Out-Law News 3 min. read

MPs call for FATCA-style automatic disclosure of UK citizens' foreign tax affairs

The UK should seek to introduce automatic information-sharing arrangements with tax authorities abroad in order to crack down on tax avoidance by UK residents storing assets overseas, an influential committee of MPs has suggested.

Rather than enter into bilateral agreements with a range of jurisdictions, the International Development Committee said, the Government should instead establish legislation based on the US Foreign Account Tax Compliance Act (FATCA). It should also use its international influence to encourage other countries to do the same.

Its comments came as part of a wider report on tax collection in developing countries, which recommended increasing UK support to tax authorities in those countries as part of a reviewed aid programme.

A model agreement on between the US and five European states, including the UK, on FATCA was published earlier this month. The Act is aimed at preventing tax evasion by US residents using foreign accounts by introducing reporting requirements for foreign financial institutions (FFI) holding accounts for 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.

The EU Savings Directive, under which the tax authorities of an EU resident's country of residence must be notified of any interest paid on an account held by that person in another member state, is Europe's closest equivalent to the new US law. However unlike FATCA, which applies to tax authorities outside of the US, the Directive does not apply to tax authorities outside the EU.

The report said that 'capital flight', or removing assets from a developing country for storage overseas, was a "serious problem" for those countries; with illicit capital flight for the purposes of tax evasion totalling an estimated $1 trillion a year. Existing arrangements for obtaining information from the relevant offshore jurisdictions were, it said, "complex"; involving the making of a "formal request" with a "consequent administrative burden".

The UK Government "claims to support automatic exchange of information in principle", according to the report, but has "expressed some concerns about the possible burden" on businesses and financial institutions, as well as in respect of "taxpayer confidentiality". However the Committee said that large businesses it had interviewed had "no opposition" to the introduction of a similar policy, which it saw as "critical" to the ability of the tax authorities of developing countries to combat capital flight.

The report also recommended that the Government carry out analysis of the likely impact of its new controlled foreign company (CFC) rules "as a matter of urgency". These "anti-tax haven" rules, which the Treasury has said will make it easier for companies to assess whether profits they make from foreign subsidiaries are liable to be taxed in the UK, have been condemned by charities and NGOs: ActionAid, for example, has estimated that the reforms may cost developing countries as much as £4 billion. The UK Government does not accept this estimate, according to the Committee, but does not deny that there will be some cost to developing countries.

A CFC is an overseas company controlled by UK residents which pays less than three quarters of the tax which it would have paid on its income if it had been resident in the UK. The rules are intended to capture companies which artificially divert UK profits to low tax territories or other favourable overseas tax regimes to reduce their UK tax liabilities. The new rules, which are due to take effect in January, will only apply to companies operating in the UK which the Committee said would make it "easier" for those operating in developing countries to use tax havens.

The International Development Committee said that existing UK aid programmes already did some work supporting tax authorities in developing countries, citing a "very successful" ten-year support programme provided to the Rwandan Revenue Authority by the Department of International Development. However, the Committee said that similar programmes in the future should be given "higher priority".

"The aim of development work is to enable developing countries to escape from over-reliance on aid," its chair, Sir Malcolm Bruce, said. "Supporting revenue authorities is one of the best ways of doing this: it represents excellent value for money, both for the countries concerned and for UK taxpayers. That is why we are urging the Government to do more.

He added that it would be "deeply unfortunate" if the Government's commitment to supporting economic growth in developing countries was "undermined" by the new CFC rules.

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