Global Tax Alert | 20 February 2014

OECD releases Common Reporting Standard

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A global FATCA-like regime

On 13 February 2014, the Organisation for Economic Co-operation and Development (OECD), at the request of the G8 and the G20, released a model Competent Authority Agreement (CAA) and Common Reporting Standard (CRS) designed to create a global standard for the automatic exchange of financial account information.

The publication of the CAA and CRS is a significant structural step in governments’ efforts to improve cross border tax compliance. This follows a raft of tax compliance legislation such as the US Foreign Account Tax Compliance Act (FATCA) and active campaigns of voluntary disclosures and legal procedures, most recently in Germany and Italy.

The CRS represents another global compliance burden for financial institutions and increases the risks and costs of servicing globally mobile wealthy customers – an otherwise attractive customer segment.

The good news for financial institutions is that the OECD has modelled the CRS on FATCA, which means it should be possible to leverage existing and planned FATCA processes and systems. However the data required is different, and the volumes are likely to be significantly greater under the CRS.

The standard has no direct legal force but it is expected that jurisdictions will follow the model CAA and CRS closely when implementing bilateral agreements.

There is significant political will to implement this standard with over 40 jurisdictions signing up to early adoption. The expected timeframe could see jurisdictions seeking to sign agreements in 2014, with new customer due diligence procedures required in 2015 and reporting in 2016.

Although there is further detail to come, financial institutions may wish to consider the impact of the CRS on their FATCA compliance, as well as the best way to engage with prospective competent authorities.

Building on FATCA

The CAA and CRS are based heavily on the FATCA Model 1 Intergovernmental Agreement (Model 1 IGA) with certain amendments to remove US specificities and build on work already performed as a result of FATCA. The aim is to reduce tax evasion by taxpayers using offshore financial accounts held both directly and indirectly through enhanced information reporting.

The CAA and CRS reflect the approach described in the OECD report of 18 June 2013 (A Step Change in Tax Transparency). Reporting financial institutions will report financial account information on certain account holders to their national tax or other competent authority. These will, in turn, provide information to other competent authorities in a partner jurisdiction under a systematic and periodic transmission of “bulk” taxpayer information – an “automatic exchange” of information. The information to be exchanged will cover all types of investment income. This will include interest, dividends, income from certain insurance contracts and other similar types of income as well as account balances and sales proceeds from financial assets.

Structure of the standard

The CAA is a base agreement. It sets out general definitions, the obligations of the jurisdictions to obtain and exchange information, and the procedures for collaborating on compliance and enforcement. The annex to the CAA is the CRS which describes the due diligence requirements for identifying and reporting on specific types of accounts under the agreement, and provides additional definitions.

The overall process for obtaining customer classifications is broadly the same as the Model 1 IGA but the nature of those classifications is based on residency rather than citizenship or nationality. This is because the OECD has recognized the investment in FATCA by the financial industry and should mean financial institutions can leverage a significant amount of the work already performed when complying with this new standard.

Expected timing for adoption of the standard

The next step is for the CAA and CRS to be formally submitted by the OECD to the G20 Finance Ministers and Central Bank Governors meeting in Sydney on 22-23 February 2014. At that time, it is expected that there will be a public statement of support from a number of jurisdictions and that this statement will set out indicative timelines for putting in place CAAs. This could see a short timeline for adoption, and might even result in the first reporting being due as early as 2016.

Adoption of the standard by partner jurisdictions will be in two phases. A competent authority will need to implement the CRS into local law. This local law would require financial institutions to collect and report data of account holders. At this stage many authorities are expected to provide guidance on local interpretation. Further, jurisdictions will need to agree to the CAA to facilitate the automatic exchange of information. This may be done bilaterally, through existing treaties, or through the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a multilateral tax information exchange instrument.

Further guidance on interpretation

Independently of the adoption of the CAA and CRS, the OECD will continue to develop the commentary to accompany the CRS as well as the technical solutions to implement the actual information exchanges. The commentary will be of crucial importance in terms of providing sufficient guidance and explanation to allow financial institutions to interpret the CRS. It is currently expected that this commentary will be released in time for the September G20 Finance Minister meetings.

A significant concern will be whether jurisdictions will take different positions in terms of interpretation. The industry hope is that any such differences are few and far between. An additional concern, given the potential number of adopting jurisdictions, will be how financial institutions will track such differences. One possible route could be for the OECD commentary to record any differences in interpretation. This approach would allow financial institutions to look to one point of reference.

The OECD Background Information Brief released at the same time as the CAA and CRS acknowledges this concern and states that the standard will be a “living system” and so may need to “evolve over time.” Helpfully the OECD also notes that “The OECD, working with G20 jurisdictions, will seek to ensure that the standard remains a single standard also over time and that as much as possible it continues to be interpreted and operated consistently across different jurisdictions.”

It is also worth noting that the CAA is only a model and, before coming to an agreement, jurisdictions are able to negotiate amendments to it. Therefore, financial institutions need to make a judgment regarding the point at which the requirements are incorporated into their operations – given that they have to balance external legal milestones with internal implementation lead times.

Implications

  • Implementation timelines are likely to be very tight.
  • OECD commentary is not due to be released until around the middle of 2014.
  • FATCA programs can be leveraged but there are differences that may require additional processes / procedures in order to comply.

Next steps

  • The approach adopted by financial institutions will be influenced by, among other things, the extent to which they consider that the anticipated timetable for implementation of the OECD proposals may change. Currently the anticipated timeline appears ambitious. In any event, as the CRS is a model agreement, the requirements are subject to change, both in terms of the final agreements that are entered into and the interpretation, local legislation and guidance provided at a country level.
  • Financial institutions will need to decide the best time to initiate a change program to ensure it can satisfy the requirements of the CRS, taking into account, in particular, the time required for implementing changes to its customer classification processes.
  • However, financial institutions may want to take steps now to understand the key differences and similarities between the CRS and FATCA, and the corresponding impact on their approach to FATCA compliance. For example, there may be opportunities to reduce effort by combining FATCA planned activities with the CRS, such as the review of high value accounts.
  • Financial institutions may also wish to consider the best approach to engaging with prospective competent authorities to help ensure that businesses can comply with the CRS in a way that minimizes cost and disruption.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom), London
  • Julian Skingley
    +44 20 7951 7911
    jskingley@uk.ey.com
  • Rod Roman
    +44 20 7951 1549
    rroman@uk.ey.com
  • Paul Radcliffe
    +44 20 7951 5816
    pradcliffe@uk.ey.com
  • James Guthrie
    +44 20 7951 4366
    jguthrie@uk.ey.com
  • Peter Frost
    +44 20 7951 5517
    pfrost@uk.ey.com
  • Stuart Chalcraft
    +44 20 7951 1190
    schalcraft@uk.ey.com
  • Jeff Soar
    +44 20 7951 6421
    jsoar@uk.ey.com

EYG no. CM4180