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Challenges of a UK ‘FATCA’ and the global focus on tax transparency

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By Dara Jegard (nee Lutes-Guest) – After signing a Foreign Account Tax Compliance Act (FATCA) with the US in 2012, Jersey closed a similar Intergovernmental Agreement (IGA) with the United Kingdom (UK) this year. The agreement will include:

  • An alternative reporting arrangement for UK residents who are categorised as non-domiciled for tax purposes (res non-doms) which will be included in an annex to the IGA and finalised to the same timetable as the US agreement
  • A disclosure facility which will allow investors with assets in Jersey to come forward and regularise their past tax affairs prior to information on their accounts being automatically exchanged.

The news of a UK-Jersey ‘FATCA’ initially prompted some serious concerns about its potential impact, in particular from UK investors who are non-domiciled for tax purposes. There was a perceived threat that if these individuals chose to divert their assets elsewhere, this could create economic losses for Jersey, and also for the UK.

There was also an understanding that for Jersey to fully engage, there needed to be a ‘level playing field’ – Jersey did not want to be the only jurisdiction to sign up. Now, the UK has clarified that similar tax-sharing initiatives are being signed amongst many overseas territories with FATCA setting the new standard in international tax transparency. With recent announcements confirming that France, Germany, Italy and Spain, as well as the Cayman Islands, Isle of Man and Guernsey, will now be operating under a similar model, Jersey is now comfortable that the UK FATCA can be a positive development.

The UK FATCA is in fact consistent with priorities raised at the most recent G8 summit, which called for new global standards on tax transparency; a campaign spearheaded by the Organisation of Economic Cooperation and Development (OECD), which commissioned a special report ahead of the summit. In particular, Monica Bhatia, Head of Global Forum on Transparency and Exchange of Information for Tax Purposes at the OECD, has praised Jersey’s active role in the promotion of tax information exchange.

Sophie Dworetzsky, Withers LLP Partner in London, commented on this move towards tax transparency, saying: “The international tax clampdown has now gathered sufficient force and shape to make it clear that there are no hiding places left for tax evaders. Although negotiations continue in many jurisdictions, it seems inevitable that they will be successfully concluded before too long. Law-abiding taxpayers should have nothing to worry about here, but the current direction of travel raises two possibilities that would be unwelcome and damaging for everyone.

“First, deliberately overlooking the difference between tax evasion and avoidance may lead us down a road where structures, which are currently entirely legal, swiftly become outdated and are viewed with suspicion. Put another way, are we headed into a spiral of ever-diminishing options for legitimate tax planning? The second, related, point is the public scepticism relating to offshore holdings at present. Whilst we must acknowledge that offshore jurisdictions are sometimes used for tax abuse, this should not be used to smear every offshore structure. For many, offshore structures provide personal privacy, and are especially useful for individuals with business interests around the world.”

There is still some uncertainty regarding the practical application of FATCA to financial institutions. A significant amount of time and energy will have to go into preparing for the new regime, with a withholding tax of 30% for all financial institutions who fail to comply. Additionally, the act of identifying and reporting US and UK taxpayers imposes an additional compliance burden. It is essential that institutions are aware that FATCA is not just a one-off process and acknowledge the workforce required for thorough checking and consistent monitoring.

Every client affiliated with the US and UK will need to have their status established on a regular basis, and this will require manually searching all records, calculating withholding tax, recording and reporting findings, and making the necessary changes to a client’s status when these findings are confirmed. As well as satisfying regulatory requirements, it will also be imperative that all existing and future clients are reassured that these arrangements will not adversely affect investment performance and all information exchanged will still remain completely confidential.

Jersey’s financial institutions have had to work hard to ensure they can adopt these changes and establish systematic repeatable processes, and also to ensure that operational costs are not disproportionate to the potential investment opportunities and other long-term benefits that can be accrued by the regime.

All institutions have had to develop new client on-boarding requirements, the necessary reporting and withholding systems and a clear system to review existing customer accounts and make amendments to contract details. Many companies have had to consider significant IT changes, especially those that are used to storing client data on static systems both electronically and on paper.

Despite all of the challenges this implementation requires, the benefits of international collaboration are greater than ever. As it becomes commonplace for countries around the globe to enforce similar FATCA requirements as part of the move towards transparency, Jersey is going to be in a strong position.

Jersey’s Chief Minister, Senator Ian Gorst, sums up the situation: “This strategy (of signing FATCA) is designed to continue to ensure the industry innovates, prospers and continues to be regarded as one of the world’s financial centres. By reaching agreement with the US and UK on enhanced information exchange, we are making an important contribution to the future success of Jersey.

“Our internationally recognised reputation for being transparent and well regulated is a key strength of our financial services sector, and what we have now agreed with the UK will serve to further reinforce this message. It is also in the Island’s long-term interest to keep in step with the global direction of travel towards greater transparency.”

The industry in Jersey has also been largely supportive of the move, actively participating and accepting that moving towards transparency is inevitable and in some ways could be beneficial for Jersey’s reputation.

As Heather Bestwick, Deputy CEO of the industry body Jersey Finance, notes, “The outline package agreed between Jersey and the UK reflects Jersey’s strong relationship with it and the Island’s international reputation for high standards of regulation.”

FATCA-style agreements also have significant implications for the growing digital industry in Jersey, as finance firms consider what new technology they will need to implement to deal with client data to ensure both compliance and efficiency.

C5 Alliance Limited Director and Head of Business Intelligence Team, Dan Hare, says, “Regulatory reporting is one of the biggest efficiency challenges faced by financial services businesses. Maintaining compliance with the various new and existing international tax regulations can be time consuming and resource-intensive. New regulations are also being introduced all the time, so the important thing is to ‘future-proof’ systems so that they can be adapted quickly and easily to new requirements.”

It is clear that the sophisticated data requirements that are emerging as a result of these new agreements will result in much closer working relationships between the finance industry and the providers of technology and business solutions.

Whatever the challenges that implementation of the agreement with the UK brings, it is reflective of a positive new mood in terms of Jersey/UK relations. A very recent report by Capital Economics revealed that Jersey helps the United Kingdom generate around £2.3 billion in tax revenues each year and supports 180,000 British jobs. It also found that, counter to some previous claims, no more than £150 million per annum of British taxes could potentially be evaded using Jersey and that the recent FATCA-style agreement with the UK would substantially reduce or eliminate the potential for tax losses.

Mark Pragnell of Capital Economics, and principal author of the report, notes, “This work goes further than any previous study and, importantly, provides a comprehensive review of the sources and uses of assets administered or managed in Jersey. The Island is a catalyst for employment and economic activity in the United Kingdom, which itself generates revenues for the British exchequer.”

In terms of next steps, the UK has also indicated that it is happy to consider a possible renegotiation of the current Double Taxation Agreement between the UK and Jersey.

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