20 November 2014

In Uncle Sam’s footsteps


When FATCA was signed by Barack Obama in 2010, many commentators were quick to argue that such ‘breathtakingly extra-territorial’ provisions would never come to fruition. Fast-forward only a few years and those five letters, FATCA, have become etched in the minds of exasperated US taxpayers (many of whom are queuing outside embassies around the globe to return their passports) and left financial institutions worldwide having to deal with the ultimate compliance nightmare.

Nevertheless, what has now become clear is that a strong precedent was set four years ago and countries are now following suit in this move from the traditional exchange of information ‘on request’ to a new era of automatic exchange of data.

It is in this context that the UK has embraced the US FATCA approach but targeting specific jurisdictions. The UK has entered into a number of automatic disclosure of information agreements with the Crown Dependencies and the British Overseas Territories, traditional offshore banking centres. These agreements have quickly been collectively rebranded as ‘UK FATCA’ or ‘Mini FATCA’. At the time of writing, reciprocal agreements have been entered into with the Isle of Man, Jersey, Guernsey and Gibraltar, whilst non-reciprocal agreements have been signed with Cayman, Bermuda, Montserrat, Turks and Caicos, British Virgin Islands and Anguilla.

With these agreements, an ever more stretched HM Revenue & Customs (HMRC) is delegating the role of ‘fiscal police’ to foreign financial institutions, entrusting them with the task of undertaking a careful due diligence to identify any so called ‘reportable accounts’ – that is any account where the account holder is either a UK resident individual, partnership or unlisted company (in FATCA talk, a ‘UK specified person’) or a non-UK entity ‘controlled’ by a UK specified person (by way of example, this will include settlors, trustees, protectors and beneficiaries of trusts) – and provide extensive information about these accounts and their owners/beneficiaries.

Tax authorities in the Crown Dependencies will have up to 30 September 2016 to exchange information with HMRC for years 2014 and 2015.

Resident Non Domiciled individuals are not exempt from the new disclosure obligations and might feel that their cherished privacy about their offshore affairs is being dented.

Nevertheless, HMRC has not done away completely with the favourable treatment of so called ‘res non doms’ and has introduced an alternative reporting regime. The reporting will be done on a tax year as opposed to a calendar year basis and, although some information will have to be provided, this will be limited to :

  • Payments and assets transferred to the UK;
  • Payments and assets received from the UK;
  • Payments transferred to/from an unknown source (this will include primarily cash transactions).

However, this will still clearly provide HMRC with fresh ammunition should it wish to challenge the position of taxpayers claiming the remittance basis. On top of that, ‘res non doms’ must act fast as alternative reporting elections in respect of 2014 are due in by mid-2015.

The package agreed by the UK with the Crown Dependencies also includes a tax disclosure facility to enable those with irregularities to redeem themselves with HMRC before the automatic exchange of information comes into effect in September 2016. In most circumstances , disclosed liabilities will carry a 10% fixed penalty for years up to and including 2007/08 and a 20% penalty for 2008/09 (as well as full interest on any tax paid). Although these facilities will be with us for a few more years still, it is already clear than in many circumstances pre-existing facilities, namely the Liechtenstein Disclosure Facility (LDF), will still offer a more appealing alternative to many ‘sinners’ as it offers immunity from prosecution.

The big question is what can we expect to see come out of UK FATCA. This exercise is undoubtedly going to generate an unprecedented amount of information to be analysed by HMRC and its data mining “Connect” system. It is also inevitably going to give rise to fresh enquiries from HMRC as well as providing a taste of things to come. Common Reporting Standards are around the corner, leaving little hiding place in the new ‘global tax village’. The advice to any less than compliant taxpayers is to make the most of these times of transition and the carrots and sticks being offered by way of the different disclosure facilities before the carrots run out.

Category: Article