Foreign Accounts Tax Compliance Act (FATCA) – it does affect potentially ALL UK trusts
FATCA was originally enacted in 2010 and was scheduled to take effect in January this year. This date was later postponed until January 2014 and now it had been pushed back yet further to 1 July 2014.
In the meantime the government has published what was thought to be its final FATCA regulations: The International Tax Compliance (United States of America) Regulations, SI 2013/1962 and its revised guidance notes (dated 14 August 2013), which have been amended primarily to reflect the new implementation date. However, it is anticipated that early in 2014 both the US FATCA Regulations and the HMRC revised Guidance will be further revised.
What is it for?
FATCA is a means to ensure that all relevant taxes are collected by the US Inland Revenue Service (IRS) either directly or through other national tax authorities. It is a system which gradually other major countries are implementing too to ensure they protect and preserve their collection of tax.
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Who does it affect?
Whether or not there is a settlor, beneficiary or trustee with an US connection, trusts which are ‘financial institutions’ or which have a corporate trustee or whose trust funds are managed through an entity which produces at least 50% of its gross income by trading in money market investments or the investment and administration of funds will need to register with the IRS.
So if the Abbey Trust is managed by Snow, White & Faithfull solicitors of Ripon, two of whose partners together with a family member are the trustees, even though they do not have any connection with the US, if the trust funds are managed on a discretionary basis with, say, Charles Stanley then the trust will be a financial institution which must register with the IRS or face Charles Stanley withholding 30% of the income arising from US shares & interest under their management.
The trust can register and report directly or it can appoint a third party to fulfil its reporting obligations. In the example, Charles Stanley might offer this service or at least raise the issues as part of their compliance processes.
How does a foreign government enforce compliance?
A failure to comply with registration and reporting obligations forces the trust fund manager to withhold 30% of US dividends and interest income due to the trust and 30% of the capital value on realisation of US shares. There are fines and possible penalties to encourage compliance. The administrative requirements on stockbrokers and fund managers will ensure that they do not overlook the compliance aspects. Indeed, many organisations providing discretionary management services to trusts may well raise these issues with trustees for first time before trust administrators.
Are there any trusts not affected by FATCA?
Charitable trusts do not need to register or report and trusts which are not UK tax resident are not within the scope of the UK/US arrangements. However, this idea is moving around the world and it is possible another arrangement in the particular jurisdiction may affect them. For example, the UK has entered into similar arrangements with the Channel Island jurisdictions.
Trusts which are Non-Financial Foreign Entities (NFFE) also do not need to register or report so each trust does need to consider whether it is a Financial Institution or a NFFE.
What should trust administrators be doing to comply?
Trusts need to determine whether they are Financial Institutions or NFFEs. If they are Financial Institutions then they need to take steps to register and report to the US IRS. If they do not wish to do this directly then they will need to:
- Appoint a Designated Withholding Agent and provide all the information to that Agent (This will make the trust an Owner Documented Financial Institution); or
- Find a Sponsor who must register the trust and comply on the trust’s behalf (This will make the trust a Sponsored Investment Entity); or
- If 20 or fewer individuals own all the debt and equity interests then they could appoint a Sponsor who will register the entity. (This will make the trust a Sponsored Closely Held Investment Vehicle). The Sponsor in registering the entity does not register the trust but must undertake all the FATCA compliance.
If the Trust is an NFFE then it will still be necessary to review all their beneficiaries, fiduciaries and office holders to decide if there is any substantial US owner or US controlling person and be able to make the necessary certifications.
A trust with a corporate trustee is known as a Trustee Documented Trust and does not need itself to register. However, the corporate trustee does need to register and will have to report on all the trusts for which it acts as a trustee.
Where our simple Abbey trust has three individuals as trustees then they will be a Financial Institution for which information about each individual trustee will have to be registered and reports made.
If the partners in the law firm decided to set up a trust corporation and transfer all the trusts they administer to that corporate trustee, encouraging all lay trustees to retire as trustees, then Snow White & Faithfull would simply register the firm’s trust corporation and the corporation would report on all the trusts for which the trust corporation acts as trustee. Where firms have many trusts under administration this may prove to be the most cost effective answer.
The original deadline for registration of 15 July 2013 has been postponed for six months. Withholding agents will be required to begin withholding on payments made after 30 June 2014 to payees that are Financial Institutions or NFFEs who are not ‘grandfathered in.
New accounts opened by Withholding agents will need to have a system in place by 1 July 2014.
The deadline for filing information reports with respect to 2013 and 2014 calendar years will be 31 March 2015.
The FATCA registration website can be found at http://www.irs.gov/Businesses/Corporations/FATCA-Registration and any data entered up to 31 December 2013 was supposed to have been regarded as draft. From 1 January 2014 the information on Financial Institutions could be updated and finalised.
The IRS intends to post its first list of Financial Institutions by 2 June 2014 and will update it on a monthly basis thereafter. To ensure inclusion in the June 2014 list the Financial Institution will need to finalise its registration by 25 April 2014. That is not very far away. Even if the deadlines are delayed further this is something which trust administrators must take seriously and aim to be compliant by 25 April 2014.
STEP, the Law Society and The Chartered Institute of Accountants in England & Wales have produced an excellent flowchart to help and STEP has also a useful webinar available at http://www.step.org/fatca.
It is anticipated that there may be further changes and possible delay but one thing is certain it is not a case of trustees hoping it will all go away – it will not and action must be taken to review ALL trusts now to be prepared.
15 April 2015: Update to above article
HMRC have subsequently confirmed that there is no need to make nil returns. Read the full Government announcment
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