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Offshore Trust and Intergovernmental Agreements

By admin
01 Oct 2015
Tax Investigation

Information Technology is to blame in my view. Everything is so much quicker and easier with a computer. Businesses have embraced technology and today children know how to use a tablet to find information on the web before they can ride a bike. It is no wonder that governments around the world have adopted technology to counter tax evasion and avoidance.

However, UK tax advisers and fiduciary service providers in low tax jurisdictions may not have believed their worlds would have changed so much and so quickly. Personally, I don’t believe the change in the UK has been slow. It has been progressive since the merger of the Inland Revenue and Customs and Excise. Signs of the impending change were dripped out and with hindsight legislation demonstrated HMRC’s desire to counter avoidance over a decade ago: the disclosure of tax avoidance scheme legislation was introduced in 2004. The desire to detect avoidance and evasion in an efficient manner has stepped up a gear with the change in information gathering powers.

Schedule 23 Finance Act 2011 introduced power to obtain information over sixteen broad categories of persons for the purpose of checking the tax position of others. The categories include:

  • Employers
  • Banks
  • Insurance companies
  • Financial institutions
  • Brokers
  • Auctioneers
  • Estate agents
  • Charities

The ability to request information from these persons in an electronic format permits HRMC to cross reference information received against that of other taxpayers. To illustrate the power of this, imagine a business selling an imported product that carries an underwritten guarantee. The underlying insurance information would appear to be accessible from the insurer, which could be matched with declared sales, import information and VAT returns. We have already seen the ability of HMRC’s Risk and Intelligence Service (RIS), who are responsible for the use of the acclaimed Connect software, to identify groups of taxpayers and launch suitable taskforces or disclosure campaign and collect significant revenue.

Given that offshore tax planning is often associated with the profitable or the wealthy, it should be no surprise that governments desire more information. We primarily have the United States to thank for the impending universal deployment of information between governments and what is now referred to as FATCA.

Overview of FATCA

FATCA stands for The Foreign Account Tax Compliance Act. It is a US law which introduces measures to prevent tax evasion by US citizens through the use of offshore financial institutions (FI).

The law requires a FI to provide information to the IRS on accounts held by US citizens. Should the FI choose not to provide the requested information, they will suffer a 30% withholding tax on all payments of US source income.

Financial Institution (FI)

As one would expect, the definition of an FI is broad and encompasses the following:

  • Depository institution
  • Custodial institution
  • Investment entity
  • Specified insurance companies

The definition therefore includes banks, investment houses, investment brokers, hedge funds, private equity funds, insurance companies and fiduciary service providers: those administering trusts, foundations and companies.

Intergovernmental Agreements (IGAs)

FATCA would be pretty redundant in establishing those who have evaded tax if the information was not provided or enforcement was difficult. The withholding tax is a significant encouragement to provide information given it is exceptionally difficult to avoid US source income. However, intergovernmental agreements will assist greatly to overcome enforcement issues with local tax authorities, agreeing to act as the intermediary for the provision of information. The reason for the IGA is to prevent the breaching of data protection and confidentiality laws.

HMRC will forward information required from UK FI under FATCA to the IRS. It’s not just about the UK though, countering tax evasion is a globally driven initiative with over sixty countries entering into multilateral competent authority agreements to automatically exchange information. The Crown Dependencies and the Overseas Territories have entered into similar agreements with the US. They have also entered into agreements with the UK.

Overview of UK FATCA

The Chancellor in the Budget 2013 announced the following:

  • An IGA for automatic exchange of information about UK residents with accounts in the Crown Dependencies
  • An alternative reporting arrangement for UK Resident Non Domiciled individuals
  • The offshore tax disclosure facility for those wishing to regularise their tax affairs in advance of the exchange of information

The intergovernmental agreements with the Crown Dependencies (and Gibraltar) are fully reciprocal. On 31 March 2014, The International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014 came into force.

The agreements with the Overseas Territories are virtually the same as that with the Crown Dependencies including information to be provided and timelines. The IGAs with the Overseas Territories (other than Gibraltar) are however non-reciprocal: UK FI do not have to provide data.

Reportable Accounts

A reportable account is a financial account maintained by the FI where:

  • The account holder is a UK specified person
  • The account holder is a non-UK entity the controlling persons of which include one or more UK specified persons

A UK specified person is broadly a UK resident individual, partnership or unlisted company. Controlling persons are those who exercise control over an entity. A trustee would obviously consider that they exercise control as opposed to the settler or beneficiaries. However, for these purposes the trust is regarded as owing a debt to a settler and beneficiaries thereby resulting in them being controlling persons. We wonder whether the same would apply to a foundation with carefully drafted regulations.

A trust is likely meet the definition of a FI since they generally are an investment entity. The financial accounts maintained by the FI is the debt or equity interest in the trust. An equity interest will be held by the settler, any mandatory beneficiary and any other persons exercising effective control, for example trustees or a protector. A discretionary beneficiary holds an equity interest only if and when a distribution is actually made to that person.


FI have to provide information to their local tax authorities by either 31 May 2016 or 30 June 2016 depending on the jurisdiction.

Tax authorities in the Crown Dependencies have until 30 September 2016 to exchange information with HMRC for the calendar years 2014 and 2015.

FI in the UK have to provide information to HMRC regarding Crown Dependency and Gibraltar reportable accounts by 31 May 2016.

For subsequent calendar years, FI will provide information by 31 May or 3o June following the end of the calendar year and tax authorities will exchange information by 30 September.

Non Domiciled UK Residents

Offshore trust planning has predominantly been of greater benefit to non UK domiciles residing in the UK. A consultation is currently in progress as to the tax treatment of such persons in the future although the proposals appear to affect those who are long term UK residents. Since 6 April 2008, non domiciled UK residents could choose to be within the remittance basis of tax by paying a fixed amount. Those charged to tax on the remittance basis can elect for an alternative reporting regime to apply.

The FI and non domiciled person must elect for the regime to apply. A FI must make an election to their tax authority by 30 May following the end of the first relevant tax year, confirming it is offering the regime. The non domiciled person must elect to the reporting FI by 30 May following the end of each relevant tax year.

By the 28 February following the end of a tax year, the FI must obtain written signed confirmation, that the non domiciles’ UK tax return includes claims for:

  • Non UK domiciled
  • Remittance basis charge (and the charge has been paid if relevant)

Confirmation should be sought that the domicile status and claim to be taxed on the remittance basis in dispute.

The alternative reporting regime has two deadlines for reporting to the local tax authorities:

  1. By 30 June following the end of the relevant tax year the FI must report the following information in respect of the Account Holder:
    • Name
    • Address
    • Date of birth
    • National Insurance Number (where available)
  2. By 30 June in the following year, the following information must be reported:
    • The same information as the first deadline, plus:
    • Gross payments and movements of assets into and from the reportable account in the relevant tax year
    • The account number, name of the FI and its FATCA identifying number

Gross payments and movements of assets includes those originating from a UK source (or one which cannot be determined) into the UK reportable account and those from the UK reportable account to an ultimate UK destination (or one which cannot be determined).

How much fun could you have with this amount of information at your fingertips? Registering for the offshore disclosure facility comes to a close on 31 December 2015.

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