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Tax milestone as Fatca reporting requirement takes effect

Published:Wednesday | July 2, 2014 | 12:00 AM

By Adam Palin

Rules requiring financial institutions to disclose the identity and activity of US citizens come into effect from Tuesday, representing a major step in cross-border information sharing between tax authorities and tightening the financial net on Americans living overseas.

Wealth managers must from today verify their clients' tax residency on the opening of new accounts to comply with the US Foreign Account Tax Compliance Act.

Fatca, which is intended to detect and deter tax evasion by US citizens through the use of accounts held abroad, places the reporting burden primarily on financial institutions and national tax authorities rather than individuals.

In the UK, information on US citizens' accounts holding more than US$50,000 must be reported to HM Revenue & Customs, who will then pass details to the US Internal Revenue Service.

"Individuals need to realise that information that could help define their tax liabilities will be passed to their local authority," said Chris Tragheim, a partner at Deloitte UK. "This is a significant milestone in the global exchange of information held overseas."

Financial institutions have a further 12 months or 24 months - depending on the client - to review their existing accounts to ascertain whether they qualify for Fatca reporting, Mr Tragheim said.

Paul Nixon, director of Vestra US, warned that private clients falling under the Fatca umbrella will also include "accidental Americans" who were born in the US and have never formally relinquished their citizenship. Like all US citizens, they are subject to US income tax on their worldwide income, regardless of where they live.

The cost and complexity of compliance with Fatca has already forced some wealth managers to shun the custom of Americans living in the UK.

"There is a growing number being jettisoned by their wealth managers who are saying that they can no longer look after [them]," said Mr Nixon.

"The whole thing is a nightmare," said Ronnie Ludwig, a partner at chartered accoun-tants Saffery Champness. "All accountants must complete a thorough review of their client base, including what investments they have."

Mr Ludwig says that UK-resident trusts also come under the scope of Fatca if they have a US beneficiary, settlor or investments, with trustees therefore faced with an obligation to disclose information relating to the holdings.

Dermot Callinan, UK head of private client advisory at KPMG, says that due to an imported definition of what constitutes a financial institution from the IRS, any trust managed by a discretionary fund manager must be treated as such - and therefore register - even when they don't benefit US citizens.

"Trustees are quite surprised when we advise them that they may be required to report," said Mr Callinan.

The next deadline for financial institutions is October 25, when the Law Society, accountancy body ICAEW and the Society of Trust and Estate Practitioners advise they should have applied for a "global intermediary identification number" to qualify as a registered intermediary with the IRS.

(c) 2014 The Financial Times Limited.