The Foreign Account Tax Compliance Act (FATCA) regulations were introduced under the HIRE Act (Helping Individuals Return to Employment).

FATCA was passed in the U.S. in 2010 and following a degree of industry consultation the proposed regulations were released in early 2012 with an invitation for feedback. The final regulations are expected in late 2012 as are finalised forms (W8-Ben, W8-BenE, etc). The fundamental purpose of the FATCA regulations is to encourage foreign financial institutions (FFI) doing business with U.S. persons to inform the IRS, directly or otherwise, that this is the case. To encourage enforcement there are punitive withholding tax and penalty provisions imposed on recalcitrant (uncooperative) persons or entities.

intergovernmental agreement (IGA)

Parallel to the abovementioned feedback process various governments were negotiating separate agreements with the U.S. The first intergovernmental agreement (IGA) was signed on 12 September 2012 between the UK and the U.S. and it is expected that others will follow, one of the articles therein allowed the UK the right to any more favourable terms agreed with others.

At this time it appears that there will be three ways for a financial institution to fulfil the obligations imposed by the FATCA regulations:

• engaging directly with the IRS (no IGA in place)
• engaging directly with the IRS under an IGA (Swiss and Japanese model)
• providing information to the local government which engages with the IRS (UK model)

The UK agreement changed a number of matters that are relevant to trustees. In particular the HMRC consultation document published 18 September 2012 noted “it is envisaged that most family trusts are therefore excluded with only professionally managed trusts remaining in scope”. The agreement also uses familiar terms such as beneficiary of a trust rather the term substantial owner that is referred to in the regulations.

It remains to be seen if these and other similar amendments are reflected in the final regulations or indeed in other IGAs.

The agreement also set out what information UK FFIs are expected to report and this overlaps with the information reportable under the proposed FATCA regulations to give professional trustees something to focus on.

Participation

The professional trustees who expect to participate will need to carry out preparatory work on their existing client base, client take-on procedures and on implementing the new reporting procedures.

Under the proposed FATCA regulations each trust is treated as a separate FFI and will have to register with the IRS however it is hoped that this treatment will change following finalisation of the IGAs such that trustee rather than the trust is the FFI which reduces the administrative burden.

Irrespective of the form of reporting the trustee will have to identify the US persons amongst its client base (settlors, beneficiaries, beneficial owners, etc).

Identifying a U.S. person

The definition of a U.S. person can include a corporation but the overarching intention is that FATCA will apply to warm blooded persons and the broader definition serves a purpose to sweep aside the veils that are sometimes used. Trustees will be expected to check if any of the seven identified US indica apply to any of their clients.

These U.S. indica are as follows:

• identification of an account holder as a U.S. resident or U.S. citizen
• a U.S. place of birth for an account holder
• a U.S. residence address or a U.S. correspondence address (including a U.S. P.O. box)
• a U.S. telephone number standing instructions to transfer funds to an account maintained in the United States
• a power of attorney or signatory authority granted to a person with a U.S. address
• an “in care of” address or a “hold mail” address that is the sole address that the FFI has on file for the account holder

Clearly some of these indica, place of birth for instance, are more likely to be recorded in the database of the trustee in question than others. Any U.S. address on file, even if this is one of several will warrant clarification and so in the ,eantime it would be prudent for trustees to write to clients noting the legislation and the implications.

Searching for pre-existing U.S. accounts

For new account holders (individuals becoming verification subjects after 1 July 2013) the task should not be too onerous as the majority of trustees will already have robust client take-on procedures. There may be issues with how to store the information in databases particularly with some of the older systems where the information fields are fixed.

The task to apply U.S. indica to existing clients will be difficult, particularly where there is a great depth of beneficiaries some of who may fall into the “non likely to benefit” category and hence may presently have thin CDD.

Where the trustee is confident that their systems adequately captures the indica (and someone is willing to sign off on this at personal risk) then they can carry out only electronic searches. If this is not the case then paper searches should be carried out on all high value accounts (above US$1,000,000).

On this basis the starting point for most trustees expecting to participate under FATCA will be to ensure that the database of the FFI is adequately populated and the information is accurate and current, unfortunately this is likely to be largely a manual process. It may be prudent for the trustee to get assurance on the quality of the database and the searches from external advisers. The IRS appears to be understanding of omissions where there has been a reasonable effort to comply and using external advisers to monitor quality can help evidence this.

Reporting and registration procedures

The format of the reports will be detailed in the final regulations, the UK IGA indicates that the information required (in its simplest form) will be name, address, tax identification number, account number/identifier, FFI details, as well as account balance at the end of the calendar year. This is not dissimilar to the present FBAR reporting requirements except for electronic reporting and using year-end as opposed to maximum in the year balance.

As the regulations presently stand each FFI will identify a reporting officer as well as other authorised persons all of which will need to get IRS identification numbers, it should be noted that this falls away under the UK IGA.

Withholding tax

It is probably a bit early to focus on collection and payment of withholding tax (WHT) but it should certainly be something that the trustee should be aware of. The persuasive aspect of the legislation is that in certain circumstances 30 percent can be withheld on U.S. source pass thru payments and so is more like a penalty than WHT. That said the IRS have indicated a willingness to remove FATCA withholding tax where there is an IGA in place although there will be specific provisions to deal with recalcitrant account holders. And one final thought for the U.S. legislators that think up acronyms – AMERICA Works (American Manufacturing Efficiency and Retraining Investment Collaboration Achievement Works Act). In this case America is getting everyone else to work as well.