Over the last few years, the tax landscape for financial institutions has become increasingly complex, and the new national and cross-border legislation have resulted in additional requirements for banks, funds and fund managers. But have you fully embedded the changes and do you have the right processes in place to demonstrate compliance?

The scale of the change is the issue

Looking at the regulatory updates collectively, they aim to improve the quality of data and promote greater transparency. On an individual level, the changes are fairly manageable to implement - the issue is the sheer volume and cumulative scale of the updates. Most firms simply do not have the necessary infrastructure in place to implement the changes effectively, and their data collection processes may be complicated due to legacy systems that do not work seamlessly with other systems.

We continue to see the following issues impacting banks:

FATCA/CRS (Foreign Account Tax Compliance Act/Common Reporting Standard) and UK reporting

Financial Institutions are required to conduct due diligence on their customers, monitor accounts for changes in circumstance and report accordingly to HM Revenue & Customs (HMRC). Depending on the type of firm, and its operations, it may also be subject to UK reporting requirements such as the Bank, Building Society Interest (BBSI), Other Interest (OI) and ISA returns.

Key challenges: Reporting requirements are based on entity classifications and firms may be unclear on which returns they are expected to complete. Existing processes and procedures may not be robust enough, particularly around data gathering and cleansing.

Qualified Intermediary (QI) Agreement

All Qualified Intermediaries must appoint a Responsible Officer to maintain compliance related processes and procedures. This should be reviewed every three years by an independent internal team or third party.

Key challenges: Many firms may struggle to design, implement and test an appropriate compliance framework, and additional people training may be needed.

S871m and QDD status

The US introduced a tax under Section 871m of the US Internal Revenue Code to reduce arbitrage by preventing non-US persons from holding derivative instruments that are similar to US securities, but subject to lower withholding tax (WHT). The tax applies to US-source dividends and dividend-like payments to non-US persons.

Key challenges: Qualified Derivatives Dealers (QDDs) must establish how this impacts the QI’s obligations and collect the necessary reporting information accordingly.

Preventing tax leakage

Tax leakage can be caused by withholding tax (WHT), transaction tax, stamp duties or capital gains tax (CGT), amongst others, and it can have a significant impact on a firm’s financial status and investments. But depending on the firm’s financial position, some of these taxes can be reclaimed.

Banks trading in underlying securities or derivatives are particularly affected by transaction taxes and stamp duty, which can affect the trading positions available to its clients.

Key challenges: There are a number of tax exemptions available, depending on location or various political treaties, such as the EU Treaty governing the free movement of capital. Firms may struggle to determine which ones are appropriate and relevant to them.

Corporate Criminal Offence (CCO)

Under the Criminal Finances Act, firms must demonstrate that they have implemented reasonable and preventative procedures against facilitation offences.

Key challenges: A robust risk assessment should be undertaken and suitable procedures put in place to mitigate the identified risks.  Further training may be needed for senior management and core personnel.


DAC6 imposes mandatory reporting requirements for intermediaries and taxpayers on some cross-border arrangements, or which specifically intend to create a tax advantage.

Key challenges: It is not always clear if an entity should be considered an intermediary or taxpayer. Firms should undertake an impact assessment and set up appropriate monitoring processes.

Economic substance requirements

As part of the OECD Base Erosion and Profit Shifting (BEPS) initiative, some countries introduced local domestic laws that require entities to have sufficient levels of economic substance.

Key challenges: Firms are expected to review their existing substance levels to check if they are sufficient. This requires a review of existing organisational structures and an impact assessment across all relevant jurisdictions. In some instances, substance requirements will need to be strengthened.

Funds and fund managers face additional challenges

Some additional tax challenges could apply to funds and fund managers, such as:

Offshore fund reporting

Managers of offshore collective investment schemes can apply for their fund to have Reporting Fund status with HMRC. Reporting Funds need to report details of income attributed to their UK resident investors to HMRC. 

Key challenges: Firms seeking reporting fund status must formally apply and submit annual income reports to investors and HMRC.

Investing in UK property

CGT applies to the direct and indirect disposal of UK commercial property by non-residents. In light of this, fund managers should consider their fund’s structure to understand the potential CGT and the options available to retain returns for investors.

Key challenges: Some exemptions are available and firms should consider if any can be applied to reduce tax payable for investors. Firms should conduct a risk assessment to understand the effect of these rules on their existing structures.

What to do now

Looking at the changes collectively, firms should review their existing processes and risk management frameworks to make sure they are compliant with the above. Firms should also carefully review the changes to identify any potential exemptions for the organisation and its investors. Where necessary, firms should undertake robust risk and impact assessments, with ongoing monitoring processes in the long term.

Data management processes should also be reviewed, assessing data collection and cleansing - paying particular attention to the required data format for returns and reporting.

Contact us for more information on these changes and how we can help.

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