“US FATCA, the beginning”
The resounding message from our FATCA IGA conference was that the US tax and reporting provisions were just the beginning. The drive towards exchanging account information has already spread beyond the US and reached international circles, with OECD Global Standards on this topic now finalised and approved by the G20. As the Global Standards’ nickname – OECD FACTA – suggests, the Global Standard is based on the Model 1 intergovernmental agreement (“IGA”) to implement the U.S. tax and reporting provisions commonly known as FATCA.
Yet there is a major flaw in the proposed standards.
Minimum standard, maximum headache?
The Global standard provides a common global approach for jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It has two components:
- The Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions; and
- The Model Competent Authority Agreement (CAA), pursuant to which governments would agree to exchange the information reported.
The scope of the CRS is largely the same as the Model 1 IGA regarding financial information to be reported, financial institutions required to report under the CSR and reportable accounts.The CRS also describes the due diligence procedures that must be followed.
While the standard aims to bring a common global approach to obtaining information and disclosing it to other jurisdictions, the OECD has stressed the fact that the Global Standard is not intended to be a template to be implemented, but more a minimum which can be built upon. This means that countries can ask for more information or – crucially – seek to make separate agreements on account information disclosure to suit their own needs. The danger is that this could bring a fragmented hodge-podge of laws and agreements, which could jeopardize the global drive for a common approach.
Multiple agreements, multiple systems
The CRS will need to be implemented in the domestic law of an implementing jurisdiction, whereas the CAA can be executed within existing legal frameworks such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or a bilateral tax treaty.
Countries implementing the standards will have a hard task at hand. They will not only need to change their domestic legislation but also put in place the necessary administrative procedures for collecting, processing and exchanging the information. This is without even mentioning the work to be undertaken by financial institutions who will need to introduce changes to their IT systems and client on-boarding procedures (for a summary of the financial institutions, account types and information involved, read our OECD FATCA newsletter). Putting in place one system is already an intimidating task but the work involved could be multiplied if countries decide to go their own way.
Cost and Complexity
The new rules are intended to improve efficiency and reduce costs for financial institutions: whether these goals can be achieved remains uncertain. The answer to this question will very much depend on whether individual countries are consistent in the way they implement the rules and how these interact with other similar regimes such as FATCA and the EU Savings Directive. If countries do decide to treat the OECD standard as a minimum, institutions might be required to report under multiple regimes simultaneously. The result? Increased cost and complexity for everyone involved.
On 19 March 2014, the OECD released a Joint Statement by the countries and jurisdictions committed to early adoption of the Global Standard on automatic exchange of information. Whereas Luxembourg did not take part in this initiative, the Grand-Duchy is expected to join the group of early adopters now that the EU Savings directive has been adopted (http://blog.kpmg.lu/2-steps-forward-for-the-eu-savings-directive/).
