In this alert, we consider what developments we can expect to see in the year ahead and how this growing movement towards global tax information exchange will affect financial institutions (FIs).

The story so far

In terms of FATCA itself, there has been notable movement this year in the Asia-Pacific region; Japan has already entered into a Model 2 IGA with the US, Australia is still negotiating a Model 1A IGA with the US, and Singapore has expressed its intention to enter into a Model 1A IGA with the US. In PRC, since Sino-US Strategic and Economic Dialogues in July 2013, China has announced that it will commit itself to make its best endeavour to enter into an IGA with the US on the implementation of FATCA, and both parties have undertaken to start a discussion on this in the course of 2013.

This movement in the Asia-Pacific region illustrates what has become a global trend, in that the introduction of the US FATCA regime originally caused consternation for FIs across the world; however for foreign governments it planted the seed of an idea - the thought that perhaps they could have a similar regime themselves.

Over the course of the last 12 months, the growing political focus on eradicating tax evasion and the introduction of global tax information exchange has put this at the top of the agenda for all of the big multinational organisations. There have been numerous announcements in this area, by the G5, the G8, the G20, the EU and of course the Organisation for Economic Co-operation and Development (OECD), which have gained momentum this year, with more and more countries announcing their support for these proposals.

This has culminated in a report by the OECD ‘A Step Change in Tax Transparency’, proposing a model for global automatic tax information exchange, or, as it is becoming commonly known, “GATCA”.

FATCA offshoots

It is clear to see the advantages of having a single common global standard for reporting rather than numerous stand-alone systems and the OECD’s proposals seem likely to become accepted as the new global standard. It is hoped that this unified approach will reduce the cost burden for FIs, and avoid simply ‘relocating’ the problem of tax evasion to other jurisdictions.

Given these aims it is perhaps no surprise that the OECD proposal is itself based closely on the existing Model I Intergovernmental Agreement (“IGA”), originally developed to implement FATCA outside the US. The OECD aim to ‘simplify’ the IGA by removing US-specific references changing the effective dates and aligning it more closely to existing EU anti-money laundering laws.

An OECD working party has met to develop a draft “model competent authority agreement” and “common reporting standard” with a view to obtaining OECD approval in early 2014. Implementation time frames in this area have been ambitious from the outset, and this does not seem likely to change now, with first reporting under this proposed regime being possibly as early as 2016.

There has been much talk about the advantages of a ‘big bang’ approach to implementation, enabling FIs to adopt new processes and operations as a single exercise to deal with both FATCA and GATCA. That being said, for most there will need to be at the very least a two stage approach to implementation, as it seems unlikely that the existing FATCA regime will be repealed and many FIs are already well down the road to FATCA specific implementation.

What should FI’s do now?

Deal with FATCA first - for those FIs at risk of FATCA withholding, this must remain the top priority. FIs who have not already done so should identify entities within their group, categorise them for FATCA and, where the FATCA implementation position is sufficiently clear, start the process of registering them on the US registration portal, with a view to obtaining a ‘GIIN’ number. Registration details can be entered onto the portal now on a preliminary basis, with registration itself being possible from 1 January 2014 onwards. Entities that have registered by 25 April 2014 will not be subject to US withholding when it starts in July 2014.

Future proofing – Existing FATCA programmes should be re-evaluated and where possible adapted, with a view to facilitating future compliance with the proposed global automatic exchange of tax information laws.

OECD developments - Now is the time to act in relation to the OECD proposals for a common reporting standard and model competent authority agreement. The chances are that these regulations will be what most FIs will have to deal with across most jurisdictions in which they operate, so there is a big incentive to make sure that they work for them.

Current items on the table at the OECD include scrapping the de minimis thresholds on reporting, potentially reducing the lists of exempted entities (for example, the exemption for ‘regularly traded’ entities may not be retained) and removing the reliance on US concepts and forms.

One positive feature of the process of introducing FATCA has been that, after the initial unexpected legislation from the US, the governments implementing it have consulted with industry and listened to their concerns, to adapt the regime into one that can work in the real world. It is important that the OECD process works in this way too, but that cannot happen without the engagement of different types of FI from different jurisdictions. It looks as though global tax information exchange is here to stay, so FIs should consider engaging with industry bodies now, to raise any concerns, issues or ideas that they have with the OECD proposals, so that they can help develop a system that works for them.