Proposed UK FATCA equivelent met with scepticism

InvestorsLegalOperational RiskRegulation
29 Aug, 2012

Proposals for a UK-style FATCA have been met with scepticism amid concerns it would be difficult to implement.

UK jumps on FATCA bandwaggon

The UK Parliament’s International Development Committee (IDC) has advised the government introduce legislation similar to FATCA which would require third country tax authorities to automatically exchange information relating to UK citizens or corporations as part of the worldwide clampdown on tax avoidance.

The rules could hit UK hedge fund investors. “UK national accountholders in certain hedge fund domiciles could have their details provided to the UK taxman even though assets or incomes may not be taxable. It would be another administrative and operational challenge for hedge funds on top of all of the other rules they have to currently contend with,” said Nick Matthews, member at Kinetic Partners, a London-based consultancy.

The sanctions for non-compliance with the UK FATCA equivalent have not been revealed. “Given that the IDC is urging the UK government to enact rules similar to FATCA, I suspect the UK government – were this legislation to be enacted - would impose a withholding tax not too different from what the US is doing,” commented Matthews.  Under FATCA, non-cooperative Foreign Financial Institutions (FFIs), which include hedge funds, will be subject to a 30% withholding tax on all gross proceeds.

UK authorities are also likely to obtain details of UK accountholders in US financial institutions through FATCA cooperation. This comes as the UK government signed an intergovernmental agreement (IGA) with the US in exchange for collecting data on US accountholders for the Internal Revenue Service (IRS). The latest proposal by the UK would be another barrier to tax avoidance, legal or otherwise.

The IDC report also added the UK government should exert its influence through the OECD Tax and Development Task Force to persuade other countries to follow suit with their own FATCA-esque legislation.  Such pressure would enable developing countries in particular to clamp-down on tax avoidance. The report’s authors estimated tax avoidance cost these economies up to $1 trillion in lost revenues annually.

Developing (and most developed) countries are often forced to submit formal requests via bilateral agreements to jurisdictions where tax avoidance is suspected, which can be a cumbersome process. Were the exchange of information automatic, it would make the procedure more straightforward, at least on paper.

However, this could be wrought with challenges. “The rules are noble but impractical. Not every country will have the financial clout of the UK and US. It is not just an issue for developing countries but even western nations such as those in Southern Europe. Many countries do not have the financial clout to be that persuasive in getting information on (their own domestic) accountholders from the rest of the world. Furthermore, such demands could even dent inward investment in these countries,” added Matthews.

Whether or not the rules will be enacted is open to debate. David Gauke, exchequer secretary to the Treasury, suggested the UK wait for international consensus to emerge rather than act unilaterally. Matthews also predicted the UK government would try and get international support, although added he was confident the US would back the proposal.

The proposal also raises the question as to whether an EU-wide FATCA will be implemented. The EU currently enforces the Savings Directive, which is similar to FATCA but is only applied within the EU. Nevertheless, some commentators predict an EU version of FATCA, which is extraterritorial in scope, could be on the cards.

FATCA, which will be implemented from January 1, 2013, has not been without its challenges. Some critics have pointed out it violates EU data protection laws, while others complain its definition of what constitutes an American citizen is unnecessarily broad.  Congressional backers have said FATCA will generate up to $100 billion in revenue although this figure has been disputed by opponents.

EUFATCAIntergovernmental agreementsInternal Revenue ServiceSavings DirectUKUS