Rachael Griffin: All you need to know about Fatca
The US Foreign Account and Tax Compliance Act is a complex piece of legislation that has, unsurprisingly, triggered a number of enquiries in recent months from advisers seeking to understand the implications for them and their clients. So, what do you need to know?
Fatca is a US Internal Revenue Service exercise designed to combat tax evasion by gathering data on US persons with overseas assets. The UK has signed an agreement to comply with the regulations, which became law here in July last year.
It means those offering investments, life assurance contracts and bank deposits in the UK are now required to carry out a series of checks to establish whether clients have a connection to the US. If they do, the institution is required to report information about the client and their assets to HMRC, which will forward it to the IRS.
Isas, UK-registered pensions and non-unit linked term products are not considered high risk for tax evasion purposes and so are exempt. However, life assurance policies and unwrapped investments such as unit trusts are considered a higher risk and so are caught under the rules.
So how does the information gathering work?By 30 June 2016, checks must be carried out on all existing accounts. For clients with more than $50,000 in investment products or $250,000 in life assurance contracts at 30 June 2014, where they are not covered by any exemptions, providers will need to run an electronic check for signs the policyholder is connected to the US. This includes checking records for things like policies paying into US accounts, a US correspondence address or contact number, or power of attorney granted to someone with a US address. If any of these indications are present, the account is reportable.
For accounts over $1m, additional checks must be carried out manually and completed by June 2015. The same red flags are used to identify a possible US connection on an account.
Any new clients must provide a self-certification to declare they are a US citizen or resident there for tax purposes. If so, the provider must flag their account number to the IRS, in the form of the US tax identification number.
Similar rules have also been introduced for UK and Crown Dependency taxpayers. Under new tax information exchange agreements, the UK has signed reciprocal agreements to share information with the Isle of Man, Guernsey, Jersey and Gibraltar.
Where accounts are reportable the account number must be passed to the relevant authority. In the case of the Isle of Man and UK, this will be the individual’s national insurance number. Where data is shared with Jersey, Guernsey and Gibraltar the social security number is used and the IRS requires the tax identification number for those resident in the US for tax purposes.
It is mandatory to carry out checks on all new customers and failure to complete a self-certification when requested will force firms to classify the account as reportable.
For the typical individual policyholder the majority of the compliance burden outlined above is dealt with by the provider, with clients and advisers only required to submit information to the relevant financial institutions when requested to do so. This is because in most cases the provider acts as the “financial institution†for Fatca and TIEA purposes.
However, in some cases an adviser firm may be an FI, as could their clients where they act as a trustee. Where this is the case, they may be responsible for reporting information to the relevant authorities.
Establishing whether an adviser or entity such as a company or trust is an FI is complex. For example, a trust may become an FI if it appoints a discretionary manager or corporate trustee. Those that are unsure about their own status for TIEA and Fatca purposes should seek professional legal advice.
All FIs must obtain a global intermediary identification number from the IRS. Obtaining this shows an intention to comply with Fatca and TIEA. The FI will be included on the IRS register, which is publicly available.
From 2016 a new set of rules will come into effect. The Common Reporting Standards will supersede TIEA; however, Fatca will remain in place. The introduction of the CRS extends the list of countries the rules will apply to, which means a UK FI will need to check to establish whether clients have a connection those countries that have signed up to it. The exact detail of the new rules is not yet known, however, it is envisaged at least another 40 countries will sign up.
Rachael Griffin is financial planning expert at Old Mutual Wealth
