Eva Abeles and Melora Jezierska provide an update on the current status of FATCA legislation and its implications for the charity sector
It is fair to say that FATCA (the Foreign Account Tax Compliance Act) has not been on the charity world’s radar as it is, after all, a piece of US tax legislation. However, charities operating internationally should be aware of FATCA to ensure they are not inadvertently caught by the rules.
What is FATCA?
FATCA is extra-territorial US legislation which seeks to combat US tax evasion in a rather heavy-handed manner. It requires foreign financial institutions (‘FFIs’), e.g. banks, to identify and report account holders with a US connection to the US Internal Revenue Service (IRS). Any FFI deemed to be in violation of the rules will have a 30% withholding tax imposed on all its US source income, which effectively forces banks to comply due to the global nature of the financial economy.
Under the rules, FFIs around the world are expected to enter into agreements with the US Treasury and report on account holders with a US connection directly to the IRS. In September 2012 HMRC negotiated the first Intergovernmental Agreement (IGA) with the US to manage the UK’s FATCA requirements and ensure that the rules which apply in the UK are less arduous for UK institutions, including charities. Many other countries are following suit.
Why is FATCA relevant to UK charities?
FATCA is a wide-ranging piece of legislation and its implementation has been complex. As FATCA has developed, there have been a number of questions as to whether and how the rules may affect charities. While there are still a number of questions over FATCA’s implementation which remain unanswered, now that discussions between the IRS and HMRC are in their final stages it appears that, fortunately, charities will emerge relatively unscathed.
The FATCA definition of ‘financial entity’ is very broad, covering all deposit-taking organisations from banks to insurance companies and pension funds, and there was some concern that charities would be inadvertently caught by the rules as their designation was unclear. The final US IRS Regulations designate charities as ‘non-profit organisations’, and the UK-US IGA designates charities as ‘Deemed Compliant Financial Institutions’ within Annex II of the UK-US IGA. This means that charities should generally not have any obligations under FATCA.
So, what does this mean for charities in practice?
The good news is that this should mean charities will need to do very little to demonstrate their FATCA status within the UK. We understand that the UK banks and FFIs will generally rely on the information already available to verify that an organisation is a charity. In most cases this will be Charity Commission, Office of the Scottish Charity Regulator or HMRC (for charitable tax purposes) registration numbers. However, there may be instances where charities will be required by banks and FFIs to self-certify their FATCA status. We understand that self-certification is likely to be made on a form similar to the draft IRS W-8BEN-E form that was recently issued by the IRS (this has not yet been issued in its final form).
However, things may not be quite so straightforward for charities working internationally….
Charities which send or receive money internationally may find it more difficult to prove their status under FATCA to non-UK banks/FFIs unfamiliar with UK charity requirements. This is because Charity Commission, OSCR or HMRC registration numbers are likely to mean little outside the UK. The US Regulations do provide some guidance on what information financial institutions abroad – the ‘withholding agents’ – will need in order to verify whether an entity is a charity and, therefore, a Deemed Compliant Financial Institution. In most cases, it is understood that charities should be able to verify their status to non-UK banks/FFIs by supplying a W-8BEN-E form containing a UK address and showing that the UK-US IGA recognises them as a ‘Deemed Compliant Financial Institution’.
However, how this verification process will work in practice remains to be seen and this is an area where further clarification is needed. It will be important that charities which receive income from US sources are able to avoid situations where FATCA withholding is applied by a non-UK bank/FFI which is unable to verify the charity’s status to their satisfaction. Therefore, it looks likely that FATCA could add another layer of administrative complexity for charities working internationally to contend with.
HMRC is currently finalising guidance which will confirm the details of how FATCA will operate in the UK. In the meantime, international charities should look into how FATCA will be applied in the countries in which they operate (i.e. whether there is or will be an IGA between the US and that country). In the absence of any country specific IGA, the IRS Regulations will apply.
It might be helpful to discuss banking arrangements with partners abroad to find out what, if any, additional information will be required to prove charitable status to banks in that country.
In countries where no IGA is signed, charities who receive US sourced income should also ascertain the FATCA status of any financial institutions or banks that they deal with in those territories in case withholding could apply on funds transferred from the US to that bank if it is a non-compliant financial institution.
Charity Finance Group will continue to engage with HMRC and the British Bankers’ Association to monitor developments and will update charities once there is clarity over the remaining outstanding issues.
Eva Abeles, Senior Solicitor (Charities), IBB Solicitors & Melora Jezierska, Policy & Public Affairs Officer, Charity Finance Group
A briefing on FATCA is available on the CFG website.