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Globalization of FATCA

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Presentation on theme: "Globalization of FATCA"— Presentation transcript:

1 Globalization of FATCA
21st November 2014 Presenter: James Plummer

2 Automatic exchange of information – direction of travel
FATF – Financial Action Task Force on money laundering EU Savings Directive (EUSD) Final withholding tax agreements QI system and US FATCA Tax Transparency Double Taxation Conventions (DTC)/ Tax Information exchange Agreements (TIEA) Breadth of national measures OECD Common Reporting Standard (CRS) UK FATCA

3 Background OECD issues standard for global information exchange which has been widely endorsed On 21 July 2014 the OECD issued the Standard for Automatic Exchange of Financial Information in Tax Matters. The OECD on the rationale for automatic information exchange: As the world becomes increasingly globalised it is becoming easier for all taxpayers to make, hold and manage investments through financial institutions outside of their country of residence. 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. Offshore tax evasion is a serious problem for jurisdictions all over the world, OECD and non‐OECD, small and large, developing and developed. 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. The Standard is a global “FATCA-like” automatic information exchange regime aimed at preventing off-shore tax evasion and maintaining the integrity of tax systems. The Standard includes the Model Competent Authority Agreement (CAA), the Common Reporting Standard (CRS) and accompanying Commentaries. Over 98 jurisdictions have committed to swiftly implement the CRS. Of those, more than half are “early adopter” jurisdictions which have committed to begin exchange of information by September 2017. In early adopter jurisdictions, new account opening procedures will need to be in place from 1 January 2016. . 3

4 Background Next steps for participating jurisdictions
Participating jurisdictions will be seeking to enter into CAAs to exchange information It is expected that the first of these will be signed in the early Autumn of 2014 Jurisdictions will need to implement local law to bring the CRS into effect The CRS will need to be translated into domestic law, whereas the CAA can be executed within existing legal frameworks such as Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or the equivalent of Article 26 in a bilateral tax treaty. Before entering into a reciprocal agreement to exchange information automatically with another country, it is essential that the receiving country has the legal framework and administrative capacity and processes in place to ensure the confidentiality of the information received and that such information is only used for the purposes specifiedin the instrument. The EU the Council Directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation between EU member states is designed to extend the scope for mandatory information exchange between tax administrations. The Directive effectively implements CRS and is intended to ensure a common adoption approach across the EU. The DAC sets out a common basis for the exchange of information and will remove the need for member states to agree to Competent Authority Agreements with one another. There are differences between the DAC and CRS. Some jurisdictions (e.g. Australia, UK) have started a consultation process Next steps for financial institutions Financial institutions now have a new global compliance standard to implement and adhere to by 1 January 2016 Financial Institutions should consider the impact of the CRS and identify any synergies with their existing US FATCA programme

5 The Common Reporting Standard
Blueprint for the automatic exchange of information issued by the OECD The common reporting standard (CRS) covers: Definitions; Types of information to exchange; The time and manner of exchange; and Confidentiality of data and safeguards that must be respected However, it also states that “Given that implementation will be based on domestic law, it is important to ensure consistency in application across jurisdictions to avoid creating unnecessary costs and complexity for financial institutions in particular those with operations in more than one jurisdiction”

6 OECD CRS: status of commitments
On 29 October 2014, a number of jurisdictions confirmed their intended implementation timelines of the new global standard: India (EA) Ireland* (EA) Isle of Man* (EA) Italy* (EA) Jersey* (EA) Korea* (EA) Latvia* (EA) Liechtenstein* (EA) Lithuania* (EA) Anguilla* (EA) Argentina* (EA) Barbados (EA) Belgium* (EA) Bermuda* (EA) BVI* (EA) Bulgaria (EA) Cayman Islands* (EA) Chile Colombia* (EA) Croatia* (EA) Curacao* (EA) Cyprus* (EA) Czech Republic* (EA) Denmark* (EA) Dominica Estonia* (EA) Faroe Islands* (EA) Finland* (EA) France* (EA) Germany* (EA) Gibraltar* (EA) Greece* (EA) Greenland (EA) Guernsey* (EA) Hungary* (EA) Iceland* (EA) Luxembourg* (EA) Malta* (EA) Mauritius* (EA) Mexico* (EA) Montserrat* (EA) Netherlands* (EA) Niue Norway* (EA) Poland* (EA) Portugal* (EA) Romania* (EA) San Marino* Seychelles (EA) Slovakia* (EA) Slovenia* (EA) South Africa* (EA) Spain* (EA) Sweden* (EA) Jurisdictions undertaking first exchanges by 2017 Trinidad & Tobago Turks & Caicos* (EA) United Kingdom* (EA) Uruguay Jurisdictions undertaking first exchanges by 2018 Albania* Andorra Antigua & Barbuda Aruba* Australia Austria* The Bahamas Belize Brazil Brunei Canada China Costa Rica Grenada Hong Kong Indonesia Israel Japan Marshall Islands Macau Malaysia Monaco New Zealand Qatar Russia Saint Kitts & Nevis Samoa (US) Saint Lucia Saint Vincent & the Grenadines Saudi Arabia Singapore Sint Maarten Switzerland (M1 intended) Turkey United Arab Emirates Key EA – “Early Adopter Group” – see below for specific implementation timeline * - Signatory to the Multilateral Competent Authority Agreement FATCA IGA classification Green – Jurisdictions entered into an IGA model 1 (including in substance) Blue – Jurisdictions entered into IGA model 2 (including in substance) Grey – Jurisdictions under FATCA with no IGA Key dates for “early adopters” 1 January 2016 New account opening procedures to record tax residence to be in place from 1 January 2016 31 December 2016 Due diligence for identifying high-value pre-existing individual accounts to be completed March 2017 First CRS reporting by financial institutions September 2017 Exchange of information between Competent Authorities commences 31 December 2017 Due Diligence for identifying low-value pre-existing individual account and entity accounts to be completed

7 The impact of differences in CRS to IGA Model 1
15 April 2017 The impact of differences in CRS to IGA Model 1 Total number of differences 185 Significant 41 22% Medium 81 44% Less significant 63 34%

8 CRS: Similarities and differences to FATCA CRS vs. FATCA
De minimis limits $50,000/$250,000 No de minimis (with the exception of pre-existing entities with a value lower than $250,000) Indicia Focused on US citizenship Focused on tax residency Due diligence Separate due diligence for pre-existing and new accounts, and for individuals and entities. Significantly different processes between FFI Agreement and Model 1 IGA Due diligence modelled on IGA, but with a number of key differences Who is an FI? Most financial institutions unless specifically exempted as being lower risk FATCA exemption removed per CRS thus include smaller local entities excluded under FATCA => Flexibility for local guidance to define specific exemption for low risk entities Account scope Most banking products unless low risk, some insurance, most asset management Banking and Asset Mgmt. broadly similar, though regularly traded exemption removed. Many jurisdictions will have no back book exemption for Insurance Reporting Primarily to US (some US reporting obligations to non-US). Account balances from 2014, with income and sale proceeds phased in Many-to-many, via local authority. Account balances, income and sale proceeds from day one

9 CRS: What is required? CRS shares a number of similarities with FATCA, allowing, to a large extent, leverage of existing FATCA capabilities to support delivery. The scale of change required will depend on the implementation approach adopted for FATCA Significant redesign required Process changes and new information requirements Minor or no redesign effort Gap to: Model 1 FATCA IGA Overall client due diligence Possible need for dual FATCA and CRS classifications of both (i) Reportable clients; and (ii) Reportable accounts Pre-existing individual identification Additional indicia checks required but only for high value accounts, or accounts where no current residence address held. De minimis limits removed New individual identification Current self certification must be amended to cover all countries, rather than a ‘not US’ declaration Pre-existing entity identification Minor changes to entity types – documentation standards and workflow largely preserved. New entity identification A number of changes needed, including a self-certification on residency for all new entity accounts Reporting Reporting to local authorities as under FATCA in a ‘many to many’ manner No phased implementation, as seen under FATCA Multiple reporting formats issued by IRS, OECD and HMRC. Schemas broadly similar, but some differences Withholding No withholding requirement under CRS Compliance As with Model 1 FATCA, compliance is under local law

10 High-level gap analysis between FATCA IGA and OECD CRS
Area Sub Area Key differences Impact General Timeline Potentially staggered approach for CRS implementation as and when jurisdictions sign Competent Authority Agreements (CAA) Complexity of implementation i.e. local v hub & spoke model Reportable Jurisdictions Increased scope of implementation with CRS currently supported by 67 jurisdictions Legislative interpretation required in numerous locations Specified/ Reportable Persons Under the CRS, Reportable Person covers an increased scope of Individuals and Entities to be classified. For the CRS, Financial Institutions in Non- Participating Jurisdictions will be deemed Passive Non-Financial Entities and the Controlling Person(s) will be required to be identified Larger volumes of clients to classify and report on May no longer rely on tactical approach Non-compliant Financial Institutions (FIs) Withholding tax deterrent not applied to FIs located in non-participating jurisdictions. See Withholding section for further information No withholding, but local enforcement powers IGA/ Agreements Potential for multi-lateral CRS Competent Authority Agreements No direct reporting from FIs to other Competent Authorities under the CRS Only one report required, but schema fields require analysis and may vary between locations

11 High-level gap analysis between FATCA IGA and OECD CRS
Area Sub Area Key differences Impact Financial Institutions (FI) Reporting Financial Institutions Relevant Holding Companies and Treasury Companies are not deemed Reporting FIs under the CRS Need to revisit entity classification Non-reporting Financial Institutions The definition of a Non-reporting FI is more limited under CRS FIs with a local client base, low value accounts and non-profit organisations are not automatically exempt under the CRS Deemed Compliant FIs are not replicated in the CRS although CRS allows low risk entities to be defined as exempt under local jurisdiction FIs will require analysis for differences in classification between FATCA and the CRS Area Sub Area Key differences Impact Accounts Financial Accounts Product scope is broadly consistent (depository, custodial etc. ) Product analysis to be revisited, but will be largely similar Excluded Accounts The definition of an exempt product under CRS is narrower than under FATCA . eg. Certain low risk products are not exempt under CRS Some products excluded under FATCA will be reportable under CRS Industry variation Insurance: Back book exemption Asset Management: Regularly traded exemption Wider scope than FATCA

12 High-level gap analysis between FATCA IGA and OECD CRS
Area Sub Area Key differences Impact Due Diligence- Individuals Individuals – Pre-existing Accounts All pre-existing individual accounts are within scope under the CRS Under CRS you can rely on residence address to determine tax residency, no need to undertake indicia search Individuals – New Accounts All New Individual Accounts are within scope under the CRS Need to make amendments to all accounts onboarding Self-certification - Individuals Citizenship not required in CRS self-certification Require tax residency for all new accounts Indicia search – Individuals CRS could dramatically reduce the number of pre-existing individuals that need to be subject to full indicia review. But note: continued need for enhanced review Due Diligence- Entities Entities – Pre-Existing Accounts Under the CRS accounts exceeding $250,000 must be subjected to due diligence. There is no upper threshold in CRS Classifications differ to FATCA. Some redesign likely to be required Entities – New Accounts No difference Cannot rely on W-series forms. Significant redesign effort may be required Self-certification - Entities Self-certification always required to identify tax residency for new entities for the CRS Required to collect self certification on residency Indicia search - Entities No set indicia search published in CRS however information maintained for regulatory or customer relationship purposes may be relied upon End result is expected to be similar to FATCA

13 High-level gap analysis between FATCA IGA and OECD CRS
Area Sub Area Key differences Impact Reporting & Withholding Reporting Broadly similar, however, a comparative analysis of the IRS FATCA and OECD schema illustrates deviations in data elements between the two schemas, e.g. one third only appear in one of the schemas. Volumes of reportable data and accounts will vastly increase Unlikely to be able to rely on tactical reporting solution Detailed analysis of the schemas required Multiple data sources required to inform reporting engine Withholding No withholding under CRS. Implementing jurisdictions are expected to place local effective enforcement provisions to address non-compliance No requirement to build withholding capability

14 Gap analysis: FATCA and CRS
No group concept and no deemed-compliant FI under CRS No withholding/penal withholding under CRS No registration duties under CRS No phased implementation for CRS; multiple reporting possible No de minimis rules under CRS, search for indicia of residency CRS based on AML/KYC information, FATCA in addition on US documents FATCA allows group compliance, CRS not

15 Immediate next steps regarding the OECD CRS
1 Establish CRS program governance Determine whether or not OECD/CRS is managed separately from FATCA program Identify program sponsor and steering committee Establish change management protocols and rapidly build stakeholder awareness Build an internal communications strategy including Board involvement 2 Assess overall impact of CRS Map early adopter countries to group footprint Understand CRS requirements, local privacy laws and agreements between jurisdictions Determine impact of CRS to lines of business Perform comparison of CRS requirements to existing FATCA program, identifying synergies where appropriate 3 Define strategy and impact to current FATCA program Determine and document key assumptions and enterprise policy decisions Local vs. central communication and decision making Resource availability 4 Plan CRS compliance efforts Establish workstreams Prioritize activities and secure resources Define milestones and build work plans 5 Determine strategic FATCA and CRS reporting platform Identify reporting solution strategy and approach Central reporting implementation models Identify solution alternatives

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