Global regulators need to standardise tax reporting mechanisms

Global regulators need to standardise the mechanisms by which financial institutions exchange tax information on their clients amid concern the number of tax information exchange agreements between various countries is spiraling out of control.

This comes as a number of countries and global regulatory bodies introduce their own tax reporting standards in response to the Foreign Account Tax Compliance Act (FATCA). These include the Organisation of Economic Co-operation and Development’s (OECD) Common Reporting Standard (CRS), also described as Global FATCA or GATCA. Other initiatives include the UK’s own mini version of FATCA whereby UK residents with overseas accounts in the Crown Dependencies and Overseas Territories will have their data supplied to the Inland Revenue. China is also cracking down on its citizens with offshore bank accounts through its Foreign Asset Reporting Requirements (FARR).

All of these rules are causing challenges for fund managers. “There are various versions of FATCA being introduced across multiple jurisdictions. It would be ideal if global regulators streamlined all of these tax mechanisms. While many of these tax initiatives are broadly similar, there are subtle differences. Furthermore, service providers to the fund managers should start thinking about implementing platforms that have the capability to fulfil the reporting requirements of the different countries’ FATCA regimes,” said Anson Lee, director of US Tax at Tudor Investment Corporation.

Whether or not such an initiative is forthcoming is questionable. Regulators have failed to harmonise regulatory reporting, among other post-crisis reforms, for example. “I am sceptical it will happen but it would make sense for financial institutions to report to a single authority versus multiple authorities, under some sort of a global standard,” said Lee.

Lee also advocated the creation of a centralised utility to store tax data of clients of financial institutions. “Again, this is a fantastic idea, but some investors will be understandably sensitive about their data being held in a centralised warehouse because it could breach certain jurisdiction’s data privacy rules.  Accountholders would also want this centralised institution to be in a jurisdiction which they were comfortable with, or enactment of certain global reporting rules that require accountholders to submit their data in a centralised facility” he said.

This is already happening to an extent. The Depository Trust & Clearing Corporation (DTCC) recently launched its Clarient Entity Hub which aims to centralise client data and documents on behalf of financial institutions. The Hub, which was founded in conjunction with BNY Mellon, Barclays, Credit Suisse, J.P. Morgan, Goldman Sachs and State Street, will enable market participants to deal with internal risk management requirements and Know Your Customer (KYC) checks, which will certainly assist in attaining FATCA compliance.