject to an ‘enhanced review’ from $500,000 to
$1m.
“Although the [FATCA
proposals] eliminate the stricter ‘private banking relationship’
set out in a prior notice, they do require a ‘relationship
manager’s’ actual knowledge to be part of the due diligence process
for accounts subject to ‘enhanced review’,” she said.
Konschnik said the proposal
also addresses trusts in some detail for the first time. The rules
appear to require trusts with US owners to be classified as
‘grantor’ or ‘non-grantor’.
They set out rules for
determining when a US person will be treated as having a beneficial
interest in a trust, and contain attribution and constructive
ownership rules to determine whether a US grantor or beneficiary of
a foreign trust is a substantial US owner of a foreign
entity.
“Trusts with financial assets
appear to be foreign financial institutions (‘FFIs’) and there do
not seem to be an exception for ‘small family trusts’,” she
said.
The public consultation period on the FATCA proposals
closes on 30 April.
