2 November 2012, the Trusts (Amendment No.5) (Jersey) Law, adopted by Jersey’s government in November 2011, came into force. The changes are designed to bring clarity and certainty in a number of areas.
Key measures include the introduction of a definition of purpose, which includes the acquisition, holding, management or disposal of property. It will therefore be possible to establish ‘ownership only’ purpose trusts.
Action against trustees after the alleged breach of trust (subject to fraud or recovery of trust property claims) will only be possible up to 21 years. Previously it was almost indefinite. The new limitation does not apply to foreign trusts whose proper law is the law of a jurisdiction to which the Hague Convention extends.
The law introduces a definition of the ‘protector’ as a person, other than a trustee, enforcer or beneficiary, who holds a power, discretion or right in connection with a trust, and further strengthens Jersey’s trust vehicles from attack by foreign courts.
The amending law will permit professional trustees to be paid reasonable fees even when the trust deed is silent on the matter. Previously, trustees were only remunerated for their services if authorised by the terms of the trust or by order of the Royal Court.
When there is a change in trustee, the amending law gives the outgoing trustee the right to enforce a term of a contract providing reasonable protection against liabilities. It also provides clarity in expressly permitting trustees to contract with themselves in respect of two or more trusts for which they are trustee.
Geoff Cook, chief executive of Jersey Finance, said: “The international private wealth management industry is constantly evolving, and clarity and certainty are absolutely vital, so it is important that we continue to evolve our trust framework and ensure that our legislation is as robust as possible.”
28 August 2012, the Barbados government implemented a framework to attract high net worth individuals (HNWIs) by simplifying the process for relocation to Barbados. It is part of a revised immigration department policy on Special Entry Permits for Non-Nationals to recognise their potential economic benefit.
Special Entry Permits allow HNWIs indefinite long-term visits without the ongoing need to apply to the Immigration Department to renew their visitor status on the island. Holders will also enjoy easy access to annual work permits and indefinite work permits to encourage individuals and business owners who wish to work and establish an international business on the island.
To acquire a Special Entry Permit, individuals must show net assets of US$5 million, a police certificate of character and health insurance coverage worth US$350,000 for persons under 50 years; US$500,000 for those over 50 years. The fee for a Special Entry Permit for a retired person is US$5,000 if over 60 years-old, or US$3,500 if under 60 years.
If a HNWI qualifies for a Special Entry Permit, annual or indefinite work permits ca then be purchased, if desired, with no additional requirements. HNWIs must contact the Central Bank of Barbados to register their Permit status in order to open foreign currency accounts, which are exempt from all exchange controls.
12 April 2012, the Supreme Court of Canada upheld the lower courts’ choice of the “central management and control test” as the appropriate test for determining the residence of a trust in holding that a trust was resident in Canada for purposes of the Canada–Barbados tax treaty if the trust was liable to taxation in Canada by reason of residence.
In Fundy Settlement v Canada [2012 SCC 14], two family trusts had been settled by an individual resident in St. Vincent for the benefit of Canadian-resident beneficiaries. The trustee, a corporation resident in Barbados, disposed of shares held by the trusts in two Ontario corporations. The purchaser remitted some C$152 million to the Minister of National Revenue as withholding tax on account of Canadian tax from capital gains realised by the trusts on the sale of the shares under section 116 of the Income Tax Act 1985.
The trustee subsequently applied for a refund under the Canada-Barbados tax treaty, claiming that the profits were not subject to Canadian Capital Gains Tax because the trusts were located in Barbados rather than Canada. The Canada Revenue Agency (CRA) refused the request for a refund, holding that the trusts were resident in Canada and owed Canadian income tax on the capital gain realised.
The Tax Court of Canada found that although the trustee was a resident of Barbados, the Canadian-resident beneficiaries made decisions concerning the trust with the assistance of their advisors in Canada. The trustee deferred to their directions and did not have a large role in the management of the trust. The Court held that the residence of the trust for tax purposes was Ontario, Canada, rather than Barbados. The Federal Court of Canada upheld the decision and the trustee appealed to the Supreme Court of Canada.
The Supreme Court of Canada also upheld the Tax Court’s decision. In reaching its decision, the Court applied the central management and control test and confirmed that, as with corporations, the residency of a trust should be determined by where the “central management and control” of the trust actually takes place.
The court rejected the taxpayers’ argument that a trust is fundamentally different than a corporation because it is not a separate legal person, noting that for tax purposes a special rule deems the trust to be an individual and therefore a person. The taxpayers also argued that trustee residence should be determinative of trust residence since the Canadian tax legislation closely identified a trust with its trustee. The Court asserted this was mainly for administrative convenience and should not be elevated to a substantive legal principle. The legislation was clear that the person being taxed on the trust’s income was the trust and not the trustee.
26 October 2012, the Court of Appeal ruled that a High Court divorce judge had been wrong to “pierce the corporate veil” and award the former wife of oil tycoon Michael Prest several London properties owned by companies that her ex-husband was said to control.
In 2011 a High Court judge had ordered Prest, the founder of Nigerian energy company Petrodel Resources, to hand over £17.5m to Yasmin Prest, his former wife of 15 years. Furthermore, because Prest had previously flouted court orders, the judge ordered that 14 properties in the UK and abroad that were held by Petrodel and other companies owned by him should be transferred to his former wife as part payment.
Following an appeal brought by three companies that owned a portfolio of flats and houses in London worth £9m, the Court of Appeal reversed the decision. In a split judgment two commercial judges, Lord Justices Patten and Rimer, disagreed with family judge Lord justice Thorpe.
Rimer LJ said the divorce judge had simply been “wrong” to equate the companies that owned the properties with Prest and to regard their assets as his. Even though Prest had been found to be in control of the companies, the divorce judge simply had no power to find that he was personally entitled to the properties they owned or to pierce the corporate veil and award them to his ex-wife.
Thorpe LJ strongly dissented saying: “Once the marriage broke down, the husband resorted to an array of strategies, of varying degrees of ingenuity and dishonesty, in order to deprive his wife of her accustomed affluence. Amongst them is the invocation of company law measures in an endeavour to achieve his irresponsible and selfish ends. If the law permits him so to do it defeats the Family Division judge’s overriding duty to achieve fairness.”
Patten LJ, who had the casting vote, agreed the appeal should be allowed and warned: “Married couples who choose to vest assets beneficially in a company for what the judge described as conventional reasons including wealth protection and the avoidance of tax cannot ignore the consequences of their actions in less happy times.”
Yasmin Prest is due to take her case to the Supreme Court in March.
25 October 2012, the Ministry of Finance of the Russian Federation announced – by registered Order 115n with the Russian Ministry of Justice – the removal of Cyprus from its blacklist of “States and Territories providing preferential tax treatment and (or) not requiring disclosure and furnishing of the information upon conducting of financial transactions (offshore zones)” with effect from 1 January 2013.
Cyprus was the main venue for both inbound and outbound investments and other transactions in Russia. However its inclusion on the Russian “offshore blacklist” meant that income arising from dividends received from Cypriot subsidiaries was not eligible for the zero rate profits tax enjoyed by Russian parent companies on dividends from foreign subsidiaries.
The terms of the revised Russia–Cyprus treaty, originally agreed in October 2010, were ratified by Cyprus in August 2011, but concerns over information disclosure led to delays in ratification by Russia. This has now been resolved through the introduction of a revised Exchange of Information article, consistent with article 26 of the OECD Model Tax Convention.
With effect from 1 January 2013, dividends paid from qualifying Cyprus companies to Russian companies will again be exempt from taxation in Russia, benefiting from the Russian participation exemption. Transactions of Russian companies with Cyprus companies will also avoid the onerous transfer pricing provisions introduced with effect from 1 January 2013 for countries on the blacklist. The standard transfer pricing regulations will continue to apply.
1 October 2012, the Private Company Law (Simplification and Flexibilisation) Act – the “Flex BV Act” – entered into force, amending the Dutch Civil Code to introduce new and more flexible rules for private companies with limited liability (BVs). It was approved, together the “Implementation Act” on 12 June 2012.
Incorporation procedures are simplified. A minimum capital of €18,000, a bank declaration and an auditor declaration on contributions in kind are no longer required, and the nominal value of shares can be denominated in currencies other than euros. It will no longer be necessary to specify the company’s authorised capital in the articles of association and the requirement that at least one-fifth of the authorised capital be issued will also be abolished.
Distributions to shareholders are to be approved by the management board, which will have responsibility for assessing if it is “reasonably foreseeable” that the Flex BV can fulfil its obligations following the distribution. Management board members and the recipients of a distribution may be liable for compensation if they do not act in good faith.
In respect of governance, general meeting of shareholders may be held outside the Netherlands and written resolutions of the shareholders may be adopted by a simple majority. Annual general meetings may be replaced by written resolutions.
The rules on decision-making within BVs have been relaxed. Shares with no or limited entitlement to distributions and no voting rights are allowed. Lock up periods prohibiting the transfer of shares for a specific period are now permitted in articles and share transfer restrictions are no longer mandatory.
Existing BVs are governed by the new law although they must still adhere to any stipulations in their existing articles of association. In case of a conflict between the existing articles of association and the new law, the new law will prevail.
3 December 2012, Guernsey’s new image rights registry opened to enable personalities and their agents to protect their personality and image rights in a formal way for the first time. It followed approval for the Image Rights (Bailiwick of Guernsey) Ordinance 2012 by the States parliament on 28 November. The first application was made to the Guernsey IP Office just after midnight.
The registry positions Guernsey as the first jurisdiction to have a legislative framework to register an image, enabling effective management and control of the commercial use of a person’s identity, images associated with that person, including distinctive characteristics, such as signature, voice, mannerisms and gestures.
The legislation not only establishes image rights as a new and separate branch of intellectual property law, it also provides clearly defined safeguards for personalities looking to further protect and capitalise on their image.
The law creates an image rights register enabling legal recognition of a “registered personality”. Once registered, the image right, as an identifiable asset, can be placed within a Guernsey structure, adding flexibility to image rights’ income.
Fiona Le Poidevin, chief executive of Guernsey Finance, said: “Being able to register image rights in an environment which recognises them by statute provides greater clarity in the definition of rights and a higher degree of protection from unauthorised use by third parties than is currently on offer in any other jurisdiction. This is the basis for a valuation of the rights and therefore provides a platform for increased economic benefit to be derived, including through the management, structuring and licensing of the rights.”
11 November 2012, Hong Kong signed a double tax treaty with Canada that incorporates an article on exchange of information and will come into force after the completion of ratification procedures on both sides. It is the 26th comprehensive double tax treaty concluded by Hong Kong with its trading partners.
Under the agreement, tax paid in Hong Kong will be allowed as a credit against tax payable in Canada. Double taxation will be avoided such that any Canadian tax paid by Hong Kong companies doing business through a permanent establishment in Canada will be allowed as credit against the tax payable in Hong Kong.
Hong Kong residents receiving interest from Canada are subject to Canada’s withholding tax. Canadian withholding tax on royalties will be capped at 10%. The Canadian dividends withholding tax will also be reduced to 15%.
Hong Kong’s tax treaty with Switzerland, which was signed on 6 December 2010, entered into force on 15 October 2012. The treaty, which incorporates the latest OECD international standard on exchange of information, applies from 1 January 2013 with regard to Swiss taxes and from 1 April 2013 concerning Hong Kong taxes.
Profits earned by Swiss residents in Hong Kong were previously subject to both Hong Kong and Swiss income tax. Profits of Swiss companies doing business through a branch in Hong Kong were fully taxed in both places. Under the agreement, Switzerland will provide exemption to her residents for such income.
Previously Hong Kong residents receiving dividends from Switzerland not attributable to a permanent establishment in Switzerland were subject to Swiss withholding tax at a rate of 35%. Under the treaty, this tax rate will be reduced to 10% and will be exempted if the beneficial owner of the dividends is a company holding directly at least 10% of the capital of the company paying the dividends or a pension fund.
24 October 2012, the US Internal Revenue Service (IRS) postponed implementation of new rules under the Foreign Account Tax Compliance Act (FATCA) that will oblige foreign banks and financial institutions to disclose more information about US clients’ offshore accounts. The IRS did not give a reason for the delay but the US Treasury has not yet issued final FATCA rules.
FATCA, enacted in 2010 as part of the HIRE Act, requires all foreign financial institutions to record all payments to US persons, and report them to the IRS. Institutions that do not comply will have a 30% withholding tax docked from all income of their US investments.
FATCA has been a source of anxiety for institutions that must comply with it or face penalties, including possible exclusion from US markets. FATCA’s reporting obligations were originally scheduled to come into force in January 2013 but resistance from foreign banks and governments in 2011 obliged the US Treasury to postpone the start dates by a year. Reporting requirements and withholding taxes on dividends and interest were put back to January 2014, while withholding tax on gross proceeds of asset disposals were postponed until January 2015.
As a result of the most recent postponement, they will now have until 1 January 2017 to begin withholding US tax from clients’ investment gains and until 1 January 2014 to get procedures in place to meet FATCA reporting requirements.
The US Treasury has focused this year on signing bilateral information sharing agreements designed to help foreign banks and businesses comply with FATCA and is engaged with more than 50 countries and jurisdictions around the world. It has already concluded a bilateral agreement with the UK and is hoping to conclude negotiations with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands and Norway.
Treasury said it was actively engaged in dialogues with Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore and Sweden. It was also exploring options with Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia and South Africa.
1 October 2012, the Malta Retirement Programme Rules were published as legal notice 317 of 2012 Income Tax Act (Cap. 123) to introduce a new tax scheme for retirees from EU/EEA/Swiss nationals to take up residence in Malta.
Eligible persons that have acquired the right to reside in Malta in terms of a Registration Certificate, may also apply for the Malta Retirement Programme (MRP). Their entire pension must be declared in Malta, which must constitute at least 75% of the total income chargeable to tax in Malta. A flat rate of 15% will be applied on the gross pension chargeable to tax in Malta.
There is a minimum tax liability of €7,500 per annum which is increased by €500 for each dependent. Husband and wife must pay a minimum of €8,000. Individuals resident in Malta and benefitting from the Malta Retirement Programme should not reside in any other single jurisdiction for more than 183 days in any year and must also reside in Malta for a minimum of 90 days a year averaged over any five-year period.
To qualify for the Malta Retirement Programme status, the applicant must either own or lease property in Malta or Gozo. The minimum purchase price of property has been set at €275,000 for Malta and €250,000 for Gozo. The minimum rent is €9,600 for Malta and €8,750 for Gozo.
The programme will be managed by the International Tax Unit of the Inland Revenue Department under the same arrangements for the other High Net Worth Individual (HNWI) schemes in force.
29 November 2012, Malta’s budget bill contained a number of tax proposals designed to maintain financial stability and its attractiveness as a venue for investment.
Royalties payments derived from patents in respect of qualifying inventions, whether registered in Malta or elsewhere, have been exempt from tax in Malta since 2010, irrespective of the place where the underlying R&D has been performed. This exemption was extended in 2012 to cover royalty income from copyrights. The 2013 budget bill includes a proposal to further extend the exemption to include royalty income from trademarks.
Malta has operated a full participation exemption with respect to dividends and capital gains derived from qualifying shareholdings since 2007. The 2013 budget includes a proposal to extend the participation exemption to include profits and gains derived by a Maltese company that are attributable to a permanent establishment (PE) outside Malta, or to the transfer of such PE. The profits and gains would be calculated as if the PE were an independent enterprise operating in similar conditions and at arm’s length.
Finally, the budget includes a proposal for the introduction of a fiscal unity regime. The Minister of Finance would be empowered to make rules under which bodies of persons under common ownership would be permitted to elect to compute and bring to charge their profits and losses on a collective basis as a single taxpayer.
1 October 2012, an independent study by Australia’s Griffith University found that the leading OECD financial centres are more willing to supply anonymous shell companies – the vehicle of choice for money launderers, bribe givers and takers, sanctions busters, tax evaders and financiers of terrorism – than many so-called “offshore” financial centres.
The inter-governmental Financial Action Task Force (FATF) recommends that countries should take all necessary measures to prevent the misuse of shell companies, such as ensuring that accurate information on the “beneficial” owner is available to “competent authorities”.
Researchers posing as customers asked 3,700 incorporation agents in 182 countries to form companies for them. Overall, 48% of the agents who replied failed to request proper identification; almost half of these did not want any documents at all. The study found that providers in “tax havens” were much more likely to comply with the standards than those from the OECD member states. “It is more than three times harder to obtain an untraceable shell company in ‘tax havens’ than in developed countries,” it said.
Jurisdictions found to be most inclined to compliance included “tax havens” such as Jersey, the Cayman Islands and the Bahamas, while some developed countries like the UK, Australia, Canada and the US ranked near the bottom of the list. “It is easier to obtain an untraceable shell company from incorporation services in the USA than in any other country save Kenya,” the report said.
Only ten of the 1,722 US providers who responded to the mystery shoppers asked to see notarised identity documents. There was considerable variation between different states, with those in Wyoming, Delaware and Nevada being the most likely to supply untraceable shell companies.
“This study makes sobering reading for anyone who worries about the link between financial crime and corporate secrecy,” said The Economist. “OECD countries show little willingness to tackle their own weaknesses and end their hypocrisy. Movers of dirty money know where the best shells are to be had, and it is not on a Caribbean island.”
1 January 2013, the Swiss withholding tax agreements with the UK and Austria entered into force affecting all UK and Austrian taxpayers with a bank account or securities deposit in Switzerland. Clients must either pay a withholding tax, which is deducted directly from their account and transferred anonymously to their country of domicile, or they must disclose their account details.
Swiss banks are required to inform affected clients about the new regulation by the end of February 2013. Clients then have until the end of May to decide whether they choose for withholding tax to be deducted from their account or whether they choose to disclose their account details.
Under the terms of the agreement, the UK will receive an upfront payment of CHF500 million from the banks in January. This sum will be reimbursed to the banks in stages from anonymous retrospective taxation payments received from mid-year. No such upfront payment was agreed with Austria.
The Swiss Federal Act on International Withholding Tax (IWTA), which was brought into force by the Federal Council on 20 December 2012, will govern implementation of the tax agreements. The IWTA contains provisions on organisation, procedure, judicial channels and criminal law provisions, as well as domestic procedural rules for the upfront payment.
Switzerland said it is negotiating similar agreements with Greece and Italy, while other European and non-European countries have also shown an interest. However the German parliament voted not to ratify a similar signed agreement with Germany in December. The withholding tax model is part of the Federal Council’s new financial market policy, which aims to ensure that no untaxed foreign funds can be hidden in Switzerland while maintaining client anonymity.
19 October 2012, a left-wing alliance submitted 103,000 signatures to the Federal government to force a nationwide referendum to abolish the preferential “lump-sum” tax regime for wealthy foreigners. The ballot will take place after the cabinet and parliament have discussed the issue.
Since 2009, five of Switzerland’s 26 cantons, including Zurich and Basel City, have abolished lump sum taxation, while several others have decided to set a minimum annual income of beneficiaries at between SFr400,000 and SFr600,000 a year. Attempts are also underway in at least four cantons, including Geneva, to force a ballot at a local level.
In September, the Swiss parliament came out in favour of tightening regulations. The federal lump sum tax was set at seven times the rental value a property used as residence, instead of five. For those who live in hotels, taxes will be levied on three times the cost of their accommodation from a current two times. Beneficiaries must have an annual income of at least SFr400,000.
Finance Minister Eveline Widmer-Schlumpf described the reform as a compromise solution to appease critics of the preferential tax system. The tax increase would be phased in over five years.
Official figures from 2010 show there are 5,445 people who qualify for the special regime – which was first introduced in 1862 by the canton of Vaud alongside Lake Geneva – with revenue for the federal authorities totalling nearly SFr700 million.
7 December 2012, the UK government announced it was to sign an enhanced information exchange agreement with the Isle of Man, which would enable automatic exchange information on tax residents on a reciprocal basis. To minimise burdens on financial institutions the agreement will follow, as closely as practicable, the UK-US Agreement to Improve International Tax Compliance and to Implement FATCA. The agreement will be concluded to the same timetable as the agreement currently being negotiated between the Isle of Man and the US.
UK Secretary to the Treasury David Gauke said: “Our ground breaking agreement with the US sets a new standard in international tax transparency and today’s agreement between the UK and Isle of Man to move to much greater levels of automatic exchange is the next step in this process … We are looking to reach similar agreements with other jurisdictions and are in discussions with Jersey and Guernsey about enhanced information exchange as part of our common commitment to combat tax evasion.”
On 10 December, however, Jersey and Guernsey released a joint statement stating they did not wish to sign up to an automatic tax exchange agreement with the UK unless it was a global regulation. Both islands currently have tax information exchange agreements that permit them to share information on a case-by-case basis.
The Chief Ministers of Jersey and Guernsey said the islands would be put at competitive disadvantage and requested more information. Jersey Chief Minister Senator Ian Gorst said: “Jersey considers it is important that in doing so the UK government mirrors the approach of the US FATCA in being global in its application, ensuring a non-discriminatory approach for all jurisdictions.”
11 December 2012, the UK government published its draft 2013 Finance Bill, which included the General Anti-Abuse Rule (GAAR). Implementation of the rule is to be delayed until it receives Royal Assent, expected in July 2013, rather than the originally planned date of April next year.
Following consultation, a number of amendments have been made to the draft legislation. The stated purpose of the GAAR is to counteract “tax advantages” arising from “tax arrangements” that are “abusive”. The key changes to the legislation relate to the so-called “double reasonableness test” including clarification of the circumstances to be taken into account in determining whether arrangements are abusive.
Although the government recognised that “IHT has a number of differences when compared to the other direct taxes and has complex interactions with trust and estates legislation”, it will still be covered by the GAAR because excluding it “would leave IHT potentially exposed to abusive avoidance schemes”. However the government proposes that the GAAR will not apply to tax arrangements already entered into before royal assent to the Finance Bill.
The GAAR will initially apply to income tax, corporation tax capital gains tax, petroleum revenue tax, inheritance tax, stamp duty land tax and the new property annual charge. It is intended that the GAAR will also apply to national Insurance contributions, but this will require separate legislation and this is likely to be enacted after the GAAR has been introduced.
The Finance Bill also included the first publication of legislation regarding the GAAR advisory panel. The panel is designed to safeguard from inappropriate use of the GAAR by HMRC.
As part of the Bill, the rules that determine an individual’s tax residence are to be placed on a statutory basis from the start of the 2013/14 tax year. The legislation will provide for a tax year to be split into a UK part and an overseas part in certain circumstances, and contain new rules for the taxation of certain income and gains arising during a period of temporary non-residence.
14 September 2012, the UK became the first country to sign a bilateral agreement with the US to allow for implementation of the tax-reporting requirements under the 2010 US Foreign Account Tax Compliance Act (FATCA). It follows the Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA that was negotiated in July by the US with the governments of France, Germany, Italy, Spain and the UK.
The FATCA rules, which require foreign financial institutions to report detailed information about US account holders to the Internal Revenue Service (IRS) and possibly withhold taxes on individual accounts, are due to be finalised in coming months but are not expected to be fully implemented until 2014. The aim is to create a new global regulatory system to prevent US citizens from evading taxes through foreign accounts and includes a facility to obtain US taxpayer information through foreign governments.
The UK Treasury said the agreement would improve its ability to obtain information from the US to help address its own tax evasion issues, while benefiting UK financial institutions by addressing their legal concerns. While the UK agreement is reciprocal, allowing for the sharing of information on UK residents held in US financial institutions, other deals may not allow for such exchanges.
The governments of Guernsey, Jersey and the Isle of Man also announced plans, on 9 October, to negotiate partnership agreements with the US to implement FATCA, which will be similar “in form” to the UK agreement.
They said the decision to enter into the agreements “follows consultation with industry representatives, who have given their support for the proposed course of action” and is after discussions between the three Crown Dependencies and the US. Formal negotiations are now due to take place and it is hoped that the intergovernmental agreements will be signed “rapidly”.
14 November 2012, the US Treasury issued a second model agreement – which had been outlined in joint statements with Japan and Switzerland in June – reflecting the business-to-government approach for cooperation to facilitate the implementation of the US Foreign Account Tax Compliance Act (FATCA).
FATCA was enacted by US Congress in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers – or by foreign entities in which US taxpayers hold a substantial ownership interest – with foreign financial institutions (FFIs). Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.
A first version of the model agreement, outlined in February 2012 in joint statements with France, Germany, Italy, Spain and the UK, offered a model for automatic tax information sharing between governments on a reciprocal basis, based on existing bilateral income tax treaties or tax information exchange agreements (TIEAs). This enables FFIs to report the necessary information to their home country revenue authority, which will then forward that information automatically to the Internal Revenue Service (IRS).
The second model agreement will generally require FFIs in FATCA partner jurisdictions to report FATCA information directly to the IRS. Direct FFI reporting will then be supplemented by group requests – made under an applicable tax treaty or TIEA between the US and the FATCA partner country – for information about customers who do not consent to information reporting. The FFI will be able to provide aggregate information on all such accounts to its home tax authority, which is then authorised to transmit the data to the IRS.
Switzerland and the US initialled an agreement on the simplified implementation of the US FATCA legislation on 3 December. The simplifications apply in particular to Social Security, private retirement funds and casualty and property insurances, which are exempt from FATCA, as well as to the due diligence requirements of financial institutions.