UK and the USA have signed a new treaty that gives both governments unprecedented access to files about the financial affairs of taxpayers.
The pact is aimed at improving international tax compliance and working with the US Internal Revenue Service to cut the red tape around controversial FATCA rules that start from January 2013.
FATCA (Foreign Account Tax Compliance Act) forces financial institutions like banks, investment houses and insurance companies outside the US to tell the IRS about accounts held by US taxpayers.
IRS to tip off UK about US accounts
A by-product of the agreement is a two-way flow of financial information – not only will UK financial institutions give information about US taxpayers, but the IRS will do the same about British taxpayers with accounts and investments in the US.
The deal is part of a multinational crackdown on tax involving the US, UK, France, Spain, Germany and Italy.
Other nations are also looking at signing similar agreements, including Japan and Australia.
For Britain, this approach focuses on the use of existing tax treaties for information exchange between tax authorities, rather than direct reporting by financial institutions to the US Internal Revenue Service. A wider scope of information than before will be exchanged and on an automatic basis.
Significant benefits
The UK has negotiated terms that sees many UK financial institutions and products presenting a low risk of US taxpayers using them to pay less tax than they should. These will be exempt from FATCA reporting.
In general, the agreement also UK financial institutions outside the FATCA rules for withholding tax on accounts held by US taxpayers.
David Gauke, Exchequer Secretary to the Treasury, said: “This agreement demonstrates our commitment to working internationally to tackle tax evasion. It is the first of its kind and represents a significant step forward in the scope and nature of information exchange between governments. Furthermore, the changes we have achieved to FATCA implementation will provide significant benefits to UK financial institutions.”
Consultation period
The agreement has been laid before the Houses of Parliament and will undergo a 21 sitting day scrutiny period as part of the ratification process.
Financial institutions and other interested parties will now be consulted on implementation of the agreement in the UK and draft legislation will be published later in 2012.
FATCA is part of the US Hiring Incentives to Restore Employment Act of 2010, aims to combat tax evasion by US tax residents using foreign accounts.
