Katharine: UK and France follow the US into FATCA-like agreements (exchange of tax information)

It looks like more and more automatic exchange of information agreements will be signed over the coming years.

Following on from the US’s revolutionary Foreign Account Tax Compliance Act, the UK, France, Spain, Germany and Italy have announced that they will develop and pilot a new multilateral tax information exchange agreement.

They see this as an important, early step in a much wider move towards a new international standard in automatic exchange of information; one that will improve the ability of tax administrations to clamp down on tax evasion.

Once in effect, a wide range of financial information – on more than just bank deposits - will be exchanged between the five countries.

In a statement, HM Revenue & Customs (HMRC) explained:

“This will help catch and deter tax evaders as well as provide a template for wider multilateral automatic tax information exchange.”

In Spain, the Ministry of the Treasury said that it considers such agreements to “represent an unprecedented step forward”. It would enable checks on information related to assets and rights held overseas, that should have been declared by residents by 30th April this year.

The five Finance Ministers formally advised EU Commissioner for Taxation, Algirdas Šemeta, about their Action Plan in a letter dated 9th April 2013. The letter makes it clear that this is just the start, and that the other EU member states should be persuaded to sign up. They hope Europe will take the lead in promoting a global system of automatic information exchange to remove the hiding places for those who seek to evade paying their taxes.

In a statement the following day, Mr Šemeta said that automatic exchange of information is the most effective means for countries to collect taxes due to them, and that the EU needs it to be widely applied. He called for a “tough common stance” against tax havens, including sanctions against those who facilitate tax evaders.

The multilateral exchange facility between the UK, France, Spain, Germany and Italy will be based on the model intergovernmental agreements they have signed with the US under its Foreign Account Tax Compliance Act (FATCA).

This latest wave in pushing for an automatic exchange of information (as opposed to information supplied on request) on a broad range of financial information started with the US’ FATCA.

FATCA was signed into law by President Obama in 2010, and will largely come into effect in January 2014. Its aim is to prevent Americans from evading US taxes through the use of foreign bank accounts and other financial instruments.

It's estimated that global tax evasion amounts to 5% of the global economy

Foreign financial institutions, based in countries all over the world, have to enter into compliance agreements with the US Treasury to automatically report on US clients. The US has found a strong incentive to make them agree do so – if they refuse, they will suffer a withholding penalty of 30% of the payments made to them.

Offshore centres like the Channel Islands and Isle of Man were keen to sign up to avoid the penalties, which could damage their finance industry.

This is considered a radical and controversial approach, and was very unpopular when first unveiled. Some banks have been unwilling to have American clients because of the amount of reporting work that would be involved.

Nonetheless, it was only a matter of time before other countries realised the benefits such agreements could bring and began looking to set up similar arrangements.

France introduced a ‘mini FATCA’ last year, whereby trusts and trustees have to report to the French authorities where a trust has French assets, beneficiaries or settlors.

The Isle of Man, Jersey and Guernsey have recently agreed to report client information to the UK authorities, along the lines of intergovernmental agreements they are signing with the US.

Luxembourg, which has so far continued to apply withholding tax under the EU Savings Tax Directive rather than automatic exchange of information, recently announced that it is preparing to ease its banking secrecy. On 10th April, Prime Minister Jean-Claude Juncker told the country’s parliament that this will start within two years.

It is interesting to note that he said that they had not changed their position because of European pressure, but rather “because the Americans do not leave us a choice”. He explained that if Luxembourg refused to sign up to FATCA, there would be no more financial business with the US, an inconceivable prospect.

He stressed that the Grand Duchy’s financial centre did not see black money and tax evasion, so it could “safely apply” automatic exchange of information from 2015.

These exchange of information agreements have implications beyond tax compliance. As the Chief Executive of the Association of Life Offices, Alan Morgan-Moodie, commented:

"It's actually all about reporting, and tracking the wealth of the population, and where it resides. And it is the end of any form of confidentiality, certainly throughout Europe and the US, and I'm sure it will percolate into other areas.”

(This information was written by the tax law firm Blevins Franks).