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In a flurry of acronyms, FATCA, CRS and LEI pile costs and regulations on trustees

15/05/2017 Lynne Rowland, tax partner Kingston Smith,

In his Presidential campaign Donald Trump vowed to make a bonfire of red tape. In the days following taking office the new President was intensively lobbied to repeal the Foreign Account Tax Compliant Act (FATCA).

Introduced by Barack Obama in 2010, FATCA was seen to be ineffective, unpopular and costly. In common with so many before him President Trump has not behaved like candidate Trump. Whilst he is delivering on some promises, there has been silence on the future of FATCA. This means that FATCA is still enshrined in UK tax law.

Globalization and increasing regulation are transforming the global tax framework. Surprise, surprise these challenges mean additional costs for trustees and no obvious increase in tax revenues.

But hot on the heels of FATCA, the OECD introduced the Common Reporting Standard (CRS) as a global reporting standard.

While trustees have yet to get to grips with FATCA and CRS, they are now being bombarded with requests to obtain a Legal Entity Identifier (LEI) - which will enable their investment managers to continue to trade on the Stock Exchange from early 2018.

Endorsed by the G20, the London Stock Exchange (LSE) requires investors who are deemed to be legal entities to obtain a LEI number. A legal entity for these purposes includes trusts, companies, pension funds (but not self-invested personal pensions), charities and unincorporated bodies that are parties to financial transactions.

Where investment portfolios are held within trusts, the trustees will be obliged to obtain an LEI. The LSE will charge an initial allocation cost of £115 + VAT and an annual maintenance cost of £70 + VAT per LEI. Some stockbrokers will obtain the LEI on behalf of their clients, sometimes with an administration fee charged on top of the registration cost.

Since the introduction of FATCA, CRS and now LEI the compliance costs of having a trust have gone up significantly. These procedures do not add any value to a trust or provide any additional comfort to the trustees. They are simply another spool of red tape that has to be unwound on an annual basis, eating into the returns to be distributed to beneficiaries.

It is easy to understand the frustration felt by trustees at the ever-increasing rules and the bump in professional fees that this complexity involves. The question may consequently arise whether the continued existence of some of these trusts can any longer be merited. Ironically, the legal costs of termination often persuade the trustees to keep going in the hope that regulation will one day decrease…

In the meantime, trustees can only hope that President Trump will follow through on his promise to cut red tape and that the US will stop using its financial muscle to bully non-US financial institutions to serve as tax collectors for the IRS.

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