FATCA to apply to non-US clients

 In Tax, Trusts

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FATCA and the UK crown dependencies‘Son of FATCA’ rules introduced

There have been plenty of articles about the US FATCA rules, which are designed to help the US authorities locate their citizens’ offshore assets.  Less known, perhaps, are the new ‘son of FATCA’ rules introduced by the UK.

By way of context, US citizens are taxed on a worldwide basis, so have to report all their assets worldwide to the US Internal Revenue Service (‘IRS’).  Just in case any US citizen has forgotten (honestly or otherwise) to report their offshore assets, the new FATCA rules ensure the IRS get the relevant information anyway.  In the UK, FATCA operates by ensuring that any UK resident ‘financial institution’ reports on its US clients to HM Revenue & Customs (‘HMRC’), who in turn pass the information on to the IRS.

FATCA extended to the UK’s crown dependencies & Gibraltar

Clearly this was too good an opportunity for the UK government to miss.  Following the US example, the UK introduced The International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014.  These Regulations, which came into force on 31 March 2014, introduce FATCA-style reporting to the UK’s crown dependencies (Jersey, Guernsey and the Isle of Man) plus Gibraltar.

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The Regulations impose reporting obligations on financial institutions in the relevant territories.  This requires the financial institution to report any accounts belonging to UK residents, which were in existence on or after 30 June 2014.  The reporting is not actually due to start, however, until 1 January 2016.

Reciprocal exchange-of-information rules apply.  So the UK will give information to the authorities in Jersey, Guernsey, the Isle of Man and Gibraltar on any account held in the UK for a resident of one of those jurisdictions.

Automatic tax information exchange

This contrasts with the automatic tax information exchange agreements the UK has signed with its overseas territories.  The Cayman Islands were the first, followed by Bermuda, Monserrat, the Turks and Caicos Islands, Anguilla and the British Virgin Islands.  These agreements are non-reciprocal, meaning the reporting is all one-way: from the overseas territory to the UK.

Again, reporting is not due to start until 1 January 2016, but financial institutions in the countries affected are already changing their due diligence in order to comply.  So if you have clients with dealings in any of the countries listed above, they can expect to start receiving letters (if that haven’t already done so) informing them of the new reporting requirements.

International Tax Compliance Regulations

These new rules should be seen in context of the wider international attempts to introduce exchange of information provisions worldwide.  The International Tax Compliance Regulations 2015, which came into force on 15 April 2015, were made to give effect to a number of agreements between the UK and other jurisdictions.  The stated aim is to improve international tax compliance.  The Regulations cover:

  • The US-UK FATCA agreement
  • New EU money laundering rules in Council Directive 2011/16/EU; and
  • Automatic exchange of information agreements between the UK and various countries

The Regulations came into force for the FATCA rules on 15 April 2015 whereas the Regulations only come into force on 1 January 2016 for the other parts.  The Regulations are designed to bring together the reporting obligations and due diligence requirements under the various agreements.

When clients ask which jurisdictions these Regulations apply to, it is probably easier to look for those jurisdictions that are not covered by the Regulations.   Of the most wellknown tax ‘havens’, only Panama is missing, with Cayman, Bermuda, BVI etc. all included.

Consequences for non-doms

For those clients who are UK resident but non-domiciled, and eligible for the remittance basis of taxation, little should change.  Clients in that position are perfectly entitled to have assets offshore and do not need to report those assets to HMRC (only taxable remittances of offshore income or gains need to be reported).  However for those clients who are taxed on the arising (worldwide) basis, the report from an offshore jurisdiction is likely to result in enquiries from HMRC.

At the same time as introducing these reporting rules, HMRC has announced the early closure of the disclosure facilities (such as the Liechtenstein LDF and the Crown Dependencies Disclosure Facility), which clients could use to report undisclosed funds without risk of criminal prosecution.  These are now coming to an end at the end of this year (2015). Additional penalties have been introduced for clients with undisclosed offshore funds, including in Finance Act 2015, which contained increased financial penalties for anyone who placed their assets in a country that does not have exchange of information provisions with the UK.

The message is clear.  Legitimate offshore planning is fine.  Hiding funds offshore is not.

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