FATCA Tax Compliance

FATCA – many clients and professionals have heard of it but many of them remain unclear about what it might mean to them or their businesses in reality. This article is based on my understanding of the FATCA guidance notes issued jointly by the Crown Dependencies’ respective Governments in July 2014.
Often it is assumed that FATCA is only relevant to US clients or Financial Institutions that have US clients. However, that is not that case. In the Isle of Man, the Channel Islands, Gibraltar, that Cayman Islands, BVI, Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands automatic information exchange under FATCA also applies to UK clients.
FATCA stands for ‘Foreign Account Tax Compliance Act’. Although the legislation was enacted in the United States; it actually has a reach which affects all Financial Institutions (‘FI’) globally – including, of course, Middleton Katz and its clients directly.
Put simply it requires financial services businesses to AUTOMATICALLY provide financial information annually to the tax authorities about financial accounts held by certain specified categories of clients (‘Specified Persons’)
At the moment, in the Isle of Man ‘Specified Persons’ are (essentially) restricted to…
(1) UK Resident persons
(2) US passport holders and US Residents.
If you are not a ‘Specified Person’ then FATCA reporting does not (for now) apply to you so the rest of this article is irrelevant.
But – it is a virtual certainty that the definition of ‘Specified Person’ will soon be extended to include all EU residents and then beyond so maybe you should read on anyway.
How it works in Practice.
‘Financial Institutions’ (‘FI’)– these include Banks, Custodians, Investment Companies and certain Insurance companies will be issued a GIIN number (Global Intermediary Identification Number) by the IRS.
Under the legislation Middleton Katz is an ‘FI’ – as are essentially all financial firms who manage Trusts or Investment Companies for their clients. Many of our clients – mainly the trusts and Privately held Investment Companies are also FIs under the FATCA rules.
Each FI is required to disclose information about ‘Financial Accounts’ held by ‘Specified Persons’ annually to the authorities. In the Isle of Man, we actually report to the local Assessor of Income tax who passes the information on to HMRC or the IRS (as the case may be) rather then reporting directly to those authorities.
Before we make any reports – we need to categorise each of our client entities..
Most of our clients will fall into one of the following categories…
(a) A Professionally managed Trust is an ‘FI’ – so it needs to make a report if any of the Settlor, Trustee, Protector or Beneficiaries are ‘Specified Persons’. In this case, the reporting can be delegated to Middleton Katz as the administrator. Any investment companies owned by the Trust will be included on the same report. This is delegation is called the ‘Trustee Documented Trust’ regime.
(b) A stand alone investment company managed by Middleton Katz owning financial assets – such as stocks, shares or bonds would be an Investment Entity which is an ‘FI’. Again the reporting requirement could be delegated to Middleton Katz who would disclose the respective Interests of any specified persons to our Assessor of Income tax who would pass this on to HMRC or the IRS.
(c) A stand alone investment company (owning financial assets) managed by the client themselves would be categorised as an Investment Entity and is itself an ‘FI’. Either they will make FATCA reports themselves or delegate the responsibility to another willing FI like Middleton Katz (sponsoring FI) who would make the reports for them. In practice, for our clients, I think the latter is more likely.
(d) Some types of investment – notably real estate and cash, don’t count as financial assets. So an Investment Entity which derives more than 50% of its income from rents or other passive income is categorised as a Passive Non Financial Foreign Entity (‘NFFE’); this means it cannot be an FI and can’t register as such to make its own report. In this case any reporting of financial accounts held by the entity will be done by its bank or custodian rather than Middleton Katz or the Entity itself.
(e) A further type of entity is a trading entity or group which derives its income from an active trade or business. This type of Entity is categorised as an Active Non Financial Foreign Entity and is outside the scope of FATCA reporting altogether.
(f) An SPV which is a part of a larger group; in this case generally we would look to the shareholders for guidance. A group member may already be an FI (eg Investment fund or pension trustee) so they will do the reporting; alternatively the SPV may be trading and so fall into category (e) above and not require a report.
It is really important to note that duplicate reporting is not required so, if a bank hold a financial account for an entity and it has actual knowledge that another FI is making the report (say Middleton Katz in (a) (b) or (c) above) then it will not be required to make any reports in respect of that entity.
What’s actually reported ?
In respect of Investment companies with financial accounts – FIs need to report the following..
UK Specified Persons (i) Name, (ii) Address, (iii) Date of Birth (iv) NI Number, (v) Name address of the entity (vi) Account number (vii) GIIN or reporting entity (viii) Account balance at end of Calendar year.
For the US Specified Persons : (i) Name, (ii) Address, (iii) TIN (iv) Name address of the entity & TIN (if any) (v) Account number (vi) GIIN or reporting entity (vii) Account balance at end of Calendar year.
From 2015 /16 onwards this is widened to include things like details of dividend and Interest Income.
Generally reporting is only required where the value of the financial account exceeds USD50,000 equivalent but where the entity is jointly held – say 50/50 then the sum is reported gross – not pro-rated by equity percentage.
In the case of a Trust (see 7.7 of guidance notes) its a little less clear but…the requirements essentially amount to the same identification details noted above but instead of account balances it is the specified persons equity interest in the trust fund (including underlying investment companies) that must be provided.

photo credit: 401(K) 2013 via photopin cc


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