Below is note sent to clients and other interested parties
by Carey Olsen, the offshore law firm, concerning recent developments
concerning FATCA-based reporting and intergovernmental agreements as they
affect Guernsey. This publication is grateful
to Carey Olsen for permission to reproduce this note. The article was written by Laila Arstall (senior associate).

On Friday, 15 March 2013 Guernsey’s chief minister, deputy
Peter Harwood, announced that Guernsey was in the process of finalising a draft
intergovernmental agreement with the UK to cover a "tax package" of
three initiatives (UK IGA). The timing of the announcement comes as Guernsey
moves closer to concluding an agreement with the US
(US IGA) regarding the implementation in Guernsey
of the US Foreign Account Tax Compliance Act.

The announcement by the chief minister also explained that
finalised terms and details of the UK IGA will be subject to consultation with
industry on implementation issues and that the intention is to publish both the
UK IGA and the US IGA concurrently “To provide for a streamlined consultation and
implementation process”.

UK IGA

Background

With the backdrop of the international financial crisis and
worsening public sector finances, the G8 and G20 economies have signalled a
growing international consensus towards the use of multi-jurisdictional
reporting systems for the automatic exchange of information. One of the main
initiatives in this field is the US reporting regime under FATCA and its
reliance on non-US financial institutions to report to the US Internal Revenue
Service detailed information on certain US account holders and
payments made to, and assets held in, certain US accounts.

In October 2012, Guernsey announced its intention to comply
with FATCA by entering into an IGA with the US. However, to do so would require
prior authorisation from the Crown because international agreements are
normally the preserve of sovereign states. In common with the other Crown
Dependencies of Jersey and the Isle of Man, Guernsey is not a sovereign state,
and would therefore need to secure the approval of the UK Government in order
to conclude an IGA with the US.
It is in the context of seeking the UK Government’s approval to conclude the US
IGA that the UK IGA was tabled.

Under the UK’s
presidency of the G8 during 2013, Prime Minister David Cameron has said that he
will prioritise trade, tax and transparency to encourage global economic
growth. It is anticipated that entering into the UK IGA will therefore
facilitate the entering into of the US IGA in time for Guernsey’s
financial institutions to meet obligations under FATCA. This in turn will
enable Guernsey’s finance industry to continue to be open to the US market.

Tax package

The announcement indicates that the agreement will cover a
proposed tax package that will reinforce Guernsey’s
commitment to tax transparency and its status as a leading and respected
mainstream international financial centre.

The proposed package is to include:

-- An agreement on reporting of tax information along FATCA
principles through an IGA, with alternative arrangements for UK resident but non-domiciled
individuals;

-- An agreement to negotiate revisions to the existing
Double Taxation Agreement; and an agreement on a disclosure facility.

UK IGA agreement relating to cooperation in tax
matters

The announcement states that the UK IGA will include “an
agreement in principle to enhanced reporting of tax information along FATCA
principles through an intergovernmental agreement, with alternative reporting
arrangements for non-domiciled UK
tax residents.”

This suggests that the UK IGA will follow broadly the same information reporting
requirements as that expected to be signed up by Guernsey with the US for
the purposes of implementing FATCA, prompting some commentators to refer to the
UK IGA initiative under the soubriquet "Son of FATCA". Details of the proposed
UK IGA are not yet available, however we may get a feel of what it may
contain by looking at the elements of the UK-US IGA signed on 12 September 2012
to implement FATCA in the UK.
We could also be guided by the approach of the Memorandum of Understanding
entered into between the UK
and the Isle of Man on Cooperation in Tax Matters,
which was signed in February 2013.

Possible Impact of
the UK IGA on Guernsey financial institutions

Based on the UK-US IGA and the UK-IoM Agreement, and given
the growing international consensus towards multi-jurisdictional deals on
automatic exchange of information, the obligation to report under the UK IGA
will fall on Guernsey’s financial service
providers. The financial institutions are likely to have to report detailed
information on accounts, property and financial holdings (reportable
accounts) in which those who fall within a defined or specified class have an
interest. The specified class is likely to include individuals as well as
companies, trusts, partnerships and foundations, who are resident in the UK for tax
purposes.

We know that the IGA will require information to be reported
automatically and exchanged with the UK on a regular basis. This may be
on an annual basis, possibly calendar-based or to coincide with the start of
the UK
tax year. At this stage, it is not known what information is to be reported.
However, based on the information to be reported to the IRS under Article 2 of
the UK-US IGA to implement FATCA in the UK, the requirements could include:

-- Name, address, and possibly other identifier such as
national insurance number or date of birth of the member of the specified
class.

-- Account or customer reference number.

-- Name and identification reference of the reporting
financial institution.

-- Account balance or value (including in the case of
insurance or annuity contracts, the cash value or surrender value) as at the
end of the reporting period.

-- For custodial accounts: total gross interest, total gross
dividends and total gross other income paid or credited during the reporting
period, as well as total gross proceeds from the sale or redemption of property
paid or credited to the account.

-- For depository accounts: the total gross interest paid or
credited during the reporting period.

-- Any other accounts, total gross paid or credited.

If the terms of the UK IGA are reciprocal (the announcement
is silent on this point), then there would be similar reporting obligations on
UK based financial institutions to report on persons who are resident in
Guernsey for tax purposes and hold interests in relevant property through UK-based
financial institutions. It remains to be seen whether the UK IGA is reciprocal
in nature and if so, whether equivalent information is to be exchanged on the
same basis.

Alternative reporting
arrangements for non-doms

Individuals who are tax resident in the UK are
generally taxable on worldwide income and gains on an arising basis. However,
those UK residents who are
not also domiciled in the UK can, where available, by election and payment of the appropriate
remittance basis charge, claim to be taxed in the UK on a remittance basis for the
relevant period. As a result, their UK
tax liability is limited to any UK
source income and gains, and any worldwide income and gains that are remitted
to the UK
during the relevant period.

No details have yet been released which would indicate how
the alternative reporting arrangements for non-doms will work. However, describing the
proposals relating to non-doms, Guernsey’s
Treasury & Resources Minister, Deputy Gavin St Pier, said:

“Securing a proportionate and workable non-dom reporting
regime is clearly pivotal. The arrangements we have negotiated are non-intrusive
and respect non-doms’ different status under UK tax laws. We are confident that
they will secure Guernsey’s attractiveness for
non-dom business, not least as they were devised in close consultation with
industry groups and practitioners.”

It is hoped that the range of reporting and level of details
required in order to comply with the UK IGA in respect of non-doms, will indeed
reflect the characteristics of the regime highlighted above. Precedent for an
alternative treatment of non-doms can be drawn from the approach adopted by
both the UK and Guernsey to reporting for the purposes of the EU Savings
Directive, which is based on achieving effective taxation in the
jurisdiction of residence.

However, in the case of the EUSD, the reporting regime
currently extends only to payments of interest (as defined under the relevant
domestic law implementing the EUSD provisions), whereas reporting to the IRS to
comply with FATCA includes details on balances and proceeds of sales or
redemptions. Whether the information required to be reported in respect of
non-doms under the alternative regime is indeed proportionate, workable, and
non-intrusive in practice remains to be seen.

UK-Guernsey Double
Taxation Agreement

The UK-Guernsey Double Taxation Agreement 1952 followed the
general pattern of double tax arrangements made by the UK at that
time, but was subsequently amended in 1994 and again in 2009. The third limb of
the tax package indicates a commitment to negotiate further revisions to the
existing Double Taxation Agreement.

From Guernsey’s
perspective, this is likely to be informed by the experience gained recently when
negotiating a network of international taxation agreements. As at 15 February
2013, Guernsey has signed partial DTAs with 11
countries, dealing with such issues as personal tax matters, shipping and
aircraft and/or mutual agreement procedures. Comprehensive DTAs dating from the
1950s (with the UK and Jersey) have been joined more recently by four new comprehensive DTAs with Isle of Man, Malta,
Singapore and Qatar.
Negotiations over comprehensive DTAs have been completed with each of Hong Kong
and Luxembourg.

Furthermore, negotiations over a comprehensive DTA are
currently progressing, or are anticipated to commence this year with Bahrain, Cyprus,
Liechtenstein, Monaco, Seychelles
and the United Arab Emirates.

Disclosure facility

No details have emerged as yet on the third limb of the tax
package. However, the Treasury & Resources Minister commented that this
will be part of a wider agreement between the UK
and Guernsey. Deputy Gavin St Pier is quoted
in the announcement as saying:

“Given our long-standing commitment to transparency,
including our extensive network of tax information exchange agreements and the
fact that we already exchange information automatically under the EU Savings
Directive, we don’t expect the facility to be used much, if at all.”

The disclosure facility signed up in February between the UK and Isle of Man
under the UK-IoM Agreement could provide us with a "heads-up" of what this may
entail. The Isle of Man disclosure facility
runs from 6 April 2013 to 30 September 2016. It allows outstanding UK tax liabilities
to be settled in advance of information being automatically exchanged. In
addition to providing a financial commitment to pay unpaid tax due, under the
facility penalties range from 10-40 per cent of unpaid UK tax.

The facility is open to accountholders who, at any time
during the period from 6 April 1999 (in the case of individuals) or 1 April
1999 (in the case of legal persons) (the cut-off day) to 31 December 2013,
were resident in the UK for UK tax purposes and had a beneficial interest in relevant property in the Isle of Man (widely defined and includes accounts, annuity
contracts, trusts, partnerships, companies etc). In return, HMRC will not seek
unpaid tax or penalties in respect of the period prior to the cut off day. The
disclosure facility is not open to accountholders under an ongoing
investigation by HMRC as at 6 April 2013. The UK-IoM Agreement requires
financial intermediaries in the Isle of Man to
contact their clients and make them aware of the facility before the end of
2013, and again during the six months prior to the end of the facility period
ending on 30 September 2016.

US IGA For FATCA Compliance

In common with financial centres worldwide, Guernsey
recognised that the reporting regime developed by the US under the FATCA initiative was a game-changer in the field of automatic exchange of information between
international taxing and regulatory authorities. The initiative has been
described as a "lever and a model" for countries who wish to collate equivalent
information. The volume and form of information required by the US to comply
with FATCA is likely to become part of the international standard and will have
a substantial impact of the provision of financial services globally.

On 9 October 2012, the Chief Minister of Guernsey announced
the intention to negotiate an IGA with the US which is likely to be similar in
form to that signed between the UK and the US on 12 September 2012, due be
brought into force in the UK in this year’s Finance Bill.

Latest position

The latest announcement issued by the States of Guernsey
confirms that Guernsey is moving towards concluding an IGA with the US on
FATCA, presumably under an extension of the existing Letter of Entrustment
issued by the UK Government to the States of Guernsey. This is to be welcomed,
as once the US IGA is signed up it will need to be ratified by the island’s parliament,
the States of Deliberation. In Guernsey this would be by Ordinance to bring the
IGA into effect as part of Guernsey’s domestic
law.

Whilst we wait for publication of the terms of the proposed
UK IGA and the US IGA, what can financial institutions in Guernsey
do now to meet future reporting obligations? Many institutions are already well
advanced with their preparation for FATCA compliance. Here is a checklist of suggestions:

Review information systems to ensure specific types of data
can be retrieved and processed in the format required to comply with
obligations under the IGAs once known.

Review information held and identify areas that require
updating and/or completion (remediation).

Review terms of business and client agreements relating to
the requesting of information from existing clients and related parties and the
disclosure of that information to third parties.

Review terms governing the structure and constituent entities
currently administered or managed by the financial institution in relation to
requests for and disclosure of information.

Review pro forma terms of business, letters of engagement,
administration service and management agreements to ensure the financial
institution is able to request information, hold it in a format which can be
accessed by affiliated service providers within the same group (if appropriate)
and disclose it to relevant authorities.

Review consent clauses, exonerations, indemnities and
termination provisions regarding the need to receive accurate, full and
up-to-date information for the purposes of processing that information in
compliance with tax and regulatory obligations imposed by relevant authorities.

In order to meet the forthcoming challenges, financial
institutions should aim to be in a position to call for information at
appropriate intervals, on an ongoing basis from relevant parties, who are
likely to include persons not party to the contractual arrangements entered
between the institution and its client or customer. In practice, and subject to
the terms of the IGAs, this is likely to involve, for example, requesting a
statement of tax residence from relevant parties and in the case of non-doms, this should include confirmation of their tax status.

When making a payment to a non-dom under the alternative
reporting arrangements, it might be helpful for a financial institution to get
prior confirmation from the recipient’s tax advisor that the payment does not
constitute a remittance. In the case of the US IGA, the information required
may have to be fairly lengthy in order to check for US indicia. Updated
information and confirmations should be provided annually in time for the start
of each new reporting period.

Concluding comments

In January 2011 the International Monetary Fund released its
report on Guernsey as part of its financial stability assessment programme. The
IMF concluded that Guernsey has met or exceeded
the internationally accepted regulatory standards as endorsed by the G20. In
July 2011 Guernsey moved towards automatic
exchange of information under the EUSD. As at February 2013, Guernsey
had signed up a total of 40 Tax Information Exchange Agreements - including 16
with the governments of G20 members.

Whilst the scope of agreeing with either the UK- or the US-specific provisions that are in Guernsey’s interest may be limited, it is hoped
that the IGAs to be concluded with both the UK and the US will include measures
that enable financial institutions in Guernsey to meet UK and US expectations
for the reporting of information in an efficient and practical manner, bearing
in mind the importance of maintaining proportionality and respect for the
legitimate concerns of individuals to maintain confidentiality over their private affairs.