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INTERNATIONAL
TAX REVIEW
‘COPYING AND DISTRIBUTH
eel
Asia Tax Forum 2015
‘ARE PROHIBITED WITHOUT PERMISSION OF THE,
PUBLISHER
How tax transparency went global - the
new automatic exchange standard: from
concept to reality
24 February 2015
TTR Correspondent
‘Achim Pross, head of the International Cooperation and
Tax Administration division at the OECD, and architect
of the new automatic exchange of information standard
and the multilateral competent authority agreement
(MCAA), which 52 jurisdictions have signed so far,
discusses the progress made in 2014 and looks at
opportunities and challenges ahead.
Last year saw progress on a global scale and with a speed
unprecedented in the international tax policy arena.
We went from a Within the OECD's
world where Centre for Tax Policy
information and Administration
exchange upon (CTPA) Achim Pross has
request was the only overall responsibility for
universally agreed 7 exchange of information,
standard, to a fully Ph five of the 15 BEPS
developed automatic actions, as well as the
exchange standard Forum on Tax Administration and the
with commitments to | OECD's work on serious non-
implement by more compliance, including tax crimes and
than 90 jurisdictions, | other financial crimes.
including practically
all financial centres
around the world. And by December it had already been
translated into an EU directive. This provides a step change in the
ability of the international community to tackle offshore tax
evasion. While all of this happened incredibly fast, of course it did
not come out of nowhere.
‘The game changer in automatic exchange was the enactment of
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the Foreign Account Tax Compliance Act (FATCA) in 2010 and
the subsequent development of an intergovernmental approach to
its implementation by the US in close cooperation with the G5
(Italy, France, Germany, Spain and the UK). This moved the
design of FATCA implementation from a regime of automatic
reporting by financial institutions directly to the Internal Revenue
Service in the US, not dissimilar to the US Qualified Intermediaries
regime - a US withholding tax relief system allowing financial
institutions to claim relief from US withholding tax on behalf of
customers by assuming so-called Qualified Intermediaries status -
to the traditional model of automatic exchange where information
reporting obligations are based on domestic law, information is
reported to domestic authorities and is subsequently exchanged
between governments.
In fact, article 6.3 of the first Model 1 intergovernmental
agreement (IGA) to improve tax compliance and to implement
FATCA, published in June 2012, already contained the seeds for a
common standard as it committed the signatories to develop "a
common model for automatic exchange of information, including
the development of reporting and due diligence standards for
financial institutions".
Shortly after that, banks and some of their associations started
contacting us at the OECD. They accepted that financial
institutions were going to have an expanded role in international
tax compliance, but were concerned about the possible emergence
of a multitude of different and potentially conflicting international
reporting and withholding tax regimes which may have been
impossible to operate and would have certainly led to manifold
increases in compliance costs. The message was this: we are
willing to work on a global reporting standard, but it needs to be
one single global standard. At the same time civil society was
making a strong and vocal case about a move to automatic
exchange of information and the withholding tax agreement with
Switzerland failed in the German Parliament.
It was then the pilot initiative launched by the finance ministers of
Italy, France, Germany, Spain and the UK - by accident the same
countries that cooperated in the development of the IGA - that
took the next logical step and committed their countries to
exchange among themselves the type of information they were
agreeing to exchange with the US under FATCA. There may have
been an EU law angle to this development (Article 19 of the EU
Administrative Co-operation Directive contains a most favoured
nation clause under which member states are bound to provide
any other EU member state that requests it with the same level of
information as they provide to third countries), but the key was
this: given the investment that governments and financial
institutions were making to implement FATCA around the world it
made sense to leverage off these investments and, using FATCA as
a baseline, develop a global automatic exchange standard - which
then became the "common reporting standard" or "CRS" (see
Diagram 1).
DIAGRAM 1: DEVELOPMENT OF GLOBAL INFORMATION EXCHANGE
FRAMEWORK
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Model 1 IGA reporting
Model 1 1GA exchanges
Leveraging on Model 1 IGA implementation
todevelop standardised automatic exchange
ina multilateral context
onary
Following the launch of the pilot initiative, automatic exchange
gained further political momentum. In July 2013 the G8 leaders
under the UK G8 presidency endorsed the OECD report "A Step
Change in Tax Transparency" (
http: //www.oecd.org/ctp/exchange-of-tax-
information/taxtransparency G8report.pdf) and in their
communiqué committed to "establish the automatic exchange of
information between tax authorities as the new global standard..."
With the G8's impetus, and earlier support within the G2o
context, the G2o leaders, at their summit in St Petersburg in
September 2013, expressed their full support for the OECD work,
calling for the presentation of the standard in time for their
February 2014 meeting and the finalisation of the technical work
by summer 2014. In the meantime, the pilot initiative launched by
the G5 was attracting more and more countries and by the
summer of 2014 already more than 60 jurisdictions had
committed to early adoption of the CRS. To meet the ambitious
G20 timetable, delegates from OECD and G20 countries, tasked
with developing the standard, had to work sometimes around the
clock to make this happen, not least my own team here at OECD.
And finally this could not have been done without close
consultations with business, often working to extremely
demanding timelines.
So we ended the year with a standard approved by the OECD
Council, endorsed by G20 leaders, with 93 jurisdictions committed
to its implementation and an approved EU directive translating it
into European law. Only five financial centres - Bahrain, the Cook
Islands, Nauru, Panama and Vanuatu - have not yet committed
to it and the clear hope is that they will also come on board (see
‘Table 1). The standard is optional for non-financial centre
developing countries and technical assistance to help them
implement it is offered via the Global Forum on Transparency and
the Exchange of Information for Tax Purposes.
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v
JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2017
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands,
Bulgaria, Cayman Islands, Chile, Colombia, Croatia, Curagao, Cyprus, Czech
Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany,
Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of
Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta,
‘Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal,
Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain,
Sweden, Trinidad and Tobago, Turks and Caicos Islands, UK, Uruguay
JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2018
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas,
Belize, Brazil, Brunei Darussalam, Canada, China, Costa Rica, Grenada, Hong
Kong (China), Indonesia, Israel, Japan, Marshall Islands, Macao (China),
Malaysia, Monaco, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Samoa,
Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint
Maarten, Switzerland, Turkey, UAE
JURISDICTIONS THAT HAVE NOT INDICATED A TIMELINE OR
THAT HAVE NOT YET COMMITTED
Bahrain, Cook Islands, Nauru, Panama, Vanuatu
‘The US has indicated that it will be undertaking automatic
information exchanges pursuant to FATCA from 2015 and has
entered into IGAs with other jurisdictions to do so. The Model 1
IGAs entered into by the US acknowledge the need for the US to.
achieve equivalent levels of reciprocal automatic information
exchange with partner jurisdictions. They also include a political
commitment to pursue the adoption of regulations and to
advocate and support relevant legislation to achieve such
equivalent levels of reciprocal automatic exchange.
The Berlin signing
We had already developed the idea of a multilateral competent
authority agreement in the report we submitted to the G8 leaders
as a means of facilitating and further standardising
implementation. Given the political expectations on timelines,
using an approach that would have amounted to a full
international treaty (or treaties) for all signatory countries was not
a viable option. So we had to move away from the approach used
for the FATCA IGAs. Also we already had a convention endorsed
by G20, the OECD and the Council of Europe that allowed for
automatic exchange: the Multilateral Convention on Mutual
Administrative As tance in Tax Matters (the Convention).
Importantly the Convention allows for both bilateral and
multilateral competent authority agreements.
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ficial photo from signing of Multilateral Competent Authority Agreement in
Berlin
Ki ntur photothek.net, Thomas Kohler
Going down the bilateral competent authority route not only
risked deviating from the "one single standard approach” but the
number of agreements to negotiate would have been staggering:
for example, the 51 jurisdictions that signed in Berlin in only five
minutes, would have otherwise required 1,275 separate
negotiations. Interestingly, the competent authority agreement is
designed as a framework agreement which achieves
standardisation, but otherwise leaves flexibility and control to the
signatoric
‘The Gs effectively launched this process and helped drive it,
which also explains why the G5 Finance Ministers hosted the
Berlin signing event and were on the panel during the press
conference.
The involvement of the business community
A big part of the CRS relies on financial institutions: they are in
the frontline of implementation and it would have made no sense
to develop the CRS without consulting them. Some important
points that changed in the process in response to business input
included, for instance:
simplifications in the due diligence process;
a streamlined indicia search;
allowance for a wider use of publicly available information;
a number of options including for a less burdensome rule for
new accounts of existing customers; and
= provision for a wider approach to allow for a more efficient
due diligence process.
Close consultation with business also remains a key priority going
forward. Financial institutions are first in line with
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implementation, and especially those operating in multiple
jurisdictions will notice first should inconsistencies arise or should
guidance be lacking. There is a joint interest here to ensure that
what starts as one standard stays one standard.
The key people
This was a huge team effort, but some people stand out.
It is probably fair to start with the person who chaired the group and got countries
to agree, Armando Lara Yaffar from Mexico and a well-deserved entry in
International Tax Review's Global Tax 50 in 2013 and 2014. And, of course,
Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at
the OECD. Philip Kerfs in my team, who is now leading the ongoing work, Jorge
Correa and Stephanie Smith did a lot of the thinking, drafting and much else.
Much credit also goes to the UK Treasury team, and in particular Peter Green and
Radhanath Housden for powering the early adopter process. And a big
contribution was made by the Italian EU presidency, especially David Pitaro, who
led probably the fastest ever adoption of an EU directive all the while ensuring that
it remained consistent with the global standard. Finally we may not have reached
the finish line without Keith Lawson, chairman of the business advisory group
(BAG), and early input from Michael Plowgian then at US Treasury.
The 2015 CRS pipeline
‘The focus is on implementation. The standard is new for everyone
and the timelines are ambitious. If we get it right in the first place,
we simplify significantly the peer review process which the Global
Forum on Transparency and Exchange of Information for Tax
Purposes has been tasked to do, saving costs for both business and
governments. We focus a lot on training and keeping countries
connected and coordinated as they, for example, draft legislation
and issue guidance, so that what starts as one standard stays one
standard.
We did our first foundation training in Mexico in December and
just had the first advanced training in Berlin where we also
brought in business, as the implementation process cannot
happen without financial institutions. The events are already
oversubscribed and several more will happen around the world
later in the year.
‘These events, together with our discussions with business and
other stakeholders also inform whether we need to produce
additional guidance. You should also expect to see a CRS portal
later this year which will contain relevant information, including
information on Taxpayer identification Numbers (TINs) to help
financial institutions operate the CRS. There is also close
cooperation with colleagues in the Global Forum on ‘Transparency
and Exchange of Information for Tax Purposes as they move
forward with the peer review process and the assistance they
provide to members, and in particular developing countries.
Finally, after Switzerland's signing of the multilateral competent
authority agreement in November 2014 we expect more signatures
in 2015 and may also have further signing events in support of
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. There is an obvious efficiency gain the more jurisdictions join
the same instrument.
Key challenges
Key challenges for governments include getting the
implementation right and doing so with enough time for business.
to have the necessary systems up and running when the CRS goes
live. Another key priority for governments is to protect the
confidentiality of the information and to use it effectively in their
compliance processes. The information is highly sensitive and we
need to make sure it is only exchanged where confidentiality and
data safeguards are respected both in law and in practice.
Ata collective level we need to make sure that we have consistent
implementation so we retain the consistency and logic of one
global standard for the benefit of both governments and business.
TT means ensuring that differing levels of implementation
do not allow economic distortions undermining a level playing
field so essential for the success of this process. This will be a key
task for the peer review process.
For financial institutions it means:
= overcoming "FATCA fatigue";
= getting budget approved;
= determining their status (as it may not be the same for
FATCA and the CRS);
= reviewing and modifying on-boarding procedures, involving
the legal department; and
= having early and close involvement of the IT function which
will be key in any successful CRS rollout.
Given the scale of the project, advisers will play a key role and they
are increasing both focus and capacity in this area, something
that will certainly be needed.
The OECD's TRACE project
With the CRS we have developed a common standard for
residence country reporting. Now we are committed to resuming
work on TRACE (Treaty Relief and Compliance Enhancement),
the common model for withholding tax relief at source that was
developed by the OECD together with the financial sector. Both
systems rely on the same stakeholders and are based on the same
infrastructure and technical solutions. Combining both systems
increases overall efficiency and reduces costs to all involved. Work
on TRACE has started and is focusing on aligning TRACE to the
CRS to maximise efficiency gains. There continues to be strong
support for TRACE including from business. Of course, many
commentators make the point in connection with the consultation
on BEPS Action Item 6 on treaty abuse.
The fit into the larger OECD/G20 tax agenda
‘The world is becoming increasingly connected and transparency
will continue to figure high on the political agenda. This applies to
financial account information, but of course we are also working
on:
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= country by country reporting (under Action 13);
= the mandatory spontaneous, or put more simply, "automatic
exchange of certain rulings (under Action item 5) of the
BEPS action plan; and possible disclosure obligations (under
Action 12).
We need to keep a balance to avoid flooding tax administrations
with data and overly burdening business. Tax administrations will
also need to make effective use of the information they receive —
an area where much work is underway. But more generally it
means that any planning that would fail on a full disclosure basis
is about to go out of business.
Achim Pross (achim.pross@oecd.org), head of the International
Cooperation and Tax Administration division of the Centre for
Tax Policy and Administration at the OECD
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