Monday, July 21, 2014
The OECD today released the full version of a new global standard for the exchange of information between jurisdictions.
CRS Due Diligence Standards similar but not identical to FATCA
The CRS contains a reporting and a due diligence standard that underpins the automatic exchange of information, very similar to FATCA.
Due diligence distinguishes between pre-existing accounts and new accounts, individual accounts and entity accounts.
Pre-existing accounts do not have a de minimis amount but are divided between low value and high value accounts.
Low value accounts have a permanent residency based test based on documentation or, failing that, based upon indicia. If indicia are found, then either the account holder must provide self-certification or the account must be reported to all jurisdictions to which the indicia attach.
High value accounts are defined as having an aggregate balance or value of $1 million US dollars by December 31 of a calendar year. High value accounts require a paper based search as well as the test of actual knowledge of the relationship manager.
All new individual accounts (no de minimis) require self-certification, with confirmation of its reasonableness, which can be performed at the time of account onboarding.
Preexisting entity accounts
Preexisting entity accounts firstly need to determine if the entity is a reportable person, generally using available AML/KYC information, and if such information is not available, then a self certification will be required from the entity.
However, a preexisting entity account de minimis size of US$250,000 is available at the option of the jurisdiction adopting the CRS.
If the entity is a passive entity then the residency of the controlling members of the entity must be determined. Passive entity status may be determined by self-certification unless the financial institution has contra-indication information, or information is otherwise publicly available to refute the self-certification. Controlling members of the entity may be determined based upon the AML/KYC information available. Control must be interpreted in a manner consistent with the FATF standard.
New entity accounts
For new accounts, the de minimis option is not available because self-certification is easily obtainable at account opening.
The Standard for Automatic Exchange of Financial Account Information in Tax Matters 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, developed at the OECD under a mandate from the G20, endorsed by G20 Finance Ministers in February 2014, and approved by the OECD Council.
Common Reporting and Due Diligence Standards (“CRS”)
February 13 the OECD released the Standard for Automatic Exchange of Financial Account Information Common Reporting Standard. The Draft Commentaries for the CRS, developed by the Working Party No. 10 on Exchange of Information and Tax Compliance, and discussed at its May 26-28, 2014 meeting, are expected to be released very shortly, in July.
The CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It 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. Part I of the report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.
What are the main differences between the CRS (“GATCA”) and FATCA?
The CRS is also informally called “GATCA”, referring to the “globalization” of FATCA.
The CRS consists of a fully reciprocal automatic exchange system from which US specificities have been removed. For instance, it is based on residence and unlike FATCA does not refer to citizenship. Terms, concepts and approaches have been standardized allowing countries to use the system without having to negotiate individual Annexes.
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. The CRS also provides for a simplified indicia search for such accounts. Finally, it has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in the automatic exchange under the standard.
Single Global Standard for Automatic Exchange (“GATCA”)
Under GATCA jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Part I of this report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.
The Report 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.
To prevent taxpayers from circumventing the CRS it is specifically designed with a broad scope across three dimensions:
- The financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets.
- The financial institutions that are required to report under the CRS do not only include banks and custodians but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.
- Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the individuals that ultimately control these entities.
The OECD's CRS describes the due diligence procedures that must be followed by financial institutions to identify reportable accounts.
Reporting Schema and Protocols
The CRS Schema Information sections are:
I Message Header with the sender, recipient, message type, reporting period
II Controlling Person or Account Holder details if an individual
III Account Holder if an entity
IV CRS Body; Reporting FI and Reporting Group; and Account details
The OECD address the challenge of transliteration when sending and receiving jurisdictions do not use a common alphabet. The Competent Authorities are to agree how they will undertake such transliteration. If there is no such agreement, then the sending jurisdiction should transliterate from its domestic alphabet or literation to a Latin alphabet aligned with international standards for transliteration (for example as specified in ISO 8859).
Financial Institution ID Number?
The CRS does not require one identifier, such as the US FATCA GIIN, be employed by all jurisdictions. Rather, it establishes several possible identifying numbers, including: a TIN, business/company registration code/number, Global Legal Entity Identifier (LEI), or Global Intermediary Identification Number (GIIN).
If CRS and IGAs are Universally Adopted, Then Why is the Multilateral Convention on Mutual Administrative Assistance in Tax Matters Still Necessary?
Both the CRS model, which is currently being developed by the OECD with G20 countries, and the IGAs are based on the automatic exchange of information from the tax administration of one country to the tax administration of the residence country. As with other forms of exchange of information, a legal basis is needed to carry out automatic exchange. While bilateral treaties such as those based on Article 26 of the OECD Model Tax Convention would permit such exchanges, it may be more efficient to implement a single global standard through a multilateral instrument. See OECD Information Brief
Global Forum Peer Reviews and Monitoring Of Automatic Exchange
G20 governments have mandated the OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes to monitor and review implementation of the standard. More than 60 countries and jurisdictions of the 121 Global Forum members have now committed to early adoption of the standard, and additional members are expected to join this group in the coming months. See the link for Country Peer Reviews and the Global Forum list of ratings chart.
The OECD's press release is excerpted below:
The Standard provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations. The new consolidated version includes commentary and guidance for implementation by governments and financial institutions, detailed model agreements, as well as standards for harmonised technical and information technology solutions, notably a standard format and requirements for secure transmission of data.
The OECD will formally present the Standard to G20 Finance Ministers at their next meeting in Cairns, Australia, on 20-21 September. ...
More than 65 countries and jurisdictions (see list below) have already publicly committed to implementation, while more than 40 have committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017. This includes a group of OECD and non-OECD countries which have adhered to the OECD Declaration on Automatic Exchange of Information in Tax Matters as well as a group of early adopters.
More jurisdictions are expected to commit to implement the Standard in the run up to the late-October meeting of the Global Forum Transparency and Exchange of Information for Tax Purposes on which brings together more than 120 countries and jurisdictions, to be held in Berlin and hosted by the German Ministry of Finance. At this occasion a signing ceremony is expected to be held for a new multilateral agreement that activates automatic exchange once legislation and other conditions are in place. Assistance will be available to support less developed countries, so they benefit from this move towards a more transparent tax environment, and international organisations are ready to co-operate to support these countries.
Even before the Standard has become operational, the drive toward greater transparency and better exchange of information is having a tangible effect on taxpayer behaviour. OECD analysis of voluntary disclosure programmes since 2009 shows that more than half a million taxpayers have voluntarily disclosed income and wealth hidden from their tax authorities. Countries have identified more than EUR 37 billion from voluntary disclosure programmes which OECD encourages countries to consider.
Against this backdrop, the OECD is updating policy guidance in this area, contained in a 2010 report, “Offshore voluntary disclosure: comparative analysis, guidance and policy advice”.
free chapter download here —
> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671 Number of Pages in PDF File: 58