There has been significant progress since we first reported on the development of Automatic Exchange of Information (AEoI) in an earlier issue. Beginning with the OECD’s 13 February publication of a multilateral Standard for automatic exchange which was endorsed in May 2014 by all 34 member countries, along with Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa. AEoI has now become a reality for many countries around the world. In this article, we examine what this really means along with reviewing the current implementation timeline of these early adopter jurisdictions.
“The next challenge regarding Automatic Exchange of Information is now to get all jurisdictions to commit to this Standard and put it into practice.”
G20, September 20131
In the previous issue of frontiers in tax we reported on the background to the development of Automatic Exchange of Information (AEoI) and explored the emerging framework of international tax transparency.3 That article noted that at their St. Petersburg Meeting of September 2013, the G20 announced that they expected to begin Automatic Exchange of Information by the end of 2015.4
A key subsequent step was the OECD publication on 13 February 2014 of a multilateral Standard for automatic exchange of financial account information.5 This Standard was developed in partnership between the OECD and the G20 countries, and in close co-operation with the EU. The document is in two parts: Part I contains the introduction to the Standard; Part II contains the text of a Model Competent Authority Agreement (CAA) and a Common Reporting and Due Diligence Standard (CRS). It defines a Standard for mutual exchange of information on account holders with foreign tax residence, account balances, income and gross proceeds from certain financial transactions.
The new Standard was endorsed in May 2014 during the OECD’s annual Ministerial Council Meeting in Paris by all 34 member countries, along with Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa.6 Fortyfour countries and jurisdictions have committed to early adoption of the Standard and implementation by 2016 for exchange beginning in 2017.7
On 21 July 2014, the OECD released a detailed commentary on the standard to help ensure its consistent application.8 The OECD also plans to provide information and guidance on the technical measures necessary to implement the processes of actual information exchange, including compatible transmission systems and a standard format for reporting and exchange. This latter component is scheduled to be presented in time for the G20 meeting of finance ministers in September 2014.
According to the current implementation timeline of the early adopters, the new regime will start in 2016 by obliging financial institutions to classify all new accounts from 1 January 2016 and all pre-existing accounts as of 31 December 2015.
“Tax fraud and tax evasion are not victimless crimes: they deprive governments of revenues needed to restore growth and jeopardize citizens’ trust in the fairness and integrity of the tax system. Today’s commitment by so many countries to implement the new global standard, and to do so quickly, is another major step towards ensuring that tax cheats have nowhere left to hide.”
(Organisation for Economic Co-operation and Development)
In order to build on previous experience, the CRS has been built on the approach to inter-governmental information exchange developed in relation to the US Foreign Account Tax Compliance Act (FATCA). But it is somewhat misleading to view AEoI as simply FATCA 2.0 or GATCA (“Global FATCA”). It is likely that it will apply to many more financial institutions and result in many more reportable accounts. Additionally, in some respects solutions already being developed for FATCA may be inconsistent with those necessary for AEoI. Financial institutions therefore face the double challenge of responding to both sets of requirements.
On a functional level, the requirements on financial institutions from participating countries are similar to those under FATCA. However, the scope is not limited to US persons but potentially extends to all customers with tax residence outside the implementing jurisdiction. Similarly, all pre-existing individual accounts must be documented; i.e., the threshold under FATCA does not apply. There is no exemption from financial account status for certain classes of traded instrument as there is under FATCA. Certain exemptions for financial institutions under FATCA do not apply under the CRS, and the treatment of some investment vehicles in non-participating jurisdictions also differs. All in all, this means that AEoI presents institutions with a much larger population to report on, covering a larger range of financial accounts.
Institutions in jurisdictions with Model 2 inter-governmental FATCA agreements (IGAs) (or in jurisdictions that do not have an IGA) may face even greater challenges than institutions in Model 1 IGA jurisdictions. This is because institutions in Model 1 IGA jurisdictions have had to develop domestic reporting systems to report financial account information, while institutions in other jurisdictions may not yet have developed such systems.
It is clear that AEoI requires a wholesale review, and a potentially substantial reconstruction of, solutions developed so far to respond to FATCA. In particular, processes for customer acceptance, know-your-customer (KYC) and customer documentation will need to be reviewed and extended, and new systems for reporting relevant data to the tax authorities built. Governance requirements for AEoI processes could be significantly greater than under FATCA, and need to be designed accordingly.
The major operational challenge which financial institutions will face will be to develop and implement efficient and effective processes and IT solutions. These solutions must be sustainable and scalable as more countries participate in the AEoI regime over the months and years ahead. All of this has to be undertaken while institutions are still working to achieve FATCA compliance: the consequence could be the inevitable disruption of systems and processes that have just been established for FATCA. In addition, to the extent that operating models have been defined in part to avoid or minimize operational burdens from such tax reporting requirements, these decisions will need to be re-evaluated in the light of the global scale of AEoI.
The major operational challenge which financial institutions will face will be to develop and implement efficient and effective processes and IT solutions. These solutions must be sustainable and scalable as more countries participate in the AEoI regime over the months and years ahead
Once again, the pace of regulatory change challenges the ability of financial services companies to develop the necessary systems and processes to respond. And while the deadlines are short, the detail cannot be specified until the CRS is fully defined in the domestic legislation of implementing countries beginning towards the end of the year. In addition, there are in certain cases legal limits to9 what can be pursued on an early timetable: in many jurisdictions, data protection laws prevent companies from collecting the necessary information on account holders in advance of the passage of domestic enabling legislation.
Nevertheless, there are a number of actions which can be mounted now, and which should yield benefits in any event. Examples include:
These and similar actions should also feed into the final key priority: ensuring that where business imperatives substantially favor one AEoI implementation methodology rather than another, the argument is effectively captured in representations to governments. Financial institutions can still influence how AEoI will operate. But the window of opportunity is closing rapidly.
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