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14 July 2011
UK Coalition Government proposes statutory test of tax residency in the UK
The Foreign Account Tax Compliance Act (FATCA) was enacted on March 18, 2010, by the US Government as part of the Hiring Incentives to Restore Employment (HIRE) Act. It is another tax-enforcement tool of the federal government to address tax evasion by further pushing for tax compliance by US taxpayers who have foreign bank accounts and assets in foreign financial institutions, or substantial interests in foreign non-financial entities.
FATCA imposes additional filing requirements and disclosure of information not only on US taxpayers but also on foreign financial institutions and non-financial entities.
US taxpayers holding financial assets outside the United States with an aggregate value exceeding US$50,000 must report those assets, including investments in foreign hedge funds and private equity funds, to the IRS on a new form attached to their tax return, or face a minimum penalty of US$10,000. Reporting applies for assets held in taxable years beginning on or after January 1, 2011.
Effective 2013, FATCA will require foreign financial institutions and foreign non-financial entities in which US taxpayers hold a substantial ownership interest (owning directly or indirectly more than 10%) to report, directly to the IRS, certain information about financial accounts held by US taxpayers. If they do not do so, the payment of US source income to such institutions and entities will be subject to a 30% withholding tax. To properly comply with these new reporting requirements, a foreign financial institution will have to enter into an agreement with the IRS during 2012 wherein it will be obliged to:
- Undertake certain identification and due diligence procedures with respect to its account-holders;
- Report annually to the IRS on its account-holders who are US persons or foreign entities with substantial US ownership; and
- Withhold and pay over to the IRS 30% of any payments of US source income, as well as gross proceeds from the sale of securities that generate US source income, made to (a) non-participating foreign financial institutions, (b) individual account-holders failing to provide sufficient information to determine whether or not they are a US person, and (c) foreign entity account-holders failing to provide sufficient information about the identity of their substantial US owners.
The definition of “foreign financial institutions” is broad, and includes entities that manage investments, including alternative investment entities and insurance companies. This new reporting regime applies to payments made by foreign financial institutions to covered accounts on or after January 1, 2013.
In effect, there will be an automatic exchange of information about US taxpayers with foreign financial accounts, not between foreign governments and the US Government but between foreign financial institutions and the US Government.
The IRS has advised affected parties to note that the regulations defining the new reporting and withholding requirements pertaining to foreign financial institutions are still being developed, and are expected to be issued by the US Treasury by early 2012.