On November 24th 2014 The Tax Justice Network issued a 64 page “Final Report” –
“The end of bank secrecy”? Bridging the gap to effective automatic information exchange. An Evaluation of OECD’s Common Reporting Standard (CRS) and its alternatives.

It is written by Andres Knobel and Markus Meinze. You can obtain a copy by downloading it at: http://www.taxjustice.net/wp-content/uploads/2013/04/TJN-141124-CRS-AIE-End-of-Banking-Secrecy.pdf

Executive Summary

On July 21st, 2014 the OECD published Commentaries on the Common Reporting Standard (CRS) published five months earlier, fulfilling the G20’s request to develop a global standard on Automatic Information Exchange (AIE) of tax data.

Although the objective is that CRS should become the “global” AIE standard, it will not be the only AIE system in place. For instance, the European Union Savings Tax Directive (EUSTD) has been running since 2005 (though it may soon be replaced by a more comprehensive, revised Directive on Administrative Cooperation or “DAC”) and the US’s Foreign Account Tax Compliance Act (FATCA) recently entered into force. In fact, the CRS was adapted from FATCA though it lacks its most striking feature, the 30% withholding tax on non-participants that —many argue—allowed FATCA (and probably the CRS) to become a reality. However, unlike
FATCA, the EUSTD (and now the DAC), the CRS is, at least in spirit,—supposed to be open and multilateral, not only in its scope, but also when offering benefits to all countries.

Nevertheless, the potential of the initiative does not seem to have been fully realised by the CRS. A first problem consists in the artificial limitations that have been included regarding the use of the data to fight money laundering and corruption. The CRS explicitly restricts the use of the information received to tax purses, and explicitly prohibits sharing information with law-enforcement authorities, which prevents cost-free synergies for fighting corruption and money laundering to be fully harvested.

Furthermore, entry barriers do not look particularly low for developing countries: there are no provisions on non-reciprocity in their favour (to first only receive information). On the contrary, non-reciprocity is offered only to tax havens (jurisdictions without income tax), for whom receiving information and discarding it was apparently not enough: they ensured that no data would ever be collected about their residents. This desire to perpetuate opacity seems to be an odd wish under a new transparency framework and highlights that some jurisdictions are betting on defending their offshore finance industry by selling tax residency certificates which offer escape routes to criminals. For the same reasons, the US appears willing to postpone or even sidetrack multilateral AIE, offering only very narrow reciprocity via FATCA and thus positioning itself as a monopolistic secrecy jurisdiction.

The US and other secrecy jurisdictions can find it easier to sidetrack because the CRS does not prescribe a unique multilateral competent authority agreement (CAA) for all jurisdictions to engage in AIE with each other in a consistent way. Provisions mandating secrecy jurisdictions to exchange information with any jurisdiction that raises such a request are also absent. In contrast, the Commentaries detail exhaustive confidentiality requirements for any country wishing to receive information.

As if this were a puzzle adapted to one country, Switzerland has already expressed its intention to sign only bilateral CAAs (instead of a multilateral one) and in limited cases: only with countries with close economic relations and considered promising in terms of their market potential for Switzerland’s finance industry1. On top of everything, the July version of the CSR has removed—from the original February publication —all references to commitments for capacity building and to benefits being attainable by all countries.

Seemingly, the problem in much of the CRS’ design is related to institutional problems with the OECD, a group representing only developed countries (instead of a more representative one like the UN Tax Committee), designing a standard that was supposed to benefit all, especially developing countries.

Notwithstanding its moral obligations, the OECD could have realized that a more welcoming framework for developing countries was in the best interests of developed countries: since the CRS will only be effective once all jurisdictions participate, the longer it takes for the rest of the world to be part of it the higher the chances for tax dodgers and money launderers to keep avoiding transparency.

This short-sightedness is also visible in the CRS’ many loopholes, which remain since February: apart from high thresholds preventing beneficial owners—the true owners of shell companies – from being identified, there is an opportunity to avoid any identification at all of an entity’ owners by hiding them behind an “Active non- financial entity.” In addition, a USD 250.000 de minimis threshold prevents any reporting whatsoever and is available to all entities that open an account before 2016, giving plenty of time to any individual or entity to arrange their business in an opaque-effective way, and giving financial advisers such as KPMG plenty of business opportunities. Furthermore, very valuable information on wealthy individuals (companies’ ownership, interests in real estate and hard assets, or safe deposits and warehouses for gold and art in freeports) is excluded from the information exchanged under the CRS. Another flaw refers to the lack of effective provisions encouraging the issuance and collection of Tax Identification Numbers (TINs) which are essential to analyse the information received. On the bright side, the CRS improved provisions to identify the related persons of trusts, foundations and similar legal arrangements, though not all trusts will be required to do so.

In conclusion, many loopholes remain to be fixed, entry barriers for developing countries need to be lower, and even the current CRS provisions will have to be monitored to ensure their proper enforcement (especially by secrecy jurisdictions). But all in all, a global AIE framework with the potential to benefit all countries is a major transparency breakthrough. The emergence of this framework can be attributed in part to the OECD, whose membership was far from supportive in its entirety for such a system to develop. We expect them to now to accommodate the other stakeholders’ needs and concerns by amending its standard before it enters into force. Rejecting and resisting undue influence by narrow financial sector lobbyism and their captured governments, such as the Swiss and the US governments, will be crucial to maintain any role in the future for the OECD in international tax matters.
END

The CRS is a very important document and the Cayman Islands are a signatory to it along with 60 (to date) other countries. It comes into effect very soon and could make a big difference into how and whom we do business.

It is going to be very interesting how we are affected and as a secret tax haven maybe this description of us will be a thing of the past. Whether the “loop holes” mentioned above will help us remains to be seen.

As I am no financier, accountant or tax expert I leave the rest of this editorial to the one written by Tax-News.

The Common Reporting Standard: Automatic Information Exchange goes global

By Tax-News.com Editorial

Automatic exchange of information for tax law enforcement purposes started first in Europe with the EU Savings Tax Directive, went international with the US Foreign Accounts Tax Compliance Act, and, from 2017, will go global with the recently-agreed Common Reporting Standard, the subject of this feature.

Introduction To The Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) provides for annual automatic exchange between governments of financial account information. The Standard sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

In a sense, the CRS is not a “new” initiative started from a blank canvas. Many of the systems that will enable information to the sent and received under the Standard are already in place under existing information exchange protocols. The CRS will essentially piggy-back off these mechanisms. What is new is that governments around the world have accepted the need for such information to be exchanged automatically.

Background To The CRS

Against a backdrop of rising public anger about tax avoidance and evasion, stoked by media reports about the tax planning techniques used by wealthy individuals and corporations, the G20 finance ministers endorsed automatic exchange as the new tax transparency standard on April 19, 2013. In June that year, the G8 welcomed the OECD Secretary General report “A step change in tax transparency” which set out the concrete steps that needed to be undertaken to put a global model of automatic exchange in practice. The G20 leaders then committed to automatic exchange of information as the new global standard in September 2013.

On February 23, 2014, the G20 Finance Ministers endorsed the Common Reporting Standard for automatic exchange of tax information, now contained in Part II of the full version of the Standard. In May 2014, the OECD Declaration on Automatic Exchange of Information in Tax Matters was endorsed by all 34 member countries along with several non-member countries. More than 65 jurisdictions publicly committed to implementation, with more than 40 having committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017 (known as “early adopters”).

The OECD released the full version of the Standard for Automatic Exchange of Financial Account Information in Tax Matters on July 21, 2014. This calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. The Standard was approved by the OECD Council on July 15, 2014.

On September 22, 2014, the Global Forum on Transparency and Exchange of Information for Tax Purposes delivered a Roadmap to the G20 Development Working Group which is for developing country participation in the new OECD Standard on the automatic exchange of financial account information. This Roadmap is part of the efforts to curb multinational tax avoidance and offshore tax evasion in developing countries.

On October 29, 2014, 51 jurisdictions, 39 of which were represented at ministerial level, signed a multilateral competent authority agreement to automatically exchange information based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Subsequent signatures of the agreement, including a signing ceremony on the margins of the OECD Ministerial meeting of June 2015, brings the total number of jurisdictions to 61 (see below). This agreement specifies the details of what information will be exchanged and when, as set out in the Standard.

Why Is There A Need For Such A Standard?

According to the OECD, today’s globalized, almost borderless, world of finance makes it a lot easier for people who want to hide their money abroad in order to evade tax. “Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction,” the OECD observes. “Countries have a shared interest in maintaining the integrity of their tax systems. Cooperation between tax administrations is critical in the fight against tax evasion and in protecting the integrity of tax systems. A key aspect of that cooperation is exchange of information.”

Another advantage of having a common global reporting standard is that international information exchange systems will be standardized, lowing administrative costs for all concerned. At present, there are numerous procedures in place for tax authorities to exchange information with each other. These include bilateral double taxation avoidance agreements, regional initiatives like the European Savings Tax Directive, and international agreements such as the OECD Multilateral Convention. “A proliferation of different and inconsistent models would potentially impose significant costs on both government and business to collect the necessary information and operate the different models,” the OECD states.

From Exchange of Information On Request To “Automatic” EoI

Countries that have signed up to the CRS will exchange information “automatically” with one another. This represents something of a step change in international tax enforcement. Traditionally, information about an individual or business has been sent from one tax authority to another on request, based on evidence that tax fraud or some other crime has taken place. The EU could be said to have led the way on automatic information exchange under its Savings Tax Directive. However, the United States Foreign Account Tax Compliance Act (FATCA) was the real game-changer in international tax compliance, in that it became the first global automatic exchange of information program, and the inspiration behind the CRS.

In summary, “automatic” exchange of information will entail the systematic and periodic transmission of “bulk” taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income or asset information. The information exchanged is normally collected in the source country on a routine basis, generally through reporting of the payments by financial institutions and other payers.

Basis Of Information Exchange

While there are technical similarities between the CRS and FATCA, there are some key differences, mainly that US-specific rules have been removed from the Common Reporting Standard. For instance, FATCA is based on US citizenship, a concept fundamental to the US tax system, whereas the CRS is based on residence. Also, unlike FATCA, the CRS does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. Additionally, the CRS has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in automatic exchange under the standard.

Information To Be Exchanged

The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account.

Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement that financial institutions “look through” passive entities to report on the relevant controlling persons.

The financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they present a low risk of being used for evading tax and are excluded from reporting.

Confidentiality

The OECD assures us that the standard contains specific rules on the confidentiality of the information exchanged and that the underlying international legal exchange instruments already contain safeguards in this regard. Where these standards are not met (whether in law or in practice), countries will not exchange information automatically.

Time will tell how watertight the system is in practice, however.

Financial Institutions Add Up The Costs

After the billions of dollars spent by financial institutions on preparing for FATCA, the CRS is expected to represent another bureaucratic and financial headache for financial services providers. Presumably, after FATCA, many FIs will now have some of the systems in place to report the necessary information to their local tax authority under the CRS.

Simon Leach, financial services tax partner at PwC, observed after the CRS was released by the OECD last year: “Automatic exchange of information is crucial in the continuous fight against tax evasion but the new regime will mean significant costs for financial institutions as they have to modify and build systems to meet their obligations.”

“Though based on FATCA, the CRS does vary in certain areas and this will also present challenges for organizations as they continue to implement these measures to promote tax transparency. Until this further detail emerges around implementation, and the impact of the differences between the two models is understood, financial institutions will face continued uncertainty as they seek to ensure they are in compliance with these regimes.”

However, this isn’t a simple matter of cost. Fearing the legal consequences of not meeting the FATCA requirements to the letter, many banks and other FIs have simply stopped providing services to US clients. The full consequences of the CRS have yet to be played out, but could we reach a point where some FIs refuse to do business with foreign clients altogether, if the administrative and legal costs of doing so are too high? That remains to be seen.

Signatories To The Standard

The total number of signatories as at June 4, 2015, was 61, including the following countries and territories:

Albania, Anguilla, Argentina, Aruba, Australia, Austria, Belgium, Bermuda, British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Ghana, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Turks and Caicos Islands, and the United Kingdom.

A total of 90 jurisdictions have endorsed the CRS, a number which is likely to continue to grow.

Commencement

It is envisaged that the first automatic information exchanges under the CRS will begin in 2017. However, the OECD itself admits that the current timetable is “ambitious” because many countries, especially in the developing world, do not currently have the administrative and technical mechanisms in place to meet the standard, nor the resources to build them. Therefore, with the assistance of the rich countries, it will probably take several more years before the CRS is a truly global information exchange network.

For more on this story go to: http://www.tax-news.com/features/The_Common_Reporting_Standard_Automatic_Information_Exchange_Goes_Global__573079.html#sthash.tf9jYUCX.dpuf