(Tax-News) -- September 2017 could be said to mark a historic point in international tax enforcement, as it is the month that around 50 jurisdictions have committed to making their first automatic exchanges of information under the OECD Common Reporting Standard (CRS), the topic of this special feature.
Introduction to the Common Reporting Standard
The CRS provides for annual automatic exchange between governments of financial account information. The Standard sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
In a sense, the CRS is not a "new" initiative started from a blank canvas. Many of the systems that will enable information to the sent and received under the Standard are already in place under existing information exchange protocols. All the CRS really does is standardize these mechanisms via an internationally-agreed multilateral competent authority agreement. What is new is that governments around the world have accepted the need for such information to be exchanged automatically, rather than on request.
Background to the CRS
Against a backdrop of rising public anger about tax avoidance and evasion, stoked by media reports about the tax planning techniques used by wealthy individuals and corporations, the G20 finance ministers endorsed automatic exchange as the new tax transparency standard on April 19, 2013. In June that year, the G8 welcomed the OECD Secretary General report "A step change in tax transparency" which set out the concrete steps that needed to be undertaken to put a global model of automatic exchange in practice. The G20 leaders then committed to automatic exchange of information as the new global standard in September 2013.
On February 23, 2014, the G20 Finance Ministers endorsed the Common Reporting Standard for automatic exchange of tax information, now contained in Part II of the full version of the Standard. In May 2014, the OECD Declaration on Automatic Exchange of Information in Tax Matters was endorsed by all 34 member countries along with several non-member countries. More than 65 jurisdictions publicly committed to implementation, with more than 40 having committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017 (known as "early adopters").
The OECD released the full version of the Standard for Automatic Exchange of Financial Account Information in Tax Matters on July 21, 2014. This calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. The Standard was approved by the OECD Council on July 15, 2014.
On September 22, 2014, the Global Forum on Transparency and Exchange of Information for Tax Purposes delivered a Roadmap to the G20 Development Working Group which is for developing country participation in the new OECD Standard on the automatic exchange of financial account information. This Roadmap is part of the efforts to curb multinational tax avoidance and offshore tax evasion in developing countries.
On October 29, 2014, 51 jurisdictions, 39 of which were represented at ministerial level, signed a multilateral competent authority agreement (MCAA) to automatically exchange information based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. By August 30, 2017, a total of 95 jurisdictions had signed the MCAA, with roughly half of these intending to exchange information according to the CRS in September 2017.
However, jurisdictions have the option of relying on a bilateral agreement, such as a double tax treaty or a tax information exchange agreement, in order to exchange information automatically in accordance with the CRS.
In addition, certain CRS exchanges will take place on the basis of the EU Administrative Cooperation Directive. These will typically involve EU member states and certain third countries, although the CRS will provide the underlying framework for these automatic information exchanges.
Information exchanges may also take place under other bilateral agreements, notably the UK-CDOT accords between the UK and its Crown Dependencies and Overseas Territories, which has been likened to the US FATCA framework.
Why the Need for a CRS?
According to the OECD, today's globalized, almost borderless, world of finance makes it a lot easier for people who want to hide their money abroad in order to evade tax. "Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction," the OECD observes. "Countries have a shared interest in maintaining the integrity of their tax systems. Cooperation between tax administrations is critical in the fight against tax evasion and in protecting the integrity of tax systems. A key aspect of that cooperation is exchange of information."
Another advantage of having a common global reporting standard is that international information exchange systems will be standardized, allowing administrative costs for all concerned. At present, there are numerous procedures in place for tax authorities to exchange information with each other. These include bilateral double taxation avoidance and tax information exchange agreements, and international agreements such as the OECD Multilateral Convention. "A proliferation of different and inconsistent models would potentially impose significant costs on both government and business to collect the necessary information and operate the different models," the OECD states.
What Does "Automatic" EoI Mean?
Countries that have signed up to the CRS will exchange information "automatically" with one another. This represents something of a step change in international tax enforcement. Traditionally, information about an individual or business has been sent from one tax authority to another on request, based on evidence that tax fraud or some other crime has taken place. The EU could be said to have led the way on automatic information exchange under its Savings Tax Directive. However, the United States Foreign Account Tax Compliance Act (FATCA) was the real game-changer in international tax compliance, in that it became the first global automatic exchange of information program, and the inspiration behind the CRS.
In summary, "automatic" exchange of information will entail the systematic and periodic transmission of "bulk" taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income or asset information. The information exchanged is normally collected in the source country on a routine basis, generally through reporting of the payments by financial institutions and other payers.
Basis Of Information Exchange
While there are technical similarities between the CRS and FATCA, there are some key differences, mainly that US-specific rules have been removed from the Common Reporting Standard. For instance, FATCA is based on US citizenship, a concept fundamental to the US tax system, whereas the CRS is based on residence. Also, unlike FATCA, the CRS does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. Additionally, the CRS has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in automatic exchange under the standard.
Information to Be Exchanged
The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account.
Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement that financial institutions "look through" passive entities to report on the relevant controlling persons.
The financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they present a low risk of being used for evading tax and are excluded from reporting.
While the CRS MCAA is a multilateral agreement, exchange relationships for CRS information are bilateral in nature and are activated when both jurisdictions have the domestic framework for CRS exchange in place and have listed each other as intended exchange partners.
At the time of writing, there were over 2,000 bilateral relationships for the automatic exchange of CRS information, involving more 70 jurisdictions committed to the CRS. The full list of automatic exchange relationships that are currently in place under the CRS MCAA is available online.
The OECD assures us that the standard contains specific rules on the confidentiality of the information exchanged and that the underlying international legal exchange instruments already contain safeguards in this regard. Where these standards are not met (whether in law or in practice), countries will not exchange information automatically.
Time will tell how watertight the system is in practice, however.