The US and five European governments including the UK have agreed to share information on US account holders in an effort to crack down on offshore tax evasion.
The tax agreement takes the countries a step closer towards complying with the US Foreign Account Tax Compliance Act (FATCA) - part of US legislation that aims to combat tax evasion by US tax residents using foreign accounts.
FATCA requires Americans to disclose overseas holdings directly to the US Internal Revenue Service. It also requires foreign financial institutions to tell the IRS about offshore accounts controlled by Americans if assets in them are worth more than $50,000 (£32,000).
The IRS is on track to start penalising foreign banks in 2014 for failing to comply with FATCA, pressuring them and their home country governments to work out solutions, Reuters reported.
Richard Mannion, national tax director at Smith & Williamson, said that accountants will need to check if any of their clients have US connections - for example, if they are a settlor of a trust or a beneficiary.
“There must be loads of people who don’t realise that they are affected by [FATCA],” Mannion said.
The “model inter-governmental agreement”, signed by the US and European governments in July includes:
- The legal barriers to compliance, such as those related to data protection, have been addressed
- Withholding tax will not be imposed on income received by UK financial institutions
- UK financial institutions will not be required to withhold tax on payments they make
- The due diligence requirements are more closely aligned to the requirements under the existing anti-money laundering rules
- There is a wider scope of institutions and products effectively exempt from the FATCA requirements
- HMRC will receive additional information from the US IRS to enhance its compliance activities