Financial Services Tax – UK Update from Dechert’s Tax Group - February 2013: FATCA Update – No Duplicate Reporting for Investment Funds

by Dechert LLP

Following the execution of an inter-governmental agreement (or “IGA”) with the United States in September 2012 and a consultation exercise which closed in late 2012, HM Revenue & Customs (“HMRC”) recently published draft regulations and guidance notes on the IGA and the implementation of FATCA in the UK.

These documents provide further helpful clarification for affected financial institutions in a number of areas. Perhaps most significantly, the documents resolve the investment management industries’ concern that multiple, duplicate reports would be required in respect of a single fund vehicle. It is now clear that investment managers and administrators, who were previously thought to be at risk of reporting, should not be required to duplicate reports made in respect of the fund for which they act. There is also further detail regarding the treatment of partnerships under the IGA.

This article briefly recaps the FATCA story so far and then considers the impact of the IGA and the helpful clarity provided by the recent publications.


In 2010 the United States introduced the Foreign Accounts Tax Compliance Act (“FATCA”). The Act sought to combat tax evasion by those US citizens and residents seeking to evade their US tax obligations by holding assets offshore. Broadly, FATCA requires financial institutions based outside the US (so-called “Foreign Financial Institutions” or “FFIs”) to enter into agreements with the IRS and to pass information about the accounts of US persons to the IRS. Financial institutions failing to comply with the US legislation may be subject to a 30% US withholding tax on any US source income.

International Cooperation

In February 2012, the US Treasury released a joint statement with the governments of the UK, France, Germany, Italy and Spain outlining a possible framework for FATCA implementation based on an inter-governmental agreement model. The need for an inter-governmental agreement was particularly pressing in the UK due to the existence of UK data protection laws which would currently prevent UK financial institutions from complying with the requirements of FATCA.

Model inter-governmental agreements were first published by the US Treasury in July 2012 and on 12th September the UK became the first country to sign a bilateral IGA with the US. Under the IGA, the UK agreed to introduce domestic legislation to enable UK financial institutions to provide the information required by FATCA without breaching UK data protection restrictions. In simple terms, this is achieved by enabling the financial institutions to report the necessary information to HMRC, which will then exchange it with the US under the terms of the IGA.

Following the signing of the IGA, the UK government issued a consultation document on 18th September entitled “Implementing the UK-US FATCA Agreement” seeking comments from interested stakeholders on a number of questions. In late 2012, HMRC published a summary of responses to the consultation along with draft implementing regulations and draft guidance notes on such regulations.


Objectives and Benefits

HMRC considers there to be two main policy objectives behind the IGA and implementing legislation. First, since the IGA is reciprocal, it should enable HMRC to enhance its own compliance activities by giving HMRC significant additional information regarding UK taxpayers with accounts in the US. Secondly, the measure is intended to assist UK financial institutions by resolving the legal issues which prevent them from complying directly with the FATCA legislation and by reducing their compliance costs.

Although the reporting obligations under the IGA are broadly similar to those that will apply to financial institutions in countries with which the US does not have an IGA, the IGA approach does provide significant benefits. In particular, financial institutions in the UK will not need to sign an FFI Agreement with the IRS (although some form of registration may be necessary), will not have payments to them withheld upon under FATCA and will not have to withhold on payments to others in most cases. The IGA should also dramatically simplify the steps needed for a UK financial institution to comply with FATCA. Although the cost of complying with FATCA is likely to be reduced by virtue of the IGA, there will still be significant compliance costs, both in terms of the initial one-off costs of establishing the requisite internal systems and the on-going costs of collecting and reporting information on an annual basis.


A further benefit of the IGA is the detailed list of institutions and products that it provides will be exempted from FATCA reporting. Broadly speaking, the entities and products listed are those deemed to pose a low risk of US tax evasion. Institutions may be deemed non–reporting financial institutions either because they are “exempt beneficial owners” or “deemed compliant”.

Exempt beneficial owners will include UK Governmental organisations, the Bank of England, any UK office of various international organisations (such as the IMF and the World Bank) and pension schemes falling within the scope of the US-UK double tax treaty.

Deemed compliant institutions will include non-profit organisations such as charities and financial institutions which have business substantially confined to the UK. Broadly speaking, in order to claim this exemption a financial institution must:

  • be incorporated or organised and licensed and regulated in the UK and have no fixed place of business outside the UK.
  • be required under UK law to withhold tax or report with respect to accounts held by residents of the UK.
  • not solicit account holders outside the UK and have at least 98% of the accounts by value provided by the institution held by residents of the UK or other EU Member States.

Exempt products, which are not treated as financial accounts and therefore do not require reporting, will include registered pension schemes, unregistered pension schemes where the annual contributions are limited to £50,000 and certain other tax favoured products such as ISAs, Child Trust Funds, HMRC approved employee share incentive plans and National Savings and Investments Saving Certificates and Premium Bonds.


It is anticipated that the draft regulations will be implemented when Finance Bill 2013 receives Royal Assent, which is likely to be in July.

The draft regulations include a provisional reporting date for reporting UK financial institutions of 31st May each year, although a number of respondents to the consultation expressed concern that this date provides UK financial institutions with less time to provide information to HMRC than would be available if they were providing directly to the IRS. HMRC will continue to discuss this point with stakeholders. Subject to this point, it is expected that the first reporting date will be 31st March 2015 in respect of 2013.

Investment Funds

The definition of “investment entity” in the IGA initially created uncertainty for the fund industry. This is because it includes not only the fund vehicles themselves but also the fund managers, investment managers, fund administrators, transfer agents, depositories and trustees acting for or on behalf of these entities.

This raised a concern that, within any single fund structure, there could be multiple entities required to report duplicate information. However, following representations on the point the HMRC summary of responses to the consultation and draft guidance make it clear that only the collective investment vehicle itself will be regarded as a reporting financial institution in relation to the financial accounts of that collective investment scheme.

Entities which are regarded as investment entities solely by reason of their relationship with a collective investment scheme (such as a manager or an administrator) will not be regarded as a reporting financial institution. For these purposes, the relevant financial accounts of the collective investment vehicle are the equity and debt interests held by investors in that vehicle.

Responses to the consultation pointed out that in most cases a third party, such as a transfer agent or administrator, would undertake the necessary FATCA due diligence on behalf of an investment fund as they would hold the register of the underlying investors in the fund. Thus, both respondents and HMRC agreed that while it was appropriate for the fund itself to carry the reporting obligation there should be flexibility with regard to who carries out the due diligence and reporting process. As a consequence it is expected that funds will be permitted to delegate the performance of their obligations under the IGA and FATCA to a service provider.

Notwithstanding the above, there may be instances in which service providers, such as fund distributors, do have reporting obligations in their own right. Specifically, this would include distributors that hold legal title to assets on behalf of customers and are part of the legal chain of ownership of interests in a fund. This will include custodian institutions holding assets on behalf of others. However, distributors that act in an advisory only capacity and are not in a chain of legal ownership as regards interests in the fund will not be regarded as a financial institution and will not have reporting obligations.

In essence, a funds’ account identification and reporting obligations should apply only to its immediate account holders. Any indirect individual account will be held through a financial institution (such as a platform or nominee). The fund’s obligation is to identify the direct account holder (i.e. the platform or nominee only) but the intermediary financial institution will then have its own obligation to identify and report on its own account holders.

The above clarification should provide some comfort that the reporting obligations under FATCA will not be quite as onerous as previously thought. However, it will remain necessary to make a report in respect of the fund (whether this is done by the fund itself, by the manager or by an administrator) and investment managers and the funds they manage should give consideration to how they intend to satisfy these obligations when the reporting obligations commence.


The recent legislation confirms that only partnerships that are managed and controlled in the UK will be within the scope of the UK IGA. Partnerships which are established in the UK but are managed and controlled elsewhere will not be able to take advantage of the IGA. Partnership vehicles which will be reporting financial institutions under FATCA should therefore consider their place of management and control (which may, for example, be the location of any general partner) and whether they will be covered by an IGA (whether the UK IGA or an IGA entered into with the US by the territory in which management and control is exercised).


Written by:

Dechert LLP

Dechert LLP on:

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