The Common Reporting Standard: The Global FATCA

Expat Briefing Editorial Team, 07 July, 2015

Much has been made of the impact of the United States Foreign Account Tax Compliance Act (FATCA) on US expats, Americans with financial interests overseas, and financial institutions all over the world. However, few people probably realize that a global FATCA-style information exchange initiative is on the way affecting people of all nationalities, whether they are expats or not, in the form of the Common Reporting Standard.

What Is The Common Reporting Standard

The Common Reporting Standard (CRS) provides for annual automatic exchange between governments of financial account information. The CRS was endorsed by G20 finance ministers in February 2014 and the final version was approved by the OECD Council in July that year.

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. The CRS will essentially piggy-back off these mechanisms. What is new is that governments around the world have accepted the need for such information to be exchanged automatically.

Why Is There A Need For Such A Standard?

Not only is it becoming easier for people to move around the world to live and to work, it is becoming easier to move money and investments across national borders too. According to the OECD, this makes things 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."

At present, there are numerous procedures in place for tax authorities to exchange information with each other. These include bilateral double taxation avoidance agreements, regional initiatives like the European Savings Tax Directive, and international agreements such as the OECD Convention on Mutual Administrative Assistance in Tax Matters. So there is also another advantage to a common global reporting standard says the OECD, and that is that international information exchange systems will be standardized, lowing administrative costs for all concerned.

"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 Is "Automatic" Exchange of Information?

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, FATCA was the real game-changer in that it became the first international automatic exchange of information initiative, and the inspiration behind the CRS.

So, what does "automatic" exchange of information entail? According to the OECD, it means 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.

How Does The Standard Differ From FATCA?

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.

What Information Will 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.

So My Financial Information Will Be Reported Even If I've Done Nothing Wrong?

In, a word, yes! As explained above, automatic exchange of information implies the systematic and periodic transmission of "bulk" taxpayer information.

Will My Information Be Kept Confidential?

The OECD assures us that it will: "The Standard contains specific rules on the confidentiality of the information exchanged and 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. Let's hope it doesn't turn into an identity thief's paradise.

What Does This Mean For Financial Institutions?

After the billions of dollars spent by financial institutions on preparing for FATCA, the CRS is expected to represent another bureaucratic and financial headache for financial services providers. Presumably, after FATCA, many FIs will now have some of the systems in place to report the necessary information to their local tax authority under the CRS. However, this isn't a simple matter of cost. Fearing the legal consequences of not meeting the FATCA requirements to the letter, many banks and other FIs have simply stopped providing services to US clients. The full consequences of the CRS have yet to be played out, but could we reach a point where some FIs refuse to do business with foreign clients altogether, if the administrative and legal costs of doing so are too high? That remains to be seen.

Simon Leach, financial services tax partner at PwC, observed after the CRS was released by the OECD last year: "Automatic exchange of information is crucial in the continuous fight against tax evasion but the new regime will mean significant costs for financial institutions as they have to modify and build systems to meet their obligations."

"Though based on FATCA, the CRS does vary in certain areas and this will also present challenges for organizations as they continue to implement these measures to promote tax transparency. Until this further detail emerges around implementation, and the impact of the differences between the two models is understood, financial institutions will face continued uncertainty as they seek to ensure they are in compliance with these regimes."

Which Jurisdictions Have Endorsed The Standard?

The total number of signatories as at June 4, 2015, was 61, including the following countries and territories:

Albania, Anguilla, Argentina, Aruba, Australia, Austria, Belgium, Bermuda, British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Ghana, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turks and Caicos Islands, and the United Kingdom.

A total of 90 jurisdictions have endorsed the CRS, a number which is likely to continue to grow.

When Will Information Reporting Begin?

It is envisaged that the first automatic information exchanges under the CRS will begin in 2017. However, the OECD itself admits that the current timetable is "ambitious" because many countries, especially in the developing world, do not currently have the administrative and technical mechanisms in place to meet the standard, nor the resources to build them. Therefore, with the assistance of the rich countries, it will probably take several more years before the CRS is a truly global information exchange network.

Tags: agreements | business | interest | Banking | Tax | Expats | FATCA | investment | British Virgin Islands | Austria | Canada | Belgium | Russia | Australia | Bermuda | Cayman Islands | Virgin Islands | tax authority | services | financial services | insurance | tax |


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