Globalisation made us wealthy and more connected than ever before, but it came with a price tag.
Tax evasion is rife across the globe, and tax havens abound from Hong Kong to the Cayman Islands. Governments are there to put a stop to it.
Tax bodies like the IRS and HMRC have stringent reporting requirements with which businesses and financial institutions must comply. Legislation has been passed to ensure that banks provide information on all financial accounts held by customers.
This is called tax compliance, and it's the bane of every businessperson. Indeed, it's the bane of the general public.
So, how do you ensure that your global business supports international transactions while being tax compliant? Fear not. We've some great advice. This article will help you understand why foreign financial institutions report on non-residents with accounts held in their bank, and what specific UK government regulation will be required of you.
This article at a glance
International tax compliance refers to compliance with the tax laws of foreign nations. Financial institutions are obligated to report to the tax body of their country and identify and verify financial accounts held by non-residents with government departments. By paying taxes on time and accurately, you demonstrate tax compliance with a country’s laws. If you ever transfer money into the foreign accounts of financial institutions, you must view compliance as essential.
What is international tax compliance?
The term international tax law, or international taxation, stems from both domestic legislation and international agreements.
Simply put, it means taxation in cross-border transactions by the tax body of the foreign countries in question – whether it's the Internal Revenue Service in the USA or HMRC in the UK. Financial institutions are obliged to report information on every person who holds an account with the bank in question.
Imagine paying tax on corporate and personal levels, and multiplying that with the different foreign countries in which you plan to transact.
Cross-border tax matters can be complex because it involves two or more foreign countries. Being in control of accounting and reporting obligations in both your home country and overseas is tedious.
This is why most international businesses, particularly multinational corporations, outsource their tax obligations to a third-party organisation that specialises in all tax matters. Most especially, tax compliance.
If you don’t plan to engage a third party, the only choice you have is to hire an experienced accountant or take matters into your own hands.
What are the international tax compliance regulations?
Different countries have varying sets of tax regulations to curb tax evasion. It’s important for exporters who sell in foreign nations and deal with foreign financial institutions to ensure that they adhere to international regulations and are up to speed with any regulatory changes.
Compliance regulations require financial institutions to identify foreign account holders. Exchange information with their home governments, whether it's the Internal Revenue Service in the USA to HMRC. It's to ensure that people with foreign financial accounts pay their taxes.
International Tax Compliance (Amendment) Regulations 2017
Let’s take the UK as an example.
The International Tax Compliance Regulations provide a legal basis for reporting obligations for UK financial institutions. From 15 April 2015 – and later amended on 17 May 2017 – the regulations made it a must for financial institutions to identify accounts maintained for account holders who are:
- Taxpayers in the EU or in jurisdictions that the UK has agreed to automatically exchange tax information (e.g. the USA and FATCA)
- Taxpayers who are required to collect and report tax information to the HMRC
This regulation concerns:
- Common Reporting Standard (CRS)
- UK/US Intergovernmental Agreement on FATCA (UK/US IGA)
- EU Directive on Administrative Co-operation (DAC)
Essentially, foreign financial institutions are obligated to report information on foreign financial account holders with a connection to the UK.
Foreign financial institutions are legally obliged to provide this information to HMRC. They must also report on pre-existing financial accounts, no matter whether or not that particular account is maintained in that year.
HMRC usually does not extend reporting deadlines, so be sure you are aware of the deadline to submit returns. For instance, the deadline for the year ending on 31 December 2021 is 31 May 2022.
You’ll be liable to various penalties including a penalty between £300 and £3,000, depending on which compliance regulation you fail to comply with. For detailed information on the penalties, hop over to this guide.
So, if you have accounts held in a foreign bank, make sure you respect this legislation and submit a correct tax return. Undoubtedly, that bank will report information on you anyway.
Intergovernmental Agreements (IGA)
For international businesspeople planning to handle tax without engaging a third party, the following is a reason to smile: There are government agreements (IGA) in place to help international companies lessen their load when dealing with agreements like FATCA.
Before transacting with the foreign financial institution of a particular country, search for available agreements or treaties that your home country may have with your desired country.
Take Singapore for instance.
Singapore has entered an IGA with the U.S. to implement FATCA obligations for financial institutions based in Singapore and has been reporting financial account information to the U.S since 2015. FATCA is a US federal law that requires foreign financial institutions to report on bank accounts held by individuals connected to the USA.
For Reporting Singapore Financial Institutions (SGFI), you can register for FATCA via IRAS (Singapore’s Inland Revenue Authority) and report all information to IRAS as part of an annual tax return. This makes it easier for Singaporean businesspeople that have cross border-trade relations with the U.S.
Simplify tax compliance for your global business
Regulatory change is complex. Jurisdictions have different laws you must keep on top of. Sometimes, it’s difficult to make sure you meet all laws and regulations in a timely and accurate way. Knowing taxation laws and being familiar with agreements your home country has with other countries can help your company stay tax compliant.
Apart from tax compliance, knowing how to avoid high forex exchange rates can also increase your company’s profits. A traditional bank will offer account holders high exchange rates and slow and sluggish payments.
Silverbird changes everything. Multi-currency account holders enjoy competitive forex rates. Hold, transfer and exchange foreign currencies online simply by using a single multi-currency account. Make and receive payments in over 30 currencies without fuss. Send payments to foreign financial accounts swiftly, at the click of a button.
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Author: Silverbird Content Team
Illustration: Kate Faldina