100040 – Background – Foreign Account Tax Compliance Act (FATCA)

 

In 2010 the United States enacted the Foreign Account Tax Compliance Act provisions (FATCA) which are contained in the HIRE Act 2010. These provisions are aimed at reducing tax evasion by US citizens and entities.

FATCA requires financial institutions outside the USA to pass information about their USA customers to the US tax administration, the Internal Revenue Service. The legislation allows for a 30% withholding tax to be applied to the US source income of any non-­‐US financial institution that fails to comply with this requirement. This caused a number of issues for UK financial institutions not least of which was how they could comply with the requirements of FATCA without breaching data protection restrictions.

On 12 September 2012 the UK and the USA signed a Treaty to implement FATCA in the UK – “The UK-­‐US Agreement to Improve International Tax Compliance and to Implement FATCA” (the US IGA). Legislation at section 222 Finance Act 2013 provides HM Treasury with powers to make regulations to give effect to this and other similar agreements. The US IGA was brought into force by the Tax Compliance (United States of America) Regulations 2014, which were subsequently incorporated into the International Tax Compliance Regulations 2015 (SI 2015/878). These regulations impose obligations on UK financial institutions to identify, maintain and report information to HMRC on financial accounts held by US citizens and entities. There is an also a requirement under FATCA for Reporting Financial Institutions to report payments to Non-Participating Financial Institutions (see FATCA Guidance paragraphs 2.5 and 9.4). Provided these financial institutions comply with the requirements of the legislation they will not be subject to the 30% withholding tax on US source income.