As countries around the globe begin to apply laws allowing for the automatic exchange of information, Eric Boes examines the preparatory steps that must be taken.
Cross border tax fraud and tax evasion by High Net Wealth Individuals (HNWI) are serious problems for many jurisdictions. For many years exchange of information between countries has been solely upon request. In practise this procedure is not efficiently working as it requires foreseeable relevance, thus ‘fishing’ for information is not allowed. But soon countries all over the world will apply Automatic Exchange of Information (AEOI) to combat tax evasion.
FATCA and the Path to AEOI
In 2014 the USA introduced FATCA to combat tax evasion by US persons. Since then the US Government has concluded so called ‘Inter-Governmental Agreements’ (IGAs) with more than 100 jurisdictions. FATCA and the IGAs require domestic financial institutions to identify the US persons amongst the financial accounts they maintain. Based on a look-through approach this identification includes US persons who are the controlling persons in a Passive Non-Financial Foreign Entity’, to combat tax evasion by the use of foreign passive investment vehicles that hold such financial accounts.
The financial institutions have to report these US accounts annually to the local tax authorities, which then automatically exchange this information with the US IRS. Parties that fail to comply to FATCA and IGA requirements, such as Non-Participating FFIs and recalcitrant account holders may be penalized with a 30 per cent withholding on certain US source payments, or by penalties and sanctions under local implementation legislation in IGA countries.
Most IGAs are reciprocal, thus tax residents of IGA countries with US bank accounts will be reported and exchanged by the US Government to the partnering tax authorities. Meanwhile, the UK has developed ‘UK FATCA’ for its Crown Dependencies and Offshore Territories.
G20 and OECD
The OECD and Global Forum have strived for a number of years to improve efficient exchange of information to combat tax evasion. In September 2013 the G20 leaders agreed to fight tax fraud and tax evasion, they also agreed that tax administrations need to cooperate with each other over the exchange of information. It made perfect sense to leverage off the investments governments and banks made to implement FATCA around the world. However, it was not desired that countries would introduce their own copy of FATCA with different standards. As a result the G20 agreed to introduce a global common standard for Automatic EOI and requested the OECD to develop such AEOI standard, aka GATCA, the global FATCA.
The Global Standard for Automatic Exchange of Information
On 15 July 2014, the council of the OECD approved a new Standard for the Automatic Exchange of Financial Information in Tax Matters (the AEOI Standard). This AOEI Standard comprises the Competent Authority Agreement (CAA) and the Common Reporting Standard (CRS), further described below, and includes Commentaries and various Annexes. Together these are the agreements for automatic exchange of information on taxpayers’ assets and income outside their home country, including bank accounts. It calls on governments to obtain detailed information from their domestic financial institutions about such accounts and to exchange this automatically with other jurisdictions on an annual basis. The G20 endorsed this AEOI standard and requested all countries to participate.
AEOI Standard goes live per January 2016
On 29 October 2014, during the Global Forum in Berlin, more than 90 jurisdictions around the world confirmed their commitment to the AEOI Standard and 52 have since signed the Multilateral Agreement. Approximately 48-55 jurisdictions will start automatically exchanging information from September 2017, which implies information regarding Fiscal Year 2016, thus effectively starting 1 January 2016.
These early adaptors include all EU countries (with the exception of Austria, which will start one year later) who agreed to include the CRS elements in the updated EU Directive on Administrative Cooperation in the field of Taxation (DAC). Also the UK Crown Dependencies and Overseas Territories, such as BVI and Cayman Islands, committed to implement CRS with a ‘go live’ date by 1 January 2016. Some 30-40 countries (including Switzerland, Singapore, the BRICS) will introduce the AEOI standard one year later, ie, by 1 January 2017 with first exchange by September 2018. On 19 March 2015 Switzerland and the EU agreed that AEOI would be in force by 2017 and many similar agreements have been announced in last few weeks. The US government has not yet formally committed to CRS but indicated in all the agreed model 1 IGAs to achieve equivalent levels of reciprocal automatic exchange.
CAA and CRS
The new global AEOI Standard has two components.
The Competent Authority Agreement (CAA) can be bilateral or multilateral and is to be signed between the so called ‘Reporting Jurisdictions’. The CAA is reciprocal in principal but jurisdictions can opt for a non-reciprocal version. The CAA provides detailed rules for exchange of information between tax administrations in different Reporting Jurisdictions, such as time and manner of exchange and provisions on confidentiality and safeguards for exchange of information.
The Common Reporting Standard (CRS) prescribes the reporting and due diligence obligations to be imposed on Financial Institutions (FIs). This CRS is heavily based on Model 1 IGA, it sets out:
the financial institutions that need to report:
this includes depository and custodian FI, but also FI-Investment Entities such as investment funds, P/E funds. certain professionally managed trusts and foundations;
the financial information to be reported,
this includes personal data but also account balance (or value), dividend and interest payments as well as gross proceeds
the different types of accounts and taxpayers covered,
depository and custodian accounts, but also equity and debt ownership in investment entities, settlors and beneficiaries in trusts, etc
such accounts held directly (or indirectly as controlling person) by tax residents of Reporting Jurisdictions.
the common due diligence procedures to be followed by these financial institutions.
these due diligence procedures for on-boarding and pre-existing accounts are almost identical to Annex I of the Model 1 IGA. But there are differences in thresholds and in indicia. For pre-existing accounts there is a streamlined indicia search whereby the data and documentary evidence collected in KYC and AML procedures can be used, but collecting additional information or certifications may be required in certain cases.
FATCA and CRS: A Comparison
The CRS is highly based on the Model 1 IGA. Both include the distinction between the requirements for Financial Institutions (FIs) and Non-Financial Entities (NFEs) and in both cases the annual reporting by FIs is to the local tax authorities. But there are differences. The definition of FI-Investment entities includes not only the “managed by” test, but also the 50 per cent gross income test. The definition of account holders, especially in case of trust is somewhat changed. Under CRS there is no central registration of FIs and also no GIIN to be obtained. There is no withholding but solely sanctions for non-cooperating parties.
In CRS there are no sponsorship facilities but it does include the Trustee Documented Trust and the possibility of using third party service providers. The most important difference is that FATCA and the IGAs are about identifying and reporting US persons, while CRS is about identifying and reporting tax residents of all the partnering Reporting Jurisdictions.
Implementation by Reporting Jurisdictions
To effectively implement the new Common Reporting Standard, the governments of Reporting Jurisdictions would, inter alia, need to:
Translate the reporting and due diligence requirements to be imposed on financial institutions into their domestic law;
Establish the legal basis (by way of global instruments) for the automatic exchange of information with other countries;
Put in place proper safeguards to protect data privacy and confidentiality and administrative and IT infrastructures to collect and exchange information; and
Introduce the necessary sanctions to ensure compliance.
The OECD will roll out the reporting formats and will launch a CRS Portal, which will contain relevant information, including information on Taxpayer Identification Numbers (TIN) to help FIs operate the CRS. And the OECD will closely coordinate with Global Forum to move forward with the peer reviews process to assess per jurisdiction the effective implementation of legislation to ensure effective exchange of information between countries.
The OECD recommends that, when implementing the CRS into local law, national tax authorities should take care to ensure consistency in the application of the new global standard across jurisdictions so as to avoid creating unnecessary costs and complexity for FIs and NFEs with operations in more than one jurisdiction. During spring 2015 the governments of many jurisdictions have yet to release details of the steps to be taken and new regulations to be introduced.
Most governments aim to finalise their legislative proposals in domestic law in 2015 and timely notify OECD and ratify the multilateral or bilateral CAA with partnering jurisdictions. Taxpayers and relevant stakeholders (particularly the financial institutions) should closely watch the progress of implementation of the Common Reporting Standards in the local jurisdictions.
Measures against Non-Cooperating Countries
In February 2015 the OECD and Global Forum announced in its interim report to the G20 Finance ministers in Istanbul the measures against those countries that fail to respect the Global Forum Standards on EOI on request and transparency.
The first measure is to increase public awareness of the outcome of the Global Forum peer reviews, which causes a negative reputational impact (‘naming and shaming’). Second, is to improve the co-ordination approach by cooperative countries by aligning domestic measures against non-compliant countries, with unilateral measures ranging from special withholding taxes rules, application of CFC regime, to an increased audit risk for taxpayers who engage in transactions involving high risk jurisdictions. Thirdly, the international financial institutions incorporate the full cooperation to EOI and transparency as an encouraging or restricting factor in their investment policies. The G20 will endorse such measures to intensify the impact on jurisdictions that fail to meet the international standard on EOI on request.
Impact for FFI
The introduction of CRS will cause an enormous compliance impact for the Financial Institutions in the Reporting Jurisdictions.
These FIs are not only the depository and custodian banks, but also brokers, funds, and many trusts and private foundations. While under FATCA only the account holders, investors or beneficiaries which are US persons have to be identified and reported, this will explode as under CRS all tax residents of all Reporting Jurisdictions will have to be identified and information about their accounts have to be reported on an annual basis. Client data should be updated and be kept in central databases for efficient verification. This all will require such FIs to assign a FATCA and CRS officer and project team, to make a gap analysis and to adapt IT systems, on-boarding procedures, policies, forms and subsequently to undertake the required Due Diligence and annual reporting of these account holders who are tax residents of Reporting Jurisdictions.
Look-through to find the UBO
Some other CRS items will make these compliance efforts of FIs even more complex. FIs not only have to identify and report the individuals and entities who are tax resident of a Reporting Jurisdiction, but based on the look-through approach also have to identify and report the controlling persons of the entity account holders that qualify as Passive Non-Financial Entity (NFE). CRS, like FATCA, is aimed to find the warm bodies, the ‘ultimate beneficial owners’ (UBOs).
And to make it even more complex, an entity which would be a FI-Investment Entity that is resident in a non-Reporting Jurisdiction will initially be considered a Passive NFE until that country becomes a Reporting Jurisdiction, likely one year later. Once the jurisdiction becomes a Reporting Jurisdiction such account holders will be treated as FI-Investment Entity and then the look-though treatment is no longer applicable. This change one year later will cause enormous administrative compliance.
Impact for Taxpayers
Tax residents of Reporting Jurisdictions with financial accounts held at FIs in other Reporting Jurisdictions will have to anticipate that banking secrecy will be totally set aside and that such information will be reported and exchanged to the tax authorities in their home land. These domestic tax authorities will start to match all received information with the information filed in local tax returns. Any mismatches will be a reason for tax audits and tax re-assessments with penalties and interest, or even criminal tax fraud prosecutions.
Tax residents of Reporting Jurisdictions therefore have to check with their tax advisor if all foreign accounts and related income have been properly disclosed under the local tax disclosure requirements. They also have to check if the foreign entities, partnerships, trusts, foundations that are interposed to hold such foreign financial accounts for the purpose of asset protection or confidentiality, estate planning or tax deferral, have to report its beneficiaries under CRS and/ or have to be disclosed under local tax disclosure requirements.
After FATCA it is CRS that is changing the game of international private wealth planning. There will be less places to hide assets and the time of “Do not ask, Do not tell” is definitely over. Time to regularise the past and to restructure investments. Taxpayers may have to start voluntary disclosure of assets and income to local tax authorities, in some countries under local Tax Amnesty regimes to mitigate taxes, penalties and risk of criminal proceedings. Investments held via offshore personal investment companies may need to be modified or restructured to trusts or foundations establishing distance in control, while other taxpayers may decide to migrate to low tax jurisdictions.
Impact for Wealth Planners
The role of private bankers, private wealth planner and other intermediaries is to support taxpayers in this process. More than ever there will be a greater need for collecting client data and for understanding a client’s business and objectives. Private clients have to be informed and educated about these global AEOI developments as well as increasing anti-abuse rules in domestic legislation and it may even be required to terminate relationship with those clients that fail to cooperate in a legitimate manner.
It is important that appropriate preparatory steps are undertaken to ensure that both financial institutions and private clients are ready for this forthcoming change. Once the Common Reporting Standards are implemented, it will assist in the detection of tax fraud and evasion. FIs need to consult with third party consultants to adapt to CRS. While high net worth individuals all over the world have to consult professional advisors and corporate service providers that can provide expertise on an international basis.
The 93 countries/groups of countries which are directly or indirectly committed to the Global AEOI Standard are:
Jurisdictions that will start exchanging information in Sept 2017: Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Cayman Islands, Chile, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom, Uruguay
Jurisdictions that will start exchanging information in Sept 2018: Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, China, Costa Rica, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Marshall Islands, Macao (China), Malaysia, Monaco, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates.
This list is continuously updated on the following website: http://www.oecd.org/tax/transparency/AEOI-commitments.pdf;
Eric Boes is an international tax professional with over 28 years’ experience and holds a master degree in Fiscal Economics from the University of Tilburg, the Netherlands. He started as an international tax advisor at Arthur Andersen and switched in 1999 to in-house tax departments of multinationals, first at Philips Electronics, followed by 11 years as global Head of Tax at Atos Origin. Eric joined Amicorp Group in 2012 as global head of FATCA and CRS services and solutions. In this capacity Eric is responsible for product and business development of services with respect to multilateral automatic exchange of information that lead to global tax transparency, including FATCA, IGAs and the Common Reporting Standards.