Russian Government issues bill for implementation of Automatic Exchange of Financial Account Information

Transcription

1 19 September 2016 Global Tax Alert Russian Government issues bill for implementation of Automatic Exchange of Financial Account Information EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 12 May 2016, at the Tax Administration Forum in Beijing, Russia signed a multilateral agreement in which it officially acceded to the Standard for Automatic Exchange of Financial Account Information (Common Reporting Standard or CRS). 1 In order to enable compliance with the CRS s requirements, amendments are required to the Russian legislation. Accordingly, on 6 September 2016, the Russian Finance Ministry issued for public discussion a bill to implement the CRS in Russia. The draft federal law Concerning the Introduction of Amendments to Part One of the Tax Code of the Russian Federation (in Connection with the Implementation of the International Automatic Exchange of Financial Account Information and Documentation for International Groups) (the Draft Law) has been posted on the federal portal of draft regulatory acts. 2 Detailed discussion Under the Draft Law, commencing from 1 January 2017, Russian financial institutions are obliged to request certain information from clients for processing and analysis, and clients are obliged to provide that information. In particular, the information in question is needed for the purpose of establishing clients tax residence status. Based on the analysis carried out, Russian financial institutions

2 2 Global Tax Alert will report particular information on clients that are tax residents of foreign states to the Federal Tax Service to be exchanged with foreign tax authorities of relevant partner jurisdictions. It must be pointed out that the Draft Law only establishes basic provisions regarding the automatic exchange of information, with references made to regulatory acts that are to be adopted by the Russian Government in consultation with the Bank of Russia (in most cases). Although the purpose of the Draft Law is to incorporate CRS rules and requirements into Russian law, many of its provisions raise more questions than they answer about how CRS requirements are to be fulfilled by Russian financial institutions. Furthermore, some of the wording used in the Draft Law deviates from the CRS provisions developed by the OECD. 3 Such discrepancies may in practice lead to information, not fully in line with CRS requirements, being supplied by the Federal Tax Service to the tax authorities of foreign jurisdictions with which the automatic exchange of information takes place. The key provisions of the Draft Law are highlighted below. Taxpayers affected by the Draft Law s requirements regarding the automatic exchange of financial information with foreign states (territories) for tax purposes Requirements to collect, process, and analyze information on clients and then transmit appropriate information to the Federal Tax Service are imposed on financial institutions. The Draft Law introduces a number of new definitions in the Tax Code, including a definition of financial institutions. That definition does not fully correspond to the term financial Institution as used in the CRS. In particular, the definition of a Russian financial institution leaves out a number of entities which are financial institutions under the CRS (such as holding companies of insurance companies or investment companies managed by a financial institution). Also, the Draft Law refers to an unincorporated structure as a financial institution, while the Tax Code only contains a definition of a foreign unincorporated structure, which may result in further uncertainty. The requirement to provide information applies to all clients of financial institutions. Information must be provided not only in relation to clients themselves, but also in relation to beneficiaries and persons who directly or indirectly control them. The Draft Law contains a definition of a person who directly or indirectly controls a client or beneficiary, but that definition does not indicate that the person in question must be an individual, as is the case under the requirements of the CRS. Also, the Draft Law provides no guidance on the definition of controlling persons in relation to an unincorporated structure, whereas the CRS contains such a definition. This uncertainty may in practice result in financial institutions being unable to identify those persons for which reports must be provided. The Draft Law also provides that if a person intending to become a client of a Russian financial institution refuses to provide information about itself and about its beneficiaries and controlling persons, the Russian financial institution may refuse to conclude a financial services agreement with that person. Information to be disclosed under automatic exchange Under the current version of the Draft Law, financial institutions are obliged to provide information to the Federal Tax Service on clients, beneficiaries and (or) persons with direct or indirect control over them which have been found to be tax residents of foreign states, including financial information and other information pertaining to the financial services agreement concluded between the client and the financial institution. Although the Draft Law contains a definition of financial information to be provided to the Federal Tax Service, it does not contain a clear definition of a financial account, which may lead to discrepancies in the composition and volume of financial information required to be included in CRS reports, for example in regard to investment companies. It is not clear from the text of the Draft Law whether Russian financial institutions would need to report on absolutely all clients who are tax residents of foreign states or only on those who are tax residents of jurisdictions with which information is to be exchanged. The Draft Law provides that the supply by a Russian financial institution to the Federal Tax Service of information included in CRS reports does not constitute a violation of banking or other legally protected secrets and does not require consent to be obtained from clients, beneficiaries or persons who directly or indirectly control them.

3 Global Tax Alert 3 Time frames for providing information to the Federal Tax Service The Draft Law provides that the procedure and deadlines for the provision of information by a financial institution to the Federal Tax Service and the composition of that information are to be established by the Russian Government in consultation with the Bank of Russia. Sanctions The current version of the Draft Law stipulates sanctions for Russian financial institutions in the event that they fail to comply with requirements relating to the automatic exchange of information, including: The recovery of a fine of RUB500,000 in the event of unlawful failure to present information to the Federal Tax Service in the context of the automatic exchange of information or the violation of the established procedure/ volume/deadlines for sending information. The recovery of a fine of RUB300,000 in the event of the violation of automatic exchange requirements relating to the determination of the tax residence of clients, beneficiaries and persons who directly or indirectly control them. Implications Since the Draft Law is open for public discussion until 6 October 2016, it is possible that amendments and/or additions might be made to it. Future Alerts will report on the status of the Draft Law. Given that the automatic information exchange requirements are to come into force from 1 January 2017, Russian financial institutions have a little less than four months to introduce all the processes and procedures needed to handle CRS requirements (including processes and procedures associated with client on-boarding, due diligence of preexisting accounts and subsequent monitoring for the purpose of identifying client status, and reporting) and to be ready to comply with the full range of information exchange requirements from 1 January It is essential to introduce such processes given the current uncertainty and ambiguity about the requirements that will affect all financial market participants, including both financial institutions and their clients, in connection with the implementation of the CRS in Russia. Endnotes 1. The Standard for Automatic Exchange of Financial Account Information is an international equivalent of the Foreign Account Tax Compliance Act (FATCA) developed by the Organisation for Economic Co-Operation and Development (OECD) for the purpose of preventing global tax evasion through the use of offshore jurisdictions and ensuring the transparency of information. More than 100 jurisdictions have committed to implementing the CRS rules, including 54 countries which plan to begin exchanging information in 2017 in respect of the year Russia plans to begin exchanging information in 2018 in respect of the year For details, see EY Global Tax Alert, Russia joins Standard for Automatic Exchange of Financial Account Information, dated 20 May The draft law also provides for the introduction in Russia of requirements relating to the preparation of country-by-country reporting for international groups. For details, see EY Global Tax Alert, Russia issues new version of draft law on BEPS Action 13 implementation, dated 9 September Only a few examples of such discrepancies are discussed.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young (CIS) B.V., Financial Services, Moscow Irina Bykhovskaya Maria Frolova Ivan Sychev Ernst & Young LLP, Russian Tax Desk, New York Julia Samoletova

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG no Gbl NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com