Global Tax Alert | 2 July 2013
OECD releases G8 report on automatic exchange of financial account information
On 18 June 2013, the OECD publicly released a report that it provided to members of the G8 group of countries in advance of their recent Summit in Lough Erne, Northern Ireland (the OECD report). The OECD report, A step change in transparency: Delivering a standardised, secure and cost effective model of bilateral automatic exchange for the multilateral context, was prepared at the request of the G8 Presidency. It follows the G20 Finance Ministers’ endorsement in April 2013 of automatic exchange of information for tax purposes as an expected future standard.
Executive summaryThe OECD report focuses on the development of an efficient approach for implementing automatic exchange of information regarding financial accounts. The OECD report begins with a discussion of recent developments on which to build in a broader, multilateral context, including in particular the development of the intergovernmental agreement (IGA) approach for implementing the information reporting obligations of financial institutions under the US Foreign Account Tax Compliance Act (FATCA) provisions. The OECD report describes three key matters that would need to be addressed in developing a standard multilateral model for automatic exchange of financial account information: (1) the scope of coverage for information to be reported and exchanged; (2) the legal basis and confidentiality restrictions with respect to information exchange; and (3) the technical and IT requirements for information exchange.
The OECD report concludes with a discussion of four steps that jurisdictions would need to take in order to implement a standard multilateral model for automatic exchange of financial account information including:
- • enactment of necessary legislation;
- • selection of a legal basis for exchange of information;
- • adaptation of the scope of reporting and due diligence requirements; and
- • development of common or compatible IT standards.
This overall approach was endorsed in the G8 Leaders Communiqué: “We support the OECD report on the practicalities of implementation of multilateral automatic exchange and will work together with the OECD and in the G20 to implement its recommendations urgently.”
The OECD report developed for the recent G8 summit and released publicly on June 18, 2013, provides a review of recent developments with respect to automatic exchange of information, discusses the key features required for effective automatic exchange of financial account information, and sets forth the steps that jurisdictions would need to take in order to implement a standard multilateral model for such exchange.
Recent developments on automatic exchange of financial account information
The OECD report notes its long history of work on all forms of information exchange for tax purposes, citing both the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and Article 26 of the OECD Model Tax Convention. It further notes the recent political interest focused on automatic exchange of information, including discussions at the April G20 Finance Ministers meeting.
The OECD report discusses the development of the Model 1 IGA by the United States and five European countries (France, Germany, Italy, Spain and the United Kingdom) for implementing the information reporting required under the US FATCA provisions. It further discusses the April announcement by these five European countries of their intention to develop and pilot exchange of information among themselves based on this model and notes that interest in this approach has been expressed to date by a dozen other countries. Finally, the report notes the agreement for information exchange based on the Model 1 IGA approach that has been entered into by the United Kingdom with its Crown Dependencies and many of its Overseas Territories.
Key features of a standard model for automatic exchange of financial account information
The OECD report discusses three key features of a standard multilateral model for automatic exchange of financial account information: (1) the scope of coverage for information to be reported and exchanged; (2) the legal basis and confidentiality restrictions with respect to information exchange; and (3) the technical and IT requirements for information exchange.
An effective model for automatic exchange of information would require agreement on the scope of the information to be reported by the domestic financial institutions in the source jurisdiction and subsequently exchanged with the tax authorities in the residence jurisdictions of the accountholders. The view expressed in the OECD report is that the agreed scope should be broad across three distinct dimensions:
Scope of financial information reported. A comprehensive reporting regime would cover different types of investment income, including interest, dividends and similar types of income, and also would address the underlying capital.
Scope of accountholders subject to reporting. A comprehensive reporting regime would require reporting with respect to individuals and would look through interposed legal entities or arrangements.
Scope of financial institutions required to report. A comprehensive reporting regime would cover banks and other financial institutions such as brokers, collective investment vehicles and insurance companies.
The OECD report also indicates that agreement would need to be reached on a robust set of due diligence procedures to be followed by financial institutions on identifying reportable accounts and obtaining accountholder identifying information in order to ensure the quality of information reported and exchanged.
The OECD report next discusses the requirement for a legal basis for both the domestic reporting obligation and the exchange of information. With respect to the reporting obligation, such a legal basis would typically be included in domestic tax legislation. With respect to the exchange of information, there are several different legal bases, including a bilateral treaty with a provision based on Article 26 of the OECD Model Convention and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. For certain countries, legal basis for exchange can be found in the Nordic Convention and in EU directives. The OECD report stresses that all treaties and other exchange of information instruments include strict provisions aimed at protecting the confidentiality of tax information and limiting how the information may be used. In this regard, it is essential that a country that would receive information in an exchange has the necessary legal framework and administrative mechanisms in place.
The OECD report sets out at a high level the need for common technical and technology solutions that would reduce overall costs for governments and financial institutions, including requirements for standard technical reporting formats and for secure and compatible methods of transmission and encryption of data.
Steps required for implementation of a standard model for automatic exchange of financial account information
The OECD report describes four steps that jurisdictions would need to take to implement a standard multilateral model for automatic exchange of financial account information. This discussion draws heavily on the experience to date with the Model 1 IGA for implementing the US FATCA provisions, which provides for information reporting by financial institutions to their local tax authorities, followed by the exchange of such information on an automatic basis with the tax authorities in the accountholder’s residence jurisdiction.
First, jurisdictions would need to enact broad framework legislation. Although a limited number of jurisdictions are already adopting such legislation, most jurisdictions will need to adopt new legislation to implement the Model 1 IGA and, in particular, the domestic reporting obligations. The OECD report suggests that this provides an opportunity for jurisdictions to create a broader framework that would allow additional jurisdictions to be subsequently added without needing to amend the underlying legislation.
Second, jurisdictions would need to elect a legal basis for the exchange of information. The OECD report suggests that, while bilateral treaties permit such exchanges, it may be more efficient to establish automatic exchange relationships through a multilateral information exchange instrument, such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. More than 60 countries, including all G20 countries, have either signed this convention or committed to do so.
Third, jurisdictions would need to adapt the scope of their domestic reporting and due diligence requirements and coordinate guidance on such requirements to ensure consistency and reduce costs and complexity for financial institutions. The OECD report focuses on the Model 1 IGA as the basis for a standard model, with amendments to ensure a model that addresses the needs of all participating jurisdictions and is administrable for both financial institutions and participating jurisdictions. Such changes would include simplifying the rules by removing US specificities that are not needed or feasible for a multilateral approach, addressing relevant effective dates and building on existing approaches, such as in the EU context and in the area of anti‐money laundering standards. Technical areas for which modifications to the IGA model would be needed include thresholds, exceptions for certain accountholders, due diligence procedures and exceptions for certain financial institutions.
Fourth, jurisdictions would need to develop common or compatible IT standards. The OECD report references the work that has been done by OECD member countries, the EU and representatives of the business community to assist in the development of a reporting format (schema) for implementing the Model 1 IGA. The reporting schema and a first version of the related instructions could be finalized within the second half of 2013. The OECD report further notes that secure transmission systems either already exist or could be established by interested jurisdictions in time for the first transmission of information under IGAs.
The OECD report also includes an annex with a schematic representation for how countries could consider building on the Model 1 IGA to develop a standardized multilateral model for automatic exchange of financial account information.
The FATCA provisions affect a broad range of financial institutions and broad categories of financial accounts, and impose substantial new obligations with respect to account identification, reporting and withholding. The Model 1 IGA approach, in which a financial institution generally provides information to the tax authorities in its own jurisdiction and that information is then exchanged by the tax authorities under a bilateral information exchange relationship, is a significant development in terms of facilitating compliance by financial institutions. However, implementation by financial institutions requires major changes in systems and processes throughout the organization.
The OECD report’s suggestion to use the Model 1 IGA approach as a basis for developing a standard multilateral model for automatic exchange of financial account information would have significant implications for financial institutions and other stakeholders. As a result, stakeholders should monitor developments in the OECD, the G8 and G20, the European Union, and other jurisdictions in which they operate. Stakeholders also should consider proactively participating in the global discussion regarding these potential new information reporting requirements.
In another project relevant to financial institutions, the OECD has been working for several years on the Treaty Relief and Compliance Enhancement Project (TRACE). The TRACE project is studying how to simplify portfolio double tax treaty claims made by cross-border investors. Aligned with this simplification was a desire by tax authorities to collect better taxpayer data from both residence and source country perspectives. The OECD’s Committee for Fiscal Affairs formally endorsed the implementation package developed through the TRACE project in January 2013, but no member countries have begun to move forward with this. Interested stakeholders should monitor whether the focus on automatic exchange of taxpayer financial account information as reflected in the OECD report will assist in moving the TRACE project forward. The simplification benefits from TRACE implementation would represent an offset for some of the additional compliance costs that would be associated with any information reporting requirements that could be imposed in connection with a move toward broader automatic exchange of financial account information.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (UK), London
- • Chris Sanger
+44 20 7951 0150
- • Paul Radcliffe
+44 20 795 15816
Ernst & Young LLP, Washington
- • Rob Hanson
+1 202 327 5696
- • Barbara Angus
+1 202 327 5824
- • Elvin Hedgpeth
+1 202 327 8319
- • Frank Ng
+1 202 327 7887
EYG no. CM3586