NEXT week, the Treasury will publish draft legislation detailing how Britain’s financial sector will be forced to implement a punitive piece of US tax legislation. Although hailed this week by George Osborne as a weapon in the fight against tax avoidance, the Foreign Account Tax Compliance Act (Fatca) has severe implications for hundreds of British firms.
Fatca is a new US extra-territorial requirement that will impose significant costs on banks and asset managers. Its aim is to force non-US financial institutions to identify US clients and report them to the Internal Revenue Service (IRS) – the American tax authorities.
While it is understandable that the US wants to obtain tax dollars from its citizens – and it estimates to be recouping almost $20bn (£12.4bn) a year in doing so – Fatca is a double whammy. It seeks global compliance and unfairly imposes significant costs and draconian individual responsibility on firms based outside the US.
Fatca has resulted in UK private client and wealth managers turning away clients, simply because they have a link with the US. Any firm with any investment in the US first has to identify which of its customers are American and report them. Non-compliance can result in a range of sanctions, including a 30 per cent withholding of any US investment.
The requirements are stringent. Foreign institutions must search for indicators of a US link among their customers – including whether there are any US telephone numbers in their records. Firms must also actively and continuously check that clients don’t become US citizens.
Furthermore, the US authorities require each foreign financial institution to appoint a so-called responsible officer. That individual will receive a US employee identification number, and will be entirely responsible for Fatca compliance. He or she may be personally liable for any substantial contravention. It’s an asymmetrical requirement and is causing many private client managers to think carefully about providing a service to those who the US authorities might deem American.
There is a ray of hope that things might improve a little, however. In September, HMRC signed an inter-governmental agreement with the US and announced a consultation process with the aim of reducing the compliance burden. The agreement requires the IRS to exchange information with the UK on UK investors within US financial institutions.
But the subsequent outcry from US financial institutions, which do not collect similar information, simply reveals the asymmetrical requirements the US is imposing on foreign financial institutions. And the new agreement itself is open to criticism. Financial institutions may have to install multiple systems and processes to cover operations across the globe.
The US is guilty of behaving like a bully. No one is advocating tax evasion. But imposing the cost on Britain’s financial sector is unfair, and our government should have the courage to say so.
Simon Culhane is chief executive of the Chartered Institute for Securities & Investment.