While the Foreign Account Tax Compliance Act (FATCA) has focused worldwide attention on U.S. efforts to create a mandatory cross-border exchange of tax information, the enactment of FATCA was not an isolated occurrence. For more than a decade, the Organisation for Economic Co-operation and Development (OECD) has been trying to obtain a multi-country agreement under which countries would exchange tax information about their residents. In late October of this year, the OECD obtained the agreement of 51 countries, dependencies and territories throughout Europe, Asia, Africa and North and South America (now 52 – collectively, Information-Sharing Jurisdictions) to share tax information among themselves about their residents, starting in 2016 and 2017. The OECD initiative represents a global implementation of cross-border tax sharing that was pioneered by FATCA. More details need to be released on this OECD plan and further work is required to integrate it with FATCA, but in the interim, financial institutions should begin to take a broader view of their tax compliance efforts.
Since 2001, the OECD has maintained a Global Forum on Transparency and Exchange of Information for Tax Purposes (Forum), but in September 2009, the Forum was “restructured as a consensus-based organisation where all members are on an equal footing.”1 The Forum’s mandates are “to promote the rapid implementation of [international standards of transparency and exchange of information],” and “to ensure that developing countries benefit from the new environment of transparency.”
In 2010, the United States enacted FATCA, to require that foreign financial institutions (FFIs) share information with the United States government about their accountholders who are U.S. persons (or U.S. controlled foreign entities), so as to assure that those investors are paying U.S. tax on the income from their offshore accounts. The United States encouraged FATCA compliance by imposing a new 30% withholding tax on certain payments to non-compliant FFIs. For further information about FATCA, please refer to the following DechertOnPoints: The Essential Guide to FATCA; Aim For Strict FATCA Compliance Despite Transition Period; and FATCA: Next Steps for Asset Managers.
FATCA enforcement has been enhanced by dozens of intergovernmental agreements (IGAs) signed by the United States with foreign countries. The Model 1 IGA obligates an FFI to provide information about its U.S. accountholders to its home country, with that country passing the information on to the IRS, which will confirm that the U.S. accountholders have fully paid their U.S. taxes. Some Model 1 IGAs are reciprocal, which makes the IGA a two-way street in that the United States must also then furnish information to the foreign country regarding that country’s residents who are accountholders in U.S. financial institutions. The reciprocal IGA concept provided the first broad cross-border exchange of tax information ever adopted. The Model 2 IGA obligates a local FFI to sign on to the FATCA disclosure program and furnish information about its U.S. investors directly to the IRS.
The international FATCA-like approach to the intergovernmental exchange of information gained a great deal of momentum in 2013. In April of that year, France, Germany, Italy, Spain and the UK announced their intentions to begin a FATCA-type information exchange among themselves, in addition to each country’s agreement to exchange information with the United States. Within the next several months, 15 additional jurisdictions (including Australia, Mexico and EU jurisdictions) had endorsed this approach.2 Also following a FATCA IGA model, the UK obtained the agreement of its Crown Dependencies and a number of its Overseas Territories to automatically provide information to the UK (sometimes known as UK FATCA). Some of these agreements are reciprocal (primarily the Crown Dependencies), but others are not. It should be noted that certain of these jurisdictions, such as the Cayman Islands, have imposed a requirement upon local financial institutions to provide notice of specified identifying information to their designated local authority by a certain date for the purpose of facilitating the future operation of UK FATCA.
These announcements took a step toward becoming formal guidance at the Forum’s meeting on November 21-22, 2013. At the meeting, the Forum created a working body – the Automatic Exchange of Information (AEOI) Group – to prepare a standard for such exchange of information. The AEOI Group was charged with “propos[ing] terms of reference and a methodology for monitoring AEOI on a going-forward basis, building on the expertise developed at the OECD level, establishing a set of criteria to determine when it would be appropriate for jurisdictions to implement AEOI having regard, in particular to capacity constraints, resource limitations and the need to ensure confidentiality and the proper use of information exchanged, and helping developing countries identify their needs for technical assistance and capacity building before engaging in AEOI.”3
On February 13 of this year, the OECD released the Common Reporting Standard,4 which outlined the standard but included neither “a detailed commentary to help ensure the consistent application of the standard” nor “information and guidance on the necessary technical solutions, including compatible transmission systems and a standard format for reporting and exchange.” Subsequently, on July 21, the OECD released a document including the detailed commentary and information and guidance missing from the February document.5
The Forum subsequently met on October 28-29 and, on the second day of the meeting, the Information-Sharing Jurisdictions signed a multilateral competent authority agreement to exchange tax information automatically by 2017.6 Also in October 2014, over four dozen jurisdictions (the early implementers of the Common Reporting Standard, which jurisdictions are substantially the same as the Information-Sharing Jurisdictions) released a statement outlining a timetable for the exchange of information (Timetable).7 Under the Timetable, all accounts opened by the end of 2015 would be considered “pre-existing accounts” under the Common Reporting Standard, and all accounts opened in 2016 or later would be considered “new accounts.” Financial institutions would need to complete due diligence procedures to identify high-value pre-existing accounts by the end of 2016 and low-value pre-existing accounts by the end of 2017. The initial information exchange will take place in September 2017 for new accounts and pre-existing high-value accounts, and in either September 2017 or September 2018 for other accounts, depending upon when a financial institution identifies the accounts as reportable accounts.
Immediate Step: Defining the Entity Type
It is likely that the Timetable will be the earliest implementation of the Common Reporting Standard. As a result, the most important immediate step for an entity with accountholders or clients in one of the covered jurisdictions is to begin to identify whether it is a Reporting Financial Institution, meaning that it is required to report information on its accountholders or clients. Financial Institutions include Custodial Institutions, Depository Institutions, Investment Entities, and Specified Insurance Companies. Section VIII of the Common Reporting Standard sets forth the defined terms thereunder, but briefly: a Custodial Institution holds financial assets for the account of others as a substantial part of its business; a Depository Institution accepts deposits in the ordinary course of a banking or similar business; an Investment Entity invests, administers, trades, or manages financial assets on behalf of others, or primarily earns its gross income from such activities and is managed by another type of Financial Institution; and a Specified Insurance Company is an insurance company or the holding company of an insurance company that makes or is obligated to make payments with respect to cash value insurance contracts or annuity contracts.
Reporting Financial Institutions are all Financial Institutions other than Non-Reporting Financial Institutions. The term Non-Reporting Financial Institution includes: governmental entities; international organizations; central banks; certain pension and retirement funds; certain credit card issuers; entities that present a low risk of tax evasion; exempt collective investment vehicles; and trusts with trustees that are Reporting Financial Institutions, provided that the trustee reports the required information with respect to all of its Reportable Accounts.
Diligence Requirements for Pre-Existing Accounts
Once an entity concludes that it is a Reporting Financial Institution and must report information under the Common Reporting Standard, it should begin to review its records to determine the pre-existing accounts on which it must report, so that it can begin to organize the information it has and collect any additional information it needs in order to comply with its reporting obligations. In addition, since accounts opened through the end of 2015 will be considered “pre-existing” accounts under the Timetable, the entity should begin to collect information required to be reported on pre-existing accounts as soon as possible, so that it will not need to request additional information from accountholders who open accounts through the end of 2015.8
A Reporting Financial Institution will need to determine which of its accounts are Lower Value Accounts, (i.e., those accounts that have a balance or value of US $1,000,000 or less) and then determine the residences of their individual Lower Value accountholders, using a current address if available.9 The procedures are similar for individual High Value Accounts (i.e., those individual accounts that are not Lower Value Accounts), but the Reporting Financial Institution may not simply assume that the current address is the accountholder’s residence, and the Reporting Financial Institution must conduct more extensive diligence if it does not have readily-available information (including searching paper records) and it may need to consult with an accountholder’s relationship manager.
In the case of an entity accountholder, the procedures are slightly different. The Reporting Financial Institution need not review accounts with balances below US $250,000, but for other accounts, must report information about accountholders that are either resident in Reportable Jurisdictions or that are Passive NFEs (defined below) controlled by residents of Reportable Jurisdictions, using self-certifications and anti-money laundering / know-your-client information obtained in the course of business.
Passive NFEs are entities that are not Financial Institutions and are not Active NFEs. Briefly, Active NFEs include entities that are not Financial Institutions and that: (a) have primarily active income; (b) have equity that is regularly traded on an established securities market; (c) are governmental entities, international organizations, central banks, or entities owned by one of these types of entities; (d) are holding companies for active businesses; (e) intend to start operating a business within 24 months of the date of their organization; (f) are in liquidation; (g) primarily engage in financing and hedging transactions with related active businesses; or (h) are exempt from income tax and are charitable, educational, or cultural entities.
Diligence Requirements for New Accounts
Different procedures will be required for new accounts (i.e., those opened in 2016 or later), including information obtained by self-certifications and anti-money laundering / know-your-client information.10 Because further guidance is expected on those specific requirements upon the implementation of the Common Reporting Standard in each jurisdiction, additional details about these requirements are expected to be provided at a later date.
After conducting the diligence described above, the Reporting Financial Institution must report the identifying information regarding the accountholder and/or controlling persons (depending on the type of account), as well as the account number, balance or value as of the end of the relevant reporting period, income earned in Custodial Accounts and Depository Accounts, gross proceeds received in Custodial Accounts, and gross amounts paid or credited to the accountholder for other accounts.11
The Common Reporting Standard will impose new reporting obligations on financial institutions, similar to those imposed by U.S. FATCA for U.S. accountholders, and by UK FATCA for UK accountholders. The Common Reporting Standard and accompanying publications by the OECD provide a broad outline of what these requirements should look like, but each country will publish its own specific guidance in the coming years. However, entities that expect to be classified as Reporting Financial Institutions may start reviewing account information and account opening procedures now, in order to be prepared for the Common Reporting Standard. Stay tuned for more information as the global exchange of tax information once considered an impossible dream is fast becoming a new reality.