Multilateral thinking needed for global crackdown on tax evasion

The Organisation for Economic Co-operation and Development (OECD) initiative for Automatic Exchange of Information (EAOI) is the next big thing in tightening the net around tax evasion or avoidance. Over the last couple of years I was heavily involved in implementing the United States Foreign Account Tax Compliance Act (U.S. FATCA) at a large Netherlands financial institutions with both bank and life insurance entities. While the parliamentary ratification in the Netherlands still has to take place, acting compliant to the requirements per July 2014 is mandatory for the impacted financial institutions.

Bilateral tour de force

The United States of America were the only jurisdiction able to enforce an extraterritorial enactment of a domestic legislation, needed in 2010 to raise money to finance employment programs in the United States. That was what the Hiring Incentives to Restore Employment (HIRE) Act was about. The focus shifted towards international tax compliance en route. The intergovernmental agreements between the United States of America and ‘partner countries’ now headline ‘Agreement between the Government of the United States of America and the Government of X to Improve International Tax Compliance and to Implement FATCA’. FATCA as a minor detail compared to the higher goal ‘international tax compliance’. Understaffed United States Internal Revenue Service and Department of the Treasury had the wonderful task of writing hundreds of pages of legislation, issue notices on moving targets and timelines, review a dozen tax filing forms and instructions, some of them still missing a month before July 1, 2014. Then there are still negotiations with all kinds of jurisdictions all over the globe on a bilateral governmental agreement. Partner countries striving to exempt as much as possible, struggling to comply to FATCA and avoid a 30% withholding penalty on U.S. gross proceeds, while having to deal with local tax legislation and data protection measures often prohibiting just disclosing information about tax payers to the United States.

Start multilateral thinking as governments

If you really want to improve international tax compliance, then a bilateral approach as taken with FATCA is too time consuming and costly. I have never seen a proper business case for that, partly because the implementation costs are all on the financial institutions, not the collaborating tax authorities. The problematic business case will not be different implementing a multilateral exchange of tax information, but the development and implementation can be done much faster (18 months) than with FATCA (4-5 years). The current plan is to have the OECD Common Reporting Standard in place as per January 2016 in the 47 (and counting) early adopter jurisdictions. Why are these jurisdictions endorsing the quick implementation?

  • implementation costs are on the financial institutions again, so for politicians simply a risk transfer method.
  • possibility to have more jurisdictions participating later.
  • peer reviews by the Global Forum, not the United States Government.
  • possibility to participate and exchange tax information on an automatic, annual basis, without having to carve out bilateral agreements with each and every partner jurisdictions. In other words: group sharing, based on a common standard.
  • momentum: FATCA in place, former tax havens dismantled, countries like Luxembourg, Switzerland and Austria lifted their banking secrecy.
  • preparation done in OECD Working Parties. FATCA Intergovernmental Agreement stripped of United States specific details or legislation.

Start multilateral thinking as implementation partners

 Wikipedia)Once you’ve completed the FATCA implementation this summer, you will look for a next engagement. As a subject matter expert and the similarities with FATCA, implementing CRS sounds logical. As first warning: looking for customers with multiple tax residencies is different from United States Persons for tax purposes, and the lack of a withholding penalty will make implementation a challenge again, just like any other project. So, don’t be surprised ending up as CRS implementation partner as of August 2014. Local legislation will be modified in 2015, not earlier. With which jurisdiction yours will be exchanging tax information will not be clear yet this summer or next half year. Your requirements will hopefully be ready in September, when the Commentary to the Standard is due to be published. That will clarify and help. Less products and organizations will be exempted compared to FATCA. As of January 2016 tax residency (or multiple instances of it) of each holder of new accounts (which may be certain insurance contracts as well as bank or investments accounts) has to be identified. Like FATCA there will be additional checks on High Value Accounts and Low Value Accounts. In 2017 reporting these to local tax authorities will start. To make that happen, an inventory of your systems, products, processes will be necessary again. Solution design can be centralized, decentralized, big-bang or phased-in. And, CRS will not be the only legislation impacting your project. So, behave like you’re the legendary Argos Panoptes, with eyes open in every direction, partner and share knowledge as much as possible.

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