Tue, Nov 4, 2014

Automatic Exchange of Information and the Common Reporting Standard: "Come forward or be caught"

On October 29, 2014, the new standard on automatic exchange of information was endorsed by the Organization for Economic Co-Operation and Development (OECD) and G20 countries. The announcement was made at the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin, the world’s largest network for international cooperation in the field of taxation and financial information exchange.

Gathering together 123 countries and jurisdictions on an equal footing, 51 of these countries showed their commitment to action by signing the agreement to institute a Common Reporting Standard (CRS). The early adopters have committed to start exchanging information under CRS from 2017 with others expected to follow in 2018. In a joint statement by the 51 signatories, they said “This (agreement) will make it possible to stamp out the crime of tax evasion and to tackle tax fraud…Tax evaders have two choices – come forward or be caught.”

With austerity measures continuing to be enforced by governments all over the world, the public demand and political will to tackle tax evasion has never been stronger. At the request of the G8 and G20, the OECD released a model CRS on 13 February 2014. The standard obliges countries to exchange information obtained from their banks and financial institutions automatically on an annual basis.

The aim is for every country to be kept fully informed about the offshore holdings of its citizens. It is hoped that the increase in transparency will serve as a deterrent to taxpayers using overseas accounts to avoid domestic tax liabilities and identify those who do. The CRS has been built upon legislation such as the US Foreign Account Tax Compliance Act (FATCA) and active campaigns within EU countries (European Union Savings Directive).

Although modelled on FATCA, the data required is different and the volume of reporting is likely to be significantly higher under CRS. The information required includes bank balances, interest income, dividends and the proceeds of sales, which can be used to assess capital-gains tax. Financial institutions that are required to report under the CRS will not only include banks and custodians but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.

On 19 March 2014, 44 jurisdictions (notably not including the US) issued a joint statement committing to the early adoption of the CRS. They included, amongst others, the UK, the Cayman Islands, the British Virgin Islands, Jersey, Guernsey, the Isle of Man and Ireland. In a joint statement the early adopters acknowledged that tax evasion is a global problem which would require a global solution.

The first exchange of information in relation to new accounts and pre-existing individual high value accounts will take place by the end of September 2017. Pre-existing accounts would be those that are open prior to 1 January 2016 and new accounts would be those opened on and after that date. In order for CRS to take effect, each jurisdiction will need to have the necessary domestic legislation in place and have entered into appropriate bilateral or multilateral governmental agreements to provide a legal basis for the exchange of information.

Despite co-operation from a number of influential countries, it is notable that the USA has not signed up as an ‘early adopter’, although they have said that they still plan to share information as part of bilateral deals. Although they have not signed up as ‘early adopters’, Switzerland and Singapore are also committed to adopting CRS. As stated by German Finance Minister Wolfgang Schaeuble it seems “Banking secrecy, in its old form, is obsolete.”

There is likely to be significant and immediate pressure on financial institutions to ensure that their policies and procedures will be ready for compliance with CRS. For individuals or corporations attempting to avoid tax this is yet another step in a line of initiatives that will lead to far greater scrutiny.

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