On 10 October 2013, the governments of the UK and the Isle of Man (IOM) signed an agreement that will provide for automatic information sharing between the respective tax authorities. This agreement is the first automatic tax information agreement based on FATCA, that has been signed between two non-US parties.
What does the agreement provide?
The agreement affects financial institutions (FIs) located in the UK and the Isle of Man, including branches and subsidiaries in each of those locations.
The FIs in the UK and the IOM will need to identify account holders (individual and corporate) who are resident for tax purposes in the other jurisdiction. FIs will then report the details to the domestic tax authorities, which will exchange the information with each other.
Affected FIs face financial and reputational risks associated with non-compliance. FIs therefore need to plan carefully how they will comply with the requirements under these agreements, in addition to understanding what other changes may be in the pipeline. This will be challenging given the current pace of international developments.
How do the detailed rules in this agreement differ from those in the UK/US FATCA IGA?
Whilst the UK/IOM agreement is based on the UK/US FATCA agreement, there are a number of distinct differences. First, there is a more pragmatic approach to the identification of potential indicia, particularly with regard to the identification of standing payments to a UK account. These will only count as indicia where they are made from a non-depository account. This will ensure that FIs in the IOM will not need to follow up on satellite TV subscriptions and similar regular payments to UK trading companies.
Second, there is no blanket exemption for pension schemes. Any small scheme (with fewer than 50 members) where non-residents are entitled to more than 20% of the assets will come within the scope of reporting. This could bring certain qualifying recognised overseas pension schemes into scope.
Third, there is provision for the alternative reporting regime to cover non-domiciled UK individuals. Whilst reducing the amount of irrelevant information flowing to HMRC, there are a number of key considerations for FIs wishing to adopt it:
What are the timescales for tax information reporting?
The timescale for the development of the reports remains challenging; US FATCA reports are currently scheduled to be due in 2015 and those for the UK/IOM IGA are due in 2016 for the 2014 and 2015 years. Technical specifications for these returns are not yet available, although the data content is described in the agreements.
How does the agreement relate to the memorandum of understanding (MOU) signed in February?
The UK/IOM IGA provides the tax authorities with information to enable them to detect and deter those seeking to evade tax. The MOU signed on 19 February by the governments of the UK and IOM included voluntary disclosure facilities (VDFs); these allow tax affairs to be regularised, on beneficial terms, in advance of the information exchange.
There are some differences in the definitions regarding ‘relevant persons’, who FIs need to notify of the VDF by 31 December 2013, and those who will be reported under the information exchange agreement in 2016. For example, a company listed on the London Stock Exchange may be classed as a ‘relevant person’ for the purposes of the MOU. However, for the purposes of the UK/IOM IGA, they may be classified under FATCA as an ‘active non-financial foreign entity’, which means the company details will not be reported under FATCA.
For those taxpayers wanting to use the IOM VDF, the first information reports are due to be exchanged after the closure of the VDF in September 2016. As long as they are otherwise eligible and an appropriate investment has been made in the IOM by 31 December 2013, then the IOM VDF can be used to make a disclosure, if suitable.
Are any other agreements in the pipeline?
Yes, at the time of writing it has just been announced that the UK has signed similar agreements with Jersey and Guernsey (see page 3). This means that all the Crown dependencies have now entered into automatic tax information sharing with the UK.
