What charities need to know about the Foreign Account Tax Compliance Act

Eva Abeles and Melora Jezierska explain the implications for the sector in this country of a new piece of tax legislation from the United States

Internal Revenue Service
Internal Revenue Service

It is fair to say that the Foreign Account Tax Compliance Act has not been on the charity world’s radar because it is, after all, a piece of US tax legislation. However, because Fatca imposes additional reporting and compliance burdens on all banks and financial institutions, it will affect how these entities interact with charities.

What is Fatca?

Fatca is extra-territorial US legislation that seeks to combat US tax evasion in a rather heavy-handed manner. It requires foreign financial institutions – banks, for example – to identify and report account holders with an American connection to the US Internal Revenue Service. Any FFI deemed to be in violation of the rules will have a 30 per cent withholding tax imposed on all its US source income, which effectively forces banks to comply because of the global nature of the financial economy.

Why is Fatca relevant to UK charities?

From 1 January 2014, FFIs will have a legal obligation to identify whether an account-holding entity is a US 'person' and whether they need to be reported under Fatca rules. It is still unclear precisely how each FFI will apply the rules in practice, but it is understood that banks and investment institutions will require additional information from all charities – even those with no US connection – that open accounts or invest assets to work out whether reporting is necessary. In most cases it's likely that this will mean some additional questions to the bank’s existing 'know your customer' and anti-money laundering questionnaire for prospective account holders.  

It is important to remember that Fatca is not intended to catch charities, which are exempt entities under the rules and thus subject to less demanding requirements. However, the onus is on FFIs to ensure that a charity is bona fide and not a tax-avoidance vehicle; as a result, they are almost certain to require a Global Intermediary Identification Number from charities too. A GIIN is a globally recognised identification number issued by the IRS to confirm an entity’s Fatca status. Requiring an entity to have a GIIN is a simple way for an FFI to ensure it meets its obligations. 

Unfortunately, these changes will add to the administrative burden on charities, but HM Revenue & Customs has put substantial effort into minimising the impact of Fatca on charities, and the rules represent a significant improvement on the original proposals, which were extremely complex and onerous. After several years of listening to stakeholders and representing their interests to the IRS, HMRC negotiated the first inter-governmental agreement with the US to ensure the rules that apply in the UK are less arduous for UK institutions, including charities. Many other countries are following suit.

When and how can charities register for a GIIN?

We understand that organisations can register for a GIIN on an IRS website. Charities will need to fill out an online form indicating their Fatca status and some basic information about themselves. The process is expected to take approximately 10 to 15 minutes and successful registrations should receive a GIIN within 24 hours. Once registered, a charity will be added to a searchable Fatca database. At present, the IRS has not indicated that it will charge entities a registration fee.

Charities with branches should be eligible for group registration: one charity registers as the lead FFI and the remaining charities in the group can then be registered by any person who has access to the account.  However, a trading subsidiary of a charity is not covered by the Fatca charity exemption and cannot be registered as part of a charity’s group.

Each GIIN will have identifying numbers to indicate the entity’s Fatca status (for example, if it is an exempt charity), its country and whether the country has an IGA in place. For group registrations, part of the GIIN will also indicate the group element.

Next steps

HMRC is expected to publish specific guidance for charities before the IRS Fatca registration website goes live in July 2013, which should include details of how charities can register for a GIIN.

Eva Abeles is a senior solicitor (charities) at IBB Solicitors and Melora Jezierska is policy and  public affairs officer at the Charity Finance Group

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