A year down the track since the Foreign Account Tax Compliance Act (FATCA) regime commenced in Australia and the world of information reporting is set to explode. In Australia there has been a strong focus on ensuring that taxpayers (and particularly, large multi-nationals) pay their “fair” share of tax and that aggressive tax minimisation is discouraged. One of the tools that the Government has employed and is looking to employ more broadly is increased information reporting on the theory that it is strongly correlated with increased taxpayer compliance.
While many “financial institutions” have only just implemented FATCA and possibly even lodged their first FATCA report with the Australian Taxation Office (ATO), there remains a raft of FATCA compliance obligations to be managed over the next few years. FATCA is however only the tip of the iceberg. The Organisation for Economic Cooperation and Development (OECD) Common Reporting Standards (CRS) commences 1 January 2016 for countries that are “early adopters”, and other proposed information reporting regimes are in various stages of development, consultation or implementation. All taxpayers - not only “financial institutions” - will need to navigate their way through these new regimes, identify potential opportunities, leverage or expand existing people, process and technology solutions and manage any potential regulatory, reputational and operational risks that may arise.
FATCA was first enacted in the United States (US) in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act 2010 in order to combat US tax evasion by US persons, including through the use of non US entities and accounts. Since then the Australian Government has implemented FATCA locally by signing an Inter-Governmental Agreement (“FATCA Agreement”) with the US on 28 April 2014 and enacting the Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014 on 30 June 2014, effective 1 July 2014.
The primary obligation of FATCA lies with “financial institutions” as defined for FATCA purposes - banks, custodial entities, investment entities and insurance companies. FATCA requires such entities to determine the FATCA status of their customers (“account holders”) and report certain US persons (and account attributes) to the ATO, which then files with the US Internal Revenue Service (IRS). But as noted above, there are other information reporting regimes looming which will impact a broader range of taxpayers.
Looking back…what should have happened FY15
Financial institutions have had a challenging year preparing for and implementing FATCA to ensure they comply with the requirements of the FATCA Agreement. In many cases this involved an enterprise-wide review of an organisation’s products and legal entities.
Key milestones expected to have been achieved over the last year include:
- The threshold question – is an entity an Australian Financial Institution (AFI)? – was considered and all relevant AFI’s for the purposes of the FATCA regime were identified (i.e. depository institutions, custodial institutions, specified insurance companies and investment entities).
- Specific “carve-outs” from the application of the FATCA regime were considered (e.g. complying superannuation funds).
- “In-scope” AFIs were registered with the IRS and obtained a Global Intermediary Identification Number (GIIN) – in their own right and/or via a compliance saving option (such as through a sponsoring entity or trustee documented FATCA registration approach).
- Customer on-boarding people, process and technology solutions were leveraged or expanded to capture FATCA relevant information for new account holders.
- Customer due diligence for “high value” pre-existing accountholders (individual account holders with an account value of US$1 million or more as at 30 June 2014) was completed by 30 June 2015.
- Customer due diligence on all other pre-existing account holders may have commenced (not due for completion until 30 June 2016).
- The first FATCA report of “US reportable account-holders”– for the period 1 July 2014 to 31 December 2014 – was prepared for lodgement with the ATO (due 31 July 2015).
- “Self-certification” forms (including US forms such as W-8s) were provided to withholding agents and other financial institutions as requested including, where relevant, to ensure FATCA withholding would not be incurred on certain US sourced income (e.g. dividends, interest, royalties etc.) from 1 January 2015. Note, from 1 January 2017, FATCA withholding tax will also be required to be applied to gross proceeds arising on the disposal of certain US assets where appropriate documentation is not in place.
In achieving the above, AFIs have been challenged with interpreting the terms of the FATCA Agreement which in many cases have been broadly drafted and largely untested. The practical application of FATCA is still evolving – as evidenced by regular updates to the ATO’s FATCA Guidance notes and continued industry engagement with Treasury and the ATO. In addition, while the ability of AFIs to rely on the US FATCA Regulations and the “most favoured nation” clause within the FATCA Agreement at first glance might appear to provide AFI’s with flexibility, they also add to the complexity of FATCA implementation from a change management perspective. In addition, to manage the latent risks associated with the uncertainty of the application of the FATCA regime to certain entities, organisations have in some instances taken a conservative approach and registered relevant entities with the IRS.
FATCA obligations will continue to be phased in over the next few years. For example:
- Customer due diligence on all other pre-existing account holders is required to be completed by 30 June 2016 (i.e. other than “high value” account holders).
- FATCA reporting of US reportable accounts will include additional financial information such as amounts paid or credited to the account (in respect of the year ending 31 December 2015 and later years), and gross proceeds in respect of custodial accounts (in respect of the year ending 31 December 2016 and later years).
- Customer due diligence on account holders of listed investment entities will be required to be performed from 1 January 2016.
As noted above, FATCA is only the start of a new wave of proposed rules aimed at increasing transparency and reporting including the following:
- OECD CRS. Australia signed the OECD CRS multilateral competent authority agreement on 3 June 2015. The agreement enables the automatic exchange of certain account holder information between countries in order to combat the evasion of tax. Australia intends to implement the agreement from 1 January 2017 with the first exchange of information in 2018 (i.e. in relation to the 2017 calendar year of income).
- Country by Country Reporting (CbC). Australia is proposing to implement the OECD's new transfer pricing documentation package including CbC reporting from 1 January 2016. The new transfer pricing reporting measures will be relevant to companies with global revenue of $1 billion or more broadly, showing information regarding global activities (including location of its income and taxes paid); a master file containing an overview of the global business, structure and transfer pricing policies; and a local file providing details of the local taxpayer’s intercompany transactions.
- Third Party Reporting. Treasury released Exposure Draft legislation on 10 July 2015 requiring a range of third parties ( including financial market participants, listed companies, trustees, administrators of a payment system and certain Government entities) to provide financial and transactional information to the ATO in order to assist with data matching and tax return pre-filling services. These enhanced reporting requirements are expected to apply from 1 July 2016.
- Voluntary Disclosure Code. The Government has asked the Board of Taxation to consider the development of a voluntary code for the increased public disclosure of tax information by businesses, particularly large multinationals, by May 2016. This proposal builds on existing laws which require large companies to publicly disclose their turnover, taxable income and tax paid.
For some organisations, the extension of current customer on-boarding and information reporting obligations may provide new business opportunities – from implementing process improvements to drive operational efficiencies, through to delivering enhanced customer experience.
However the challenge for most affected taxpayers will simply be how to comply with these obligations in an efficient, timely and cost effective manner.
This requires an assessment of how best to manage data, streamline systems and processes, whilst achieving an appropriate level of oversight and governance. In a world where many are struggling with increased regulatory requirements and red tape, information reporting appears to be the next significant wave of compliance.
Tax authorities have seen the value of data to bolster their detection and enforcement functions and have cleverly outsourced data collection to taxpayers. Ultimately for taxpayers this means more scrutiny by tax authorities and potentially, interested parties and the wider public.