What has happened?
On 8 February, the US Internal Revenue Service (the ‘IRS’) released long-awaited proposed regulations (the ‘Proposed Regulations’) under the Foreign Account Tax Compliance Act (‘FATCA’). The Proposed Regulations clarify and modify the phased implementation provided under prior IRS Notices and are open for comment until 30 April 2012.
Broadly, FATCA requires a wide range of non-US organisations to enter into an agreement with the IRS to comply with certain onerous information gathering and reporting requirements if they invest in the United States either directly or indirectly (for example, through directly-held equities, a brokerage account or many collective investment schemes).
The penalty for not entering into this agreement with the IRS is a 30% withholding tax on the organisation’s US income, including dividends, interest and certain gross sales proceeds from US investments (e.g., stocks). The US also is negotiating agreements with certain EU countries, including the UK, to provide for mutual enforcement and exchange of information.
Does this apply to my organisation?
Every UK charity and non-profit or community organisation with direct or indirect US investments should consider how the Proposed Regulations may apply in their circumstances to determine what course of action is required for their organisations.
The Proposed Regulations contain several exceptions, which should broadly mean that non-US charities will not be subject to withholding or the need to enter into IRS agreements provided that certain certifications are provided.
UK charities – and some non-charitable types of UK organisations – may be able to establish that they are equivalent to a US exempt organization by obtaining a US legal opinion and therefore not subject to withholding or any requirement to enter into an agreement with the IRS. Alternatively, if a non-US organisation is not equivalent (for example, because it has broader purposes than are allowable under US law) the non-US charity may be ‘deemed-compliant’ if it can provide a letter from local (eg, UK) solicitors that it meets certain UK requirements designed to ensure it has truly charitable purposes.
What should we do?
Charity trustees have a fiduciary obligation to safeguard the assets of their charity including to take steps to avoid unnecessary tax penalties arising on non-compliance. Ignoring the possible impact of the Proposed Regulations is therefore not an option and UK charities should consider the application of these rules in their particular circumstances, seek legal advice where appropriate and discuss with their investment manager.
The Proposed Regulations are open for comment until 30 April 2012. However, charities may find that investment advisers, banks and other financial intermediaries will start seeking documentation to support their own compliance with these rules, which may mean that charities will be asked to document their status under FATCA. Withholding generally begins on 1 January 2014 subject to transitional arrangements.
Charity trustees should also watch closely for updates, as the UK is one of several jurisdictions that has agreed to consider enacting local laws that may relieve UK organizations (which may include UK charities) from certain of the above requirements. We will continue to monitor the situation and provide relevant updates.
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