International tax for individuals

FATCA

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) aims to combat tax evasion by US tax residents using foreign (non-US) accounts. It requires financial institutions outside the US to pass information about US customers to the Internal Revenue Services (IRS), the US tax authority, or face a 30 per cent withholding tax.

In September 2012, the UK and the US signed an inter-governmental agreement providing a way for UK financial institutions to comply with FATCA without breaching data protection laws, by passing information to HM Revenue & Customs (HMRC), which will then automatically exchange the information with the IRS.

The reporting commitments for UK financial institutions began on 30 June 2014. Where certain conditions are met, they will need to register on the US Internal Revenue Service (IRS) website by 25 October 2014.

All “reportable accounts” must be identified and certain information regarding those accounts must be provided. There may also be ongoing annual reporting requirements.

Failure to register details on the IRS website by 25 October 2014 will result in the 30 per cent withholding tax being applied to certain US income and potential penalties.

Who does FATCA affect?

  • US taxpayers: they will potentially need to complete a FATCA form with their US income tax return.
  • Foreign financial institutions (FFIs): broadly this will include non-US banks, mutual funds and private equity funds. Charities and pensions are generally excluded.
  • Non-financial foreign entities (NFFEs) will be affected when they receive income from US financial institutions (USFIs).

UK trusts and FATCA

UK trusts can be caught by the reporting requirements, depending on assets held and the nature of their activities. All trustees will have an obligation to review the status of their trusts and report to the IRS if required.

  • If a trust is an NFFE, it may not need to report under FATCA. Instead the reporting of their accounts may be done by the FFIs.
  • If the trust is an FFI, it probably will have some reporting requirements.  A trust may qualify as an FFI if its assets are under the professional management of another financial institution or if the assets under management are considered to be the assets of the trust.

How Milsted Langdon can help

Our tax specialists are offering review service for trustees at a fixed fee of £275 plus VAT per trust, to confirm whether registration is required, and if appropriate, assist with the registration process. For more information, please contact us.