The global clamp down on tax evasion
The issue has dominated debate among world leaders and the Organisation for Economic Co-operation and Development (OECD) in recent months. In fact, it’s the OECD that’s been driving an effort to coordinate information exchange between jurisdictions under a single global standard in an effort to develop tax transparency.
Moving on from America’s tax information-sharing agreement FATCA (Foreign Account Tax Compliance Act), which aims to stop US citizens using foreign financial accounts to evade tax, and UK FATCA, where there are agreements between the UK and Crown Dependencies and Overseas Territories to combat tax evasion, the OECD released the Standard for Automatic Exchange of Financial Account Information in February. Clamping down on evasion and avoidance has become a priority.
The OECD Standard imposes obligations on financial institutions – the banks, brokers, funds, trusts, and insurance companies – to collect and report financial account holder information to their local tax authority. The local tax authority – in the UK’s case, HMRC – will then automatically exchange information about an account holder resident in a partner country on an annual basis.
As of March 2014, there were 44 jurisdictions committed to the early adoption of a Common Reporting Standard (CRS), which is due to start on 1 January 2016. By May, another 19 were added to the list. These jurisdictions will also comply with a Model Competent Authority Agreement (CAA), which specifies detailed rules on the exchange of information. Both of these components are intended to provide greater efficiency in reporting and reduce costs for financial institutions. And by 30 September 2017, reporting to partner jurisdictions under CRS should begin.
As Mariano Giralt, head of EMEA Tax Services at global investments company BNY Mellon told delegates at a breakfast briefing recently, this is the beginning of a new era for governments fighting tax evasion and avoidance. But it’s complex, and full of moving parts. What impact will the move to a global standard in tax sharing information have on businesses, organizations and citizens? Will we see obvious benefits from greater transparency? Will the system be fully workable for all stakeholders involved? And how long will it take to implement?
According to Giralt, the financial services industry is cooperating with political leaders to develop a common standard and implement an effective global automatic exchange of tax information. He says, “A global harmonized approach using the expertise of existing models, such as the European Savings Directive or the new US and UK FATCA, is key for the success of this important initiative.”
But there will be hurdles – local implementation could be a long process. And some questions remain unanswered: what happens when a country isn’t a participant, for example? Or what happens if someone puts something in an obscure tax haven? Will systems be ready? Will the tax take ultimately be worth the cost of systems enhancement? Will information be kept secure? Will governments be ready – if it’s a multilateral agreement, what sway will individual countries have?
It’s a huge initiative, points out Lorraine White, head of EMEA Securities Tax and US Tax Services at BNY Mellon. “This coordinated action by governments to crack down on tax evasion is unprecedented in terms of transparency and disclosure”. But the challenges are not insurmountable, says White.
And the cross-border gathering and exchange of information is an essential aspect of global financial markets, says Giralt. “ The financial services industry continues to cooperate with political leaders to develop a common stand and implement an effective global automatic exchange of tax information.”
