Global Tax Trends

US and UK tax regimes

Originally published in the November/December 2012 issue

Now that the pomp and fanfare of the US presidential election is behind us, it is an ideal time to assess the impact of potential changes to tax laws in both the United States and United Kingdom. The ease of the re-election of President Barack Obama may suggest a mandate from the American people rather than the closely contested race the polls and general press had indicated pre-election. However, the oncoming United States’ fiscal cliff – the slated increased tax rates in the US from the result of the ending of the Bush tax cuts combined with across-the-board spending cuts under the Budget Control Act of 2011 – set for early 2013 provides a challenge for the re-elected Administration and for the US economy’s fragile state.

Furthermore, the navigation of the trans-Atlantic position is complicated by the ongoing development of co-operation between the Internal Revenue Service (“IRS”), Her Majesty’s Revenue and Customs (”HMRC”) and the tax authorities of other prominent global jurisdictions. As the leading example, the reciprocity between the US and the UK is clearly evidenced through information sharing within the tax treaty network, withholding tax regimes, general tax return compliance, tax scheme disclosures, and whistleblower programmes. Individuals and business organisations must tread carefully to create the appropriate balance across multiple tax jurisdictions.

Tax rates
One of the central themes of the election in the United States revolved around the presidential candidates’ approach to taxation. The electorate heavily scrutinised the candidates’ positions with the backdrop of risk that US political deadlock may allow the Obama-extended Bush tax cuts to expire at the end of the current year, thus returning the top US federal personal tax rate to 39.6%. When compared to the Chancellor’s announcement that the top UK personal tax rate will fall from 50% to 45%, it would appear to be the beginning of harmonisation of the top personal tax rates between the US and the UK. Further evidence to support this notion exists with President Obama’s continued support that higher earners will need to contribute more in order for the US to manage the current precarious economic environment, including the additional Medicare tax.

From a business tax perspective, the general consensus indicates a trend towards lower corporate tax rates. The UK has already made great strides to improve its corporate tax regime, delivering a clear signal that it is open for business by lowering its corporate tax rates and introducing preferential initiatives such as the patent box regime. On the other side of the Atlantic, the US does not appear to reflect as consistent a message, but there is undoubtedly a high degree of bipartisan consensus amongst key tax legislators that corporate tax rates should move downward. Various US legislative proposals have been suggested, but due to the polarised political climate and the election cycle, no action has yet been affirmed. As a result, the US corporate tax rate (35%) remains one of the highest in the world.

Yet another twist arrived from the prolonged introduction of the Foreign Account Tax Compliance Act (“FATCA”), the implementation timelines of which were recently changed. The goal of FATCA is to identify US persons with investments outside the United States. The first FATCA wave was set to pass in 2013 with the expectation for Foreign Financial Institutions (“FFIs”) to enter into agreements with the IRS by 30 June 2013. FFIs would then have been required to report on certain withholdable payments commencing with the year beginning 1 January 2014. Given developments discussed below as well the financial service industry’s general need for more time overall, the timeline has been relaxed for several key milestone dates. This effectively aligns the timelines for FFIs governed under Intergovernmental Agreements (“IGAs”), those governed under the forthcoming finalised regulations and US-based withholding agents.

Generally, the only change in the timeline to the required application of withholding pushed back the obligation to withhold on gross proceeds to 1 January 2017 (previously 1 January 2015). Entities and branches operating under the UK IGA will not be required to withhold although they will need to identify specific instances where withholding must be done by others. Entities and branches operating in non-IGA counties will however be required to withhold. Finally, participating FFIs will be required to file information reports with respect to the 2013 and 2014 calendar years no later than 31 March 2015 (previously 30 September 2014). It is important to note that these key deadlines are relevant to those FFIs required to follow the draft regulations released by the US while those governed by IGAs will be subject to timelines established by their home jurisdiction.

In the UK we are observing the process of collaboration between the IRS and HMRC unfold in the form of an IGA, which requires UK FFIs and UK branches to operate subject to local law with respect to FATCA. This step underlines the intent for these two jurisdictions to work together to share information and encourage tax compliance and enforcement. The signing of the IGA marked a milestone event as the UK was the first jurisdiction to agree this landmark legislation in principle with the US and will be heavily scrutinised as further jurisdictions enter into their own agreements.

Broadly, there are two forms of IGAs in circulation consisting of reciprocal and non-reciprocal agreements. The difference consists of sharing information bilaterally instead of one-sided submitting of information to the IRS. Perhaps not surprisingly, the UK has opted for the reciprocal option and one of the themes that is underplayed is HMRC’s future unprecedented access to information on UK-resident taxpayers who invest in the United States. In conjunction with the publication of the draft US-UK IGA, there are a number of questions that arise in respect to the original articulation of FATCA and the correlation with terms and concepts found in the IGA. For example, the definition of an investment entity within the IGA appears to include investment managers who will therefore need to report on their US account holders. The general expectation is that draft guidance and draft legislation will be available from mid-December.

The US Department of Treasury (“Treasury”) recently announced that it is engaged in active discussions with more than 50 countries or jurisdictions referencing the completed principle agreement with the UK. Treasury furthermore announced that it had nearly finalised and hoped to conclude negotiations by the end of 2012 with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands and Norway. Treasury also indicated that it is holding talks to conclude IGAs with Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Lichtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore and Sweden with the expectation that several of these jurisdictions will conclude negotiations by the end of 2012. Finally, Treasury indicated it is working to explore options for IGAs with Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia and South Africa.

As we look forward to 2013, this will be a year of change and adaptation for many individuals and organisations. Actual and potential modifications to the US and UK personal rates with the magnified pressure created by the US fiscal cliff will create an adjustment period for individual tax planning. As a post-election year in the US, 2013 will also create an interesting horizon for corporate tax planning, as US legislators consider structural corporate tax reforms while the UK continues its ongoing reforms toward a highly favourable corporate tax policy. Finally, the continued evolution between the tax authorities on FATCA reciprocity may make for interesting template for future governmental collaboration.