The New Global Standard: Automatic Exchange of Information on Financial Accounts

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1 2015/FMP/WKSP1/022 Session: 6 The New Global Standard: Automatic Exchange of Information on Financial Accounts Submitted by: United States Workshop on Fiscal Management Through Transparency and Reforms Bagac, Philippines 9-10 June 2015

2 The New Global Standard: Automatic Exchange of Information (AEOI) on Financial Accounts FATCA and the Common Reporting Standard U.S. Department of the Treasury

3 Two Approaches to AEOI FATCA & CRS U.S. Foreign Account Tax Compliance Act (FATCA) Enacted in 2010, first reports due in 2015 Facilitates the reporting of accurate foreign financial account information of U.S. persons (individuals and their foreign entities) to the IRS. OECD Common Reporting Standard (CRS) Like FATCA, CRS targets tax evasion The goal for both regimes is for residence jurisdictions to obtain accurate financial account information in source jurisdictions

4 FATCA: Background Information sharing on request Prior to FATCA, the U.S. could only obtain foreign financial account information on U.S. persons by making a specific request for the information under a treaty or tax information exchange agreement Administratively, process not well-suited to combatting large-scale offshore tax evasion Automatic exchange of information under FATCA The United States is undertaking AEOI pursuant to FATCA and has entered into intergovermental agreements (IGAs) with other jurisdictions to do so. Under a Model 1 IGA, foreign financial institutions (FFIs) holding financial accounts of U.S. persons must report the account information to the appropriate governmental agency of their residence jurisdiction. The agency then reports the information to the IRS. Certain jurisdictions have signed agreements wherein the FFIs report the information directly to the IRS ( Model 2 IGAs). FFIs that are noncompliant with FATCA will be subject to a 30 percent withholding tax on certain payments made to them by FFIs that are participating in FATCA, as well as U.S. withholding agents.

5 Reciprocal Exchange of Information FATCA Many of the IGAs provide for reciprocal exchange of information ( Model 1A IGAs), where the United States agrees to provide information to the other jurisdiction with respect to certain U.S. financial accounts of its residents. Is the exchange of information equivalent? The Model 1A IGAs entered into by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions. They also include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve such equivalent levels of reciprocal automatic exchange. The administration s recent budget proposals have included proposals advocating legislative changes; e.g., changes that would require financial institutions to report account balance information in addition to amounts of dividends and interest paid to non-u.s. recipients.

6 Information Exchanged Under FATCA From FFIs in jurisdictions with IGAs: Identifying information on the account holder; Identifying information on the FFI; End-year account balance or value; Depending on the type of the account, information on amounts paid into the account and gross proceeds from the sale of property paid into the account. From U.S. financial institutions under reciprocal IGAs: Identifying information on the account holder (similar to above); Gross interest, U.S.-source dividends, and any other U.S.-source income paid into the account reportable under current domestic reporting rules applicable to non-u.s. persons.

7 Costs & Benefits of AEOI Costs (to governments): IT development (secure & compatible data transmission systems); Staff training to utilize incoming data from other jurisdictions for tax compliance purposes. Benefits (improved tax collection): data not yet available is the first year FFIs are reporting to the United States, so preliminary results won t be available for 1 2 years.

8 APEC Progress - FATCA Signed IGAs Australia, Canada, Chile, Hong Kong, Japan, Republic of Korea, Mexico, New Zealand, and Singapore Jurisdictions treated as if they had an IGA in effect (signing is the next step) China, Indonesia, Malaysia, Peru, the Philippines, Thailand IGA discussions with other APEC jurisdictions also ongoing

9 Common Reporting Standard (CRS) The OECD began developing an AEOI program based conceptually on FATCA in 2013 To facilitate multilateral account information between resident and source jurisdictions The G20 has endorsed AEOI as a global standard On October 29, 2014, 51 (now 52) jurisdictions signed the multilateral convention First exchanges under the CRS are set to begin in either 2017 or 2018, provided that CRS-committed jurisdictions are able to put implementing laws in place

10 CRS and FATCA - comparison Like FATCA, the CRS is meant to facilitate transmission of bulk information on financial accounts of taxpayers between source and residence jurisdictions Where the FATCA IGA approach entails many bilateral agreements, the CRS approach hinges on a single multilateral instrument signed by many jurisdictions Like the due diligence rules for FFIs in the FATCA IGAs, CRS due diligence requirements must be implemented by domestic law of the relevant jurisdictions Unlike FATCA, the CRS has no withholding tax to incentivize jurisdictions to participate

11 Conclusion The automatic exchange of information on financial accounts under FATCA and the CRS provide many benefits in terms of standardized, automated, annual exchange of information Predictable Cost-effective Long-term, the quality of information will improve over time Jurisdictions will see opportunities to enhance tax compliance and will develop data systems that make optimal use of the financial information reported