The UK became the first country to sign an intergovernmental agreement with US tax authorities to provide more information on overseas investors as part of the controversial US' Foreign Account Compliance Tax Act (FATCA).
As it stands there are currently differences between some terms defined in the intergovernmental agreement and mainstream FATCA rules, meaning some foreign institutions could be caught by FATCA but not the agreement and vice versa.
The UK government is currently consulting with industry groups ahead of drafting legislation in order to iron out these issues. The legislation is expected to be enacted as part of the Finance Act 2013, according to a client memo from SJ Berwin.
The agreement provides non-US financial firms, including private equity houses, a way to report tax information on any US investors through their local authorities as opposed to having to create a direct relationship with a foreign agency. The UK agreement is much the same as the draft model agreement released over the summer but includes a set of exemptions for foreign institutions considered ow risk of being used for tax evasion purposes.
The exemptions, however, are narrower than what the UK private equity might have hoped for. There are “exempt beneficial owners” which includes UK government organisations, the Bank of England, international organisations (such as the IMF) and UK retirement funds.Certain pension accounts, ISAs and Child Trust Funds will also avoid FATCA reporting burdens as “exempt products”.
The third class of exemptions, “deemed compliant financial institutions”, includes non-profits and foreign institutions with a local client base (such as building societies). This class of firms will need to meet stricter criteria before they are afforded an exemption, including having no fixed business outside of the UK, and having 98 percent of the value of their accounts held by UK or EU residents.