The Foreign Account Tax Compliance Act ("FATCA") was introduced by the United States in 2010 as part of the US Hiring Incentives to Restore Employment Act (known as the HIRE Act). The purpose of FATCA is to reduce tax evasion by US citizens. FATCA requires foreign institutions to report information on financial accounts held by their US customers to the Internal Revenue Services ("IRS"). The US government has entered intergovernmental agreements ("IGAs") with various jurisdictions in order to allow financial institutions to overcome legal burdens that they might face in complying with their obligations under FATCA.
The UK government decided to follow in the US government's steps by requiring its Crown Dependencies and Overseas British Territories to enter into IGAs which are in a similar form to the US IGA. The British Virgin Islands ("BVI") has, on 6 March 2014, agreed in principle to enter into a Model 1 IGA with the US government ("US IGA") and it has entered into an IGA with the UK government ("UK IGA") which contains similar obligations. Although the US IGA has not yet been formally signed, the IRS has announced on 2 April 2014 that financial institutions in the BVI can proceed with their FATCA reporting obligations as if the US IGA had been signed.
Why Comply?
Failure to comply with FATCA could result in the imposition of a 30% withholding tax on certain payments made to financial institutions and their account holders. Where clients do not provide the relevant information that a financial institution requires to comply with its FATCA obligations, the financial institution is required to close the account in question.
Who is caught by FATCA?
The exact scope of persons to whom FATCA applies is complex. In very basic terms, foreign financial institutions ("FFI"), which largely comprise of non-US banks, trust/fiduciary service providers, custodians, investment banks and hedge funds, must comply with FATCA. Therefore, BVI financial institutions must comply with both the US and UK IGAs.
What is the process?
Under the US IGA, BVI FFIs are required to register with the IRS for the purpose of obtaining a Global Intermediary Identification Number (known as "GIIN"). The GIIN is used by the FFIs when making the relevant reporting to the tax authorities (as explained below). FFIs that are resident outside of the BVI and indeed any other jurisdiction which has not entered into an IGA with the US must have registered their GIINs by 5 May 2014 in order to prevent the obligation to withhold payments arising.
BVI FFIs and entities that are operated by such FFIs will have until October 2014 to register for their GIINs (if one is required) to ensure that they are included on the IRS FFI list by 1 January 2015. Not all entities operated by FFIs will require a GIIN. However, if one is required, the FFI/entity must register with the IRS so as to avoid any withholding obligations.
All BVI FFIs should be working with their clients to determine their classification status. The 3 options are: a financial institution, a Passive Non-Financial Foreign Entity ("Passive NFFE") or an Active Non-Financial Foreign Entity ("Active NFFE"). Entities that are classified as Passive NFFE and Active NFFE are not required to obtain a GIIN. However, Passive NFFEs have reporting obligations through the FFI that manages the Passive NFFE.
Following classification, FFIs must carry out due diligence in respect of all their structures to identify any US or UK tax payers within such structures. Where such persons are identified, the FFI may ask them to certify whether they are in fact US or UK tax payers. The FFI then has an obligation to report various personal information as well as the value of the accounts and payments made in respect of such persons to the BVI tax authority, which will in turn provide such information to HMRC (in the UK) and the IRS (in the US).
Under the UK IGA, it is possible for FFIs to elect for the resident non-domiciled persons to elect to report using the Alternative Reporting Regime.
The first reporting year is 2014. Any information that needs to be reported in respect of the 2014 reporting period must be filed with the BVI tax authority by 30 June 2015.
All BVI FFIs and BVI entities are encouraged to consider the application of FATCA to them as soon as possible, as it may take a significant period of time to ascertain all the relevant information required for classification, registration, verification and reporting as outlined above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
