Third Report of Session 2013-14 - Select Committee on Statutory Instruments Contents


Appendix


S.I. 2013/1962: memorandum from HM Revenue and Customs

International Tax Compliance (United States of America) Regulations 2013 (S.I. 2013/1962)

1.  In its letter to HM Treasury dated 23 October 2013, the Joint Committee has requested a memorandum to be submitted on the following point-

"Having regard to the explanation given in paragraph 3 of the Explanatory Memorandum laid with the Regulations, identify the vires for regulation 2(3)."

2.  HMRC consider that regulation 2(3) is made under the power given by section 222(1)(a) of the Finance Act 2013, that is, regulation 2(3) is made-

"for, or in connection with, giving effect to or enabling effect to be given to—

(a)  the agreement reached between the Government of the United Kingdom and the Government of the United States of America to improve international tax compliance and to implement FATCA, signed on 12 September 2012."

3. The Regulations require financial institutions resident in the United Kingdom ("UK FIs") to report information to HMRC about certain accounts they maintain for US taxpayers, and to undertake due diligence procedures in identifying those accounts. The provisions relating to due diligence procedures (see regulation 6, paragraph (3) onwards) require UK FIs to apply the procedures prescribed in the 12 September 2012 agreement ("the agreement") as they apply to different types of account.

4. Regulation 2(3) modifies the effect of the agreement in that it requires UK FIs to provide information to HMRC about a smaller class of accounts than is envisaged by the agreement; and also requires financial institutions to first provide information about those accounts in respect of a calendar year that is later than that envisaged by the agreement. Regulation 2(3) also makes incidental time-related adjustments to the due diligence procedures set out in the agreement that are consequent on those other changes.

5. In the view of HMRC, the power in section 222(1)(a) of the Finance Act 2013 to make regulations in connection with giving effect to the agreement permits giving effect to the agreement only in relation to a narrower class of accounts, as compared to the class to which the unmodified agreement would extend; and so as to require such information to be provided for the first time in respect of a calendar year later than that envisaged by the unmodified agreement. HMRC considers that in all the circumstances (described below) it would be a disproportionate and unreasonable use of the power to give effect to the agreement in relation to the full range of accounts, and for the full period, envisaged by the agreement.

6. The agreement is a reciprocal agreement between the Governments of the United Kingdom and the United States of America ("US") under which each party supplies, in relation to accounts within its jurisdiction, information to the other party about accounts held by the other's taxpayers. The intention was that the information to be supplied by the UK would mirror the information that would be required, in respect of the calendar year 2013 and onwards, from all financial institutions (including those not resident in the US) under US domestic law, and that the rigorous due diligence procedures required by US law would apply to such institutions.

7. That law, the Foreign Account Tax Compliance Act ("FATCA"), which became effective in the US in January 2013, did not create a legal obligation recognised in UK law for UK FIs. UK data protection law therefore made it impossible for such institutions to comply with the US requirements, with the result that a US resident financial institution ("US FI") making a payment to a UK FI would have to apply withholding tax to that payment under US law. The effect of the agreement, and an underlying purpose of the UK in entering into it, is that withholding tax will not be applied by a US FI to payments made to a UK FI that provides to HMRC, in response to legal obligations created by these Regulations, information substantially similar to that which would otherwise have been required by the US under its domestic FATCA law.

8. Accordingly, under the agreement-

(1) any financial accounts that are still maintained by a financial institution (that is, are not closed accounts) where the account holder is a specified person (broadly, a US taxpayer) on 31 December 2013 are (subject to other conditions being met) capable of being "reportable accounts" for the purposes of the agreement;

(2) the UK is obliged to obtain information about reportable accounts and pass that information to the US, in respect of the calendar year 2013 and all subsequent calendar years;

(3) the UK is obliged to ensure that a UK FI applies due diligence when identifying whether any accounts maintained by it on or after 31 December 2013 are maintained for US taxpayers;

(4) accounts maintained on 31 December 2013 are referred to as "pre-existing accounts" and accounts opened on or after 1 January 2014 are referred to as "new accounts";

(5) the UK is obliged to ensure that UK FIs complete the due diligence procedures for pre-existing accounts by 31 December 2015, unless the value of those accounts on 31 December 2013 exceeds a specified threshold, in which case those due diligence procedures must have been applied by 31 December 2014;

(6) the detail of the due diligence procedures that the UK is obliged to impose differs for pre-existing accounts and new accounts;

(7) that detail also depends, in the case of pre-existing accounts, on the value of the account as at 31 December 2013, and whether it increases in value, as measured every 31 December in following years, above a specified threshold.

9. In July 2013 US law changed so that-

(1) "reportable accounts" are those maintained on or after 30 June 2014 (instead of 31 December 2013);

(2) the first calendar year of reporting is 2014 (instead of 2013);

(3) financial institutions have to apply due diligence to identify accounts that are maintained by them for a US taxpayer on or after 30 June 2014 (rather than 31 December 2013);

(4) pre-existing and new accounts are defined according to whether they were maintained on 30 June 2014 or on or after 1 July 2014 (instead of 31 December 2013 and 1 January 2014 respectively);

(5) in relation to accounts maintained on 30 June 2014 (rather than 31 December 2013), due diligence procedures do not need to be completed until, depending on the value of those accounts, either 30 June 2015 (instead of 31 December 2014) or 30 June 2016 (instead of 31 December 2013);

(6) the detail of due diligence procedures differs according to whether an account was already maintained on 30 June 2014 (rather that 31 December 2013) or was opened on or after 1 July 2014 (rather than 1 January 2014);

(7) that detail also depends, in the case of pre-existing accounts, on the value of the account as at 30 June 2014 (rather than 31 December 2013), and whether it increases in value on 31 December 2015 (rather than 2014) and every 31 December thereafter.

10. The US announced the above changes by Notice 2013/43, dated 12 July 2012 (titled "Revised Timeline and Other Guidance Regarding the Implementation of FATCA"). The background to the Notice was that in following months the US expected to conclude a number of agreements with other States (that is, agreements similar to the agreement concluded with the UK). Those other agreements would be unlikely to be concluded and implemented in time for financial institutions within the jurisdictions of those other States to have their systems ready to provide information about the calendar year 2013, and in relation to accounts open on or after 31 December 2013. Consequently, in order (as the Notice stated) "to allow for a more orderly implementation of FATCA" (whose timelines would otherwise be inconsistent with arrangements concluded at the international level), the US had decided to delay the effect of its domestic legislation.

11. Shortly after publication of Notice 2013/43 the US Treasury advised HMRC that there was no objection to the UK providing the US with information, under the agreement, by reference to the revised timeframe referred to in the Notice (that is, in relation to a narrower class of accounts than those covered by the agreement, commencing in a later calendar year than that specified in the agreement, and with corresponding adjustments to the due diligence timeframe provided for in the agreement). In consequence, US FIs will not be required under US law to apply withholding tax to payments made to UK FIs who provide information to HMRC according to the revised timeline: the original timeline (which is reflected in the agreement) is now irrelevant to the application of withholding tax.

12. In the circumstances HMRC considered that it would be a disproportionate and unreasonable use of the power to require UK FIs to provide to HMRC financial information about their customers in relation to whom the US had already stated that it had no interest, and accordingly which is not required to prevent the application of US withholding tax under FATCA to payments made to UK FIs. HMRC accordingly drafted regulation 2(3) to ensure that UK FIs were not required to supply information to that extent to HMRC, and to make the consequential modifications to the timing provisions relating to due diligence, as compared with those in the agreement. In the view of HMRC the Regulations were made properly in connection with giving effect to the agreement.

HM Revenue and Customs

29 October 2013



 
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