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European governments reach agreement on implementation of US tax compliance laws

A wider range of products will be exempt from a new tax compliance information-sharing agreement with the US, the UK Government has announced.

A model agreement (31-page / 145KB PDF), issued by the UK together with the governments of France, Germany, Italy, Spain and the US, sets out a "framework" which will enable the countries to implement the US Foreign Account Tax Compliance Act (FATCA). The agreement addresses concerns about the agreement such as those related to data protection. It more closely aligns due diligence requirements with those under the existing anti-money laundering rules.

However pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that issues surrounding how the new law would apply to pension funds remained outstanding. The agreement exempts "retirement plans" specifically identified in the appendix, however this section of the document will not be finalised until the relevant government consults on the plans.

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.

However, the UK said that as part of the final agreement withholding tax would not be imposed on income received by UK financial institutions, which in addition would not be required to withhold tax on payments that they make.

For FATCA's purposes, FFI include any foreign entities 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.

An agreement published by the European governments in February this year indicated that the US had backed down on its previous demand that FFI should report directly to the US Internal Revenue Service (IRS). Instead, FFI will be able to report to national authorities who will then pass on the necessary information using the existing tax treaty framework.

The Government said that the model agreement was intended to ensure that the burdens imposed on financial institutions under FATCA would be "proportionate to the goal" of combating tax evasion. In addition, a "reciprocal" arrangement would grant HM Revenue and Customs (HMRC) "equivalent information" from the IRS to enhance its own compliance activities.

"We need to be as tough on tax evasion abroad as we are at home. The Model Agreement constitutes an important step in tackling international tax evasion," the Chancellor of the Exchequer, George Osborne, said. "We have achieved substantial changes to how FATCA will be implemented that will provide significant benefits to UK financial institutions while strengthening our ability to tackle the evasion of UK tax. I look forward to the prompt conclusion of our bilateral negotiations and the signing of our agreement with the United States."

The Government will "conclude negotiations" with the US on a final agreement as soon as possible, and plans to consult on draft legislation to implement the agreement in the UK later this year.

International lobbyists at the Organisation for Economic Cooperation and Development (OECD) welcomed the agreement, and said that they would work with interested countries on developing a common model for automatic exchange of information.

"We at the OECD have always stressed the need to combat offshore tax evasion while keeping compliance costs as low as possible," Angel Gurria of the OECD said. "A proliferation of different systems is in nobody's interest. We are happy to redouble out efforts in this area, working closely with interested countries and stakeholders to design global solutions to global problems to the benefit of governments and business around the world."

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