Towards a European FATCA?

Inspired by the CRS and following recent agreement at the Economic and Financial Affairs Council of the EU (ECOFIN) on the revision of the Directive on Administrative Cooperation (DAC), September 2017 will also see the first automatic exchanges of information within the European Union.

 

DAC

The original draft contained provisions for a switch to automatic exchange, but was limited in terms of income and was conditional on the information being ‘available’. This was revised at a meeting of ECOFIN last October. The European Union Council adopted on 9 December 2014 a new Directive 2014/107/EU amending the Directive 2011/16/EU regarding mandatory automatic exchange of information in the field of taxation, in order to solve the problem posed by cross-border tax fraud and tax evasion, one of the major concerns in the EU and globally. The revised directive expands the scope of the automatic exchange of tax information to include interest, dividends, and other income as well as account balances and sales proceeds from financial assets. The deadline for Member States to adopt local legislation consistent with the revised Directive is 31 December 2015. Under the revised DAC, information related to fiscal years as from 1 January 2016 will be exchanged on an automatic basis between EU Member States as from 1 January 2017.

It should be noted that in respect of the following five categories of income:

- employment income;

- directors’ fees;

- life insurance products not covered by other Directives;

- pensions;

- ownership of and income from immovable property,

 

the EU Member States start the automatic exchange of information, if available, regarding the taxable periods from 1 January 2014 onwards (i.e. the  first intended automatic exchange should take place in 2015). Additionally, DAC provides for the EU Commission to be the sole negotiator for any automatic information exchange of an EU Member State with non-EU countries. In the meantime, the EU Commission is working to bring third countries on board. The underlying idea is to skip the second version of the EU Savings Directive (which will be phased out) and conclude agreements on the basis of the new standards.

 

Similarities between DAC and CRS

 

As is the case under CRS, DAC envisages that financial institutions (FI’s) - including depository institutions, custodial institutions, investment entities and specified insurance companies - will report to their local tax authorities, which in turn will report this information to the tax authorities in the countries of residence of the account holders.

 

For the moment, neither the CRS nor DAC are fully finalised in terms of detail and reporting methodology, which leaves FI’s that need to prepare for the increased reporting burden knowing that they need to take certain actions to be able to comply but enable to move forward with complete certainty on the parameters within they will be reporting.

 

Both under DAC and CRS, it will be necessary to carry out due diligence and reporting for all account holders resident in the different participating jurisdictions. A greater number of accounts are likely to fall within the scope of the exchange of information as there is no minimis threshold for pre-existing individual accounts under either CRS or DAC.

 

Conclusion

 

The similarities between the CRS and DAC should minimize costs and administrative burdens both for tax administrations and for economic operators. A key issue for FI’s is ensuring the consistency of global implementation for the CRS and DAC, aligned as far as possible to existing FATCA implementations.

 

I don't question the necessity for EU Member States to ensure that they collect all the tax revenues that are due to them. However, DAC raises some concerns for investors such as privacy and data protection and still unresolved issues like double taxation of financial income (dividend in particular) within the EU.

 

 

If you would like to discuss any aspect of the DAC in more detail, please contact me.

How does the CRS Regulation interact with FATCA?

The Common Reporting Standard (CRS) is a standard developed by the Organisation for Economic Co-operation and Development (OECD) for the automatic exchange of information. It is an effort to make the automatic exchange of information between tax authorities the global standard, effectively replacing the exchange of information on request as the usual way of doing business. Like FATCA, the CRS will require financial institutions (FI’s) around the globe to play a central role in providing tax authorities with greater access and insight into taxpayer financial account data including the income earned in these accounts.

 

FATCA versus CRS

 

The CRS will require financial institutions to report information to their own jurisdiction and this information will in turn be passed on to other relevant countries automatically each year. It is not designed to replace any existing basis or any other means of information exchange, but instead intends to supplement current measures. The CRS, although closely modeled on FATCA, is not simply a straightforward extension of FATCA. The CRS is based upon tax residence and, unlike FATCA, does not refer to citizenship. Not only do FI’s have to report on far more than only US persons, but on far more accounts than they would under FATCA. Unlike FATCA, which forgives tax liability on smaller accounts (less than $50,000), all individual accounts and new accounts opened by financial entities are considered reportable.

 

The CRS is wider reaching and, as a multilateral agreement, multiplies the reporting obligations of FI's. The CRS represents another global compliance burden for FI's and increases the risks and costs of servicing globally wealthy customers. The good news for FI's is that this standard follows in the footsteps of FATCA and is explicitly modeled on the approach taken in FATCA's Model 1 IGA. However, there is no withholding option under the CRS so those who think that, because they have the systems in place to deal with FATCA reporting, they have no work to do, will have to think again. The data required is different and the volumes are likely to be significantly greater under the CRS.

 

Unlike FATCA, which allows fund managers to report on their underlying funds, the CRS requires each individual fund to file on its own, reporting directly to the tax authorities in other nations. The result will be greater compliance burden for global funds.

 

What are the implications for FI's?

 

FI’s have two main tasks under the CRS. Their initial task is to identify ‘reportable accounts’. Reportable accounts are financial accounts held by tax residents in relevant CRS reportable countries. This include accounts held by individuals and entities (which includes trusts and foundations), and the requirements to look through passive entities to provide information on reportable persons.

 

The CRS sets out in detail the robust Due Diligence procedures FI’s must follow. These procedures are necessary to enable the identification of reportable accounts and obtain the accountholder identifying information that is required to be reported for such accounts.

Having identified ‘reportable accounts’ FI’s then have an obligation to report the financial information (balances, interest, dividends and sales proceeds from financial assets) on an annual basis to their local taxation authorities which will, in turn, pass that information on to the tax authorities where the account holder is resident.

Reflection

An issue that already exists under FATCA and will be expanded exponentially under the CRS is that reciprocity means every government bears the cost of incorporating expansive financial surveillance. Each participating country must work to put in place administrative procedures and IT systems to safely exchange information with other participating countries while ensuring that the information received is kept confidential only used for the purposes specified in the Competent Authority Agreement (CAA). This is a particular issue for developing countries, as the Tax Justice Network (TJN) points out, this formal equality in fact introduces substantive inequality and potentially great harm to poorer countries. Hence the plans to assist them to achieve the standards.

When is it happening?

Approximately 51 jurisdictions are 'Early Adopters' of the CRS. FI's based in those participating jurisdictions must have their due diligence processes in place by the end of 2015 as the first reports will be in respect of the 2016 calendar year. The first exchange of information will take place in September 2017, but this will require FI's to report to their local tax authorities some time in advance of this date. A further 34 countries, including Hong Kong, Switzerland, Singapore and United Arab Emirates will start reporting in 2018, one year later than the 'Early Adopters'.

For further information please contact me.