Global Watchdog organizations such as the Organisation for Economic Cooperation and Development (OECD) and the G7 Financial Action Task Force (FATF) have spent decades seeking financial reporting transparency to discourage money laundering. The movement gathered momentum following the global financial crisis of 2007-2009. The United States was the first to accelerate the speed with its enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010. This expansive data collection and reporting initiative prompted the finance ministers of the United Kingdom, France, Germany, Italy, and Spain to call for a globally standardized automatic exchange of information in early 2013. The OECD stepped up the pace with the July 2013 release of its “Action Plan on Base Erosion and Profit Shifting” (BEPS), a strategy aimed at modifying international tax rules.
In response to BEPS, more than a quarter of the world’s countries (including all the European Union countries, Mexico, British Virgin Islands, Bermuda, and Cayman Islands) have signed the OECD’s Multilateral Competent Authority Agreement (MCAA), thereby ensuring a global launch of an annual bilateral automatic exchange of financial account information. More than 90% of these countries will start collecting data in January 2016 and begin sharing it as early as September 2017. The remaining countries anticipate full data collection implementation during 2017 and a share date of September 2018.
These tax jurisdictions are currently in various stages of executing the Standard for Automatic Exchange of Financial Information in Tax Matters, a new standard for global information exchange developed by the OECD and members of the G20, the global forum whose membership includes 19 of the world’s largest national economies and a representative from the EU. These reporting parameters have been presented and modified several times in recent months, with the final version being endorsed by G20 leaders at the Brisbane Leaders’ Summit in November 2014.
More than 50 jurisdictions have signed the MCAA, and that number is expected to grow. The Global Forum on Transparency and Exchange of Information for Tax Purposes, hosted by the OECD, has a membership of more than 120 national jurisdictions that have committed to the concept. The Global Forum is the premier international body for ensuring the implementation of the internationally agreed-upon standards of transparency and exchange of information in the tax area. Over the last several years, pilot programs for information exchange have been under way.
The U.S. hasn’t signed the MCAA yet, but it is a member of the Global Forum. Analysts are unsure as to when or if the U.S. will sign because the U.S. government seems set on maintaining its numerous FATCA-related agreements with other governments and financial jurisdictions. As of March 1, 2015, the U.S. had intergovernmental agreements with 54 nations. Yet even though the U.S. hasn’t signed the MCAA, branches and subsidiaries of U.S. financial institutions in any MCAA country will be required to obtain information and automatically transmit this information to other jurisdictions on an annual basis.
The fact that the U.S. hasn’t signed the MCAA or implemented the OECD’s Common Reporting and Due Diligence Standard (CRS) may actually create additional challenges for U.S.-based financial institutions in coordinating and recording information across the various jurisdictions in which they do business. Financial institutions falling within the scope of these agreements include the majority of custodial institutions (including brokers), depository institutions, investment entities, and specified insurance companies.
The CRS information document forms the basis for the scope and nature of shared information. CRS information will include account identification data (including name, address, and date and place of birth of relevant individuals and/or controlling persons of entities), interest, dividends, account balance, income from certain insurance products, sales proceeds and other income generated with respect to the assets held in the account and/or any payments made. Accounts subject to review include those held by individuals and all entities (including trusts, foundations, and passive entities).
ADDITIONAL PREPARATION NEEDED
FATCA and CRS are different. There are three major differences: (1) CRS is a fully reciprocal automatic exchange system with many of the U.S. specifications removed (e.g., it’s based on residence rather than citizenship), (2) CRS doesn’t provide for thresholds for preexisting individual accounts, and (3) CRS doesn’t include a “frequently traded” exemption.
Advisory services from the Big 4 accounting firms have already produced detailed presentations and alerts for their clients. The firms expect the volume of CRS data exchange will be significantly higher than what is collected for FATCA purposes. Other detailed differences exist and should be reviewed in depth.
Even global financial services and tax giants such as PricewaterhouseCoopers (PwC) and KPMG acknowledge that the MCAA reporting timeline is ambitious. Individuals and entities with financial accounts in one or more of the MCAA countries need to stay abreast of the rapid developments. In addition to increased compliance/reporting requirements, a new administrative and IT infrastructure will be required because due diligence burdens for global financial institutions are expected to surge. Forthcoming reporting errors and the need for data corrections must be assumed. And U.S. taxpayers must be prepared. Those with financial accounts in an MCAA country will have that financial information shared annually with all relevant jurisdictions—hopefully using the most secure data transfer means available.
Readiness will be the key! Affected taxpayers must identify a reporting strategy and approach. Work streams and compliance milestones must be established as soon as possible. Individuals and entities with potential tax irregularities are encouraged to bring their affairs up to date immediately. And in the midst of this reporting flurry, all taxpayers need to increase awareness of their confidential financial reporting requirements. Given the pending global sharing, they should plan now for their personal financial safety.
© 2015 A.P. Curatola