Through the Finance Act 2013, the UK-US ‘Agreement to Improve International Tax Compliance and to Implement FATCA’ is now part of UK law. It is imperative that all UK trusts and trustees urgently consider their status — regardless of any known US connections.

The Foreign Account Tax Compliance Act (FATCA), part of the US Hiring Incentives to Restore Employment Act (2010), aims to combat tax evasion by US tax residents using foreign accounts. The US legislation requires financial institutions outside of the US to provide information about their US customers to the US Internal Revenue Services (IRS).

The era of FATCA is well and truly underway. At the time of writing, around 77,000 financial institutions worldwide have registered with the US authorities – with more expected in the coming months – with the first reporting period having begun in June 2014.

Over 30 jurisdictions, including the UK, have established bilateral agreements to comply with FATCA and almost 40 more have formed ‘agreements in substance’ with the US Department of the Treasury. These intergovernmental agreements (IGAs) allow financial institutions in partner jurisdictions to report the information of US account holders to their respective tax authorities for subsequent sharing with the IRS, in most cases with reciprocal reporting arrangements. Under the UK-US Model 1IGA, all UK trusts are considered as reportable entities subject to FATCA with the onus on trustees to register any trusts considered to be ‘financial institutions’ under FATCA.

If they have not done so already, UK trusts and trustees need to determine whether a trust should be classified as a financial institution under FATCA. They should also endeavour to ensure they are registered for a Global Intermediaries Identification Number (GIIN) no later than October this year. From 1 January 2015, financial institutions not registered with the IRS will be deemed non-compliant and subject to a 30 per cent withholding tax.

Not only are FATCA and the UK-US IGA complex, but there has also been a mistaken perception that the legislation does not apply to all UK trusts and a misunderstanding of the actions practitioners need to take in order to comply. To clarify UK reporting obligations, STEP in partnership with the Law Society of England and Wales and the Institute of Chartered Accountants in England and Wales (ICAEW), published a guide outlining obligations under FATCA. The guide is based on current understanding of both US FATCA legislation and HM Revenue and Customs guidance on the UK-US IGA, last updated in February this year. Importantly, even if a financial institution does not need to register with the IRS, banks and fund managers it uses will request that the trustees confirm its FATCA status as part of their due diligence processes.

Entity classification under FATCA
Firstly, practitioners need to determine if a trust will be considered an entity under FATCA. A trust will be considered subject to reporting if it is:

•  a Depository Institution accepting deposits in the course of banking;
•  a Custodial Institution holding financial assets that make up more than 20 per cent of its gross income;
•  an Investment Entity trading financial assets or otherwise investing, administering or managing funds on behalf of a client;
•  a Specified Insurance Company issuing cash value insurance or annuity contracts, or;
•  a Holding Company or Treasury Centre where holding stock of at least one financial institution is its primary activity.

If an entity is not classed as a financial institution under FATCA it must be classed as one of two types of Non-Foreign Financial Entity (NFFE). An active NFFE is engaged in a non-financial business whereas a passive NFFE is not engaged in a business and it will usually be required to identify its owners to the financial institution with which it has a relationship, particularly if it is owned by any US Persons.

FATCA registration and practitioners’ responsibilities
Overall responsibility for registering financial institutions is designated to a Reporting Person, who must carry out the following functions:
i) identify and record US persons;
ii) identify and record payments to or for those persons;
iii) report the relevant payments to the authorities.

It is up to the Reporting Person to ensure that engagement letters are sent to clients to clearly outline the scope of FATCA reporting compliance and what (if any) information must be registered. They should also make clear that the client will be responsible for communicating any changes in circumstances that may alter their FATCA status or if there are any changes in their US connections. Connections include the involvement of a US citizen or permanent resident; a person born in the US; a person transferring funds to US accounts; a US settlor or beneficiary; or a signing authority for a person with US address.

Given the intrinsic role client information plays in adhering to FATCA, it should be recorded carefully and kept up-to-date. Future changes in a client’s circumstances may have consequences for their FATCA status. I therefore strongly advise practitioners establish a process for periodic review. Accountants, for example, should incorporate FATCA-related checks into their yearly accounts preparation process. Clients should also be made aware of data protection issues as it may be necessary for them to share their client’s FATCA status and GIIN with other bodies and make appropriate reports to UK tax authorities as permitted under the Model 1 IGA.

New trusts and an exception to the rule
At the time of writing, it remains unclear as to the deadline for obtaining a GIIN and how trusts will be regulated under FATCA if they are created after the initial period of registration. In the interim, and taking into account the requirements of banks and other institutions to be able to operate accounts, it would be prudent to register any new trust as soon as is practicable.

One area to pay particular attention to is the role of executor; they are not regarded as entities under FATCA and will therefore be reported upon as usual. There is one exception, however, in that the accounts of deceased persons are not reportable accounts as long as the financial institution is able to produce a death certificate. Occasionally, executors become the trustees of a will trust and the point of transition between the two can be difficult to identify with precision. Practitioners will need to be prepared for such an eventuality and ensure that the appropriate steps are taken including appointing corporate trustees when necessary and updating client records accordingly.

*This article originally appeared in Accountancy Live

George Hodgson is STEP’s Deputy Chief Executive.