The much anticipated UK-US Agreement to implement FATCA (part of the US Hiring Incentives to Restore Employment Act of 2010) was signed on 14 September 2012. This follows the Joint Statement made in July 2012 by the governments of France, Germany, Italy, Spain, the United Kingdom and the United States announcing publication of the Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA.
FATCA (or Foreign Account Tax Compliance Provisions) aims to combat tax evasion by US tax residents using non-US accounts. FATCA requires financial institutions outside of the US to report information on US account holders to the US Inland Revenue Service (IRS). If financial institutions fail to report, then a 30% withholding tax would be applied on all US payments to them.
After significant lobbying from the financial services sector regarding the legal and administrative hurdles of complying with FATCA reporting, not to mention the significant costs, the UK along with other European governments took part in joint negotiations with the US resulting in the Model Agreement earlier this year.
Of key importance to those in the UK pensions’ industry was Annex II to the UK-US Agreement which confirms that UK registered pension schemes (as defined) are exempt from the reporting requirements of FATCA. This is in acknowledgement that pension schemes are felt to present a low risk of being used to evade US tax.
Other financial products exempt from reporting under Annex II of FATCA include Individual Savings Accounts (ISAs), Child Trust Funds and Premium Bonds.
While the UK-US Agreement is likely to be welcomed by UK financial institutions, there is still much work to be done. HMRC issued a consultation on 18 September 2012 on legislation required to implement the UK-US Agreement. Draft legislation will be published by the end of this year with a view to introducing legislation in the Finance Bill 2013. While the policy is fixed the practicalities of implementation will still need to be addressed.