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European countries set out agreed approach to new US tax evasion information sharing laws

Out-Law News | 10 Feb 2012 | 10:15 am | 1 min. read

The US has agreed that banks in the UK and four other European countries will be able to pass on information needed under its controversial new cross-border tax evasion laws through their own governments rather than directly, the Treasury has confirmed.

France, Germany, Italy and Spain, along with the UK, reached an agreement (3-page / 64KB PDF) with US tax authorities following discussions with the US Government. The arrangement means that national governments can pass on the information needed under the Foreign Account Tax Compliant Act (FATCA) rather than forcing financial institutions to report directly to the US Internal Revenue Service (IRS).

In exchange, the US Government will collect and exchange information on accounts held in US banks by residents of those countries. The new law is scheduled to come into force in 2013.

FATCA is aimed at preventing tax evasion by US residents using foreign accounts. It introduces reporting requirements for foreign financial institutions (FFI) with respect to accounts held by US residents, irrespective of national privacy laws. Institutions which do not collect and report this information can be subject to a 30% 'withholding tax' on their own US source income and sales proceeds.

For FATCA's purposes, FFI is defined to include any foreign entity whose principal business is accepting, holding, investing or trading in securities or commodities. This can include banks, investment funds, hedge funds, private equity funds and pension funds. Critics of the law have argued that it is too broad and will create excessive compliance burdens for financial institutions.

"This is a forward step but still leaves financial institutions with a huge compliance burden while the detail of the agreements is worked through, and where arrangements involve countries which have not reached a mutual agreement with the US said tax expert John Christian with Pinsent Masons, the law firm behind Out-Law.com. "Parties to cross-border financial transactions will still need to work through the FATCA implications and consider how risk should be borne between them."

Pensions expert Simon Tyler, also with Pinsent Masons, said that although the US had recently introduced an exemption from FATCA for pension schemes it was "far from clear" how this would work in practice, particularly where smaller schemes were concerned. In the draft regulations, a 'retirement fund' is only exempt where no single beneficiary has a right to more than 5% of the fund's assets.

"Any scheme that fell outside of the exemption would still have to report on any US citizen in their scheme," he said. "The US and UK Governments must provide guidance on this as soon as possible."

"This joint statement builds on the close cooperation of all the countries involved, and of the European Commission, in tackling cross-border tax evasion and provides a practical way forward that should reduce the burdens on the financial sector," said David Gauke, Exchequer Secretary to the Treasury.

The US Government said that it would use the agreement as "a model" in reaching similar arrangements with other countries.