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Standard for Automatic Exchange of Financial Account Information
On reading the many media reports on tax matters over the past months, one can’t help but notice the increasing importance that exchange of information has taken. The OECD has succeeded in imposing its standards regarding exchange of information upon request ( including interpretation of relevance and regarding banking secrecy as an irrelevant argument, to decline an exchange of information request). The peer reviews given by the OECD members are strict and the trend is clear: the OECD countries are willing to align with the OECD standards.
While the achievement of an efficient system of exchange of information upon request is still relevant, a recent trend has emerged: automatic exchange of information appears to be the holy grail of a transparent and efficient system.
In practice, automatic exchange of information already exists. At the European Union (EU) level, the EU Savings Directive and the EU Directive on Administrative Cooperation already provide for automatic exchange of information. The scope of both directives is about to be expanded. At an international level, the United States (US) has imposed its FATCA rules to its foreign partners via the conclusion of bilateral conventions (the so-called inter-governmental agreements). At an OECD level, the Multilateral Convention on Mutual Administrative Assistance in Tax matters also provides for automatic exchange of information. In developing countries such as India, exchange of information protocols are typically covered in double taxation avoidance agreements and specific tax information exchange agreements, on a request basis. Where exchange of information is not adequately acted upon by a country, India can notify such country as a non-cooperative jurisdiction resulting in significant tax disadvantages to parties that are resident of, or contract with residents of, such a country.
The idea of a single global standard has emerged. The ‘advantage of standardisation is process simplification, higher effectiveness and lower costs for all stakeholders concerned. A proliferation of different and inconsistent models would potentially impose significant costs on both government and business to collect the necessary information and operate the different models.’
On 21 July 2014, the OECD released the full version of the ‘Standard for Automatic Exchange of Financial Information’. The standard developed by the OECD has been drafted with respect to financial information. It is composed of 2 parts:
- The first part consists of the Common Reporting Standard (CRS) providing for the reporting and due diligence rules
- The second part consists of the Model Competent Authority Agreement (CAA) which provides for the rules that allow the implementation of the information exchange between competent authorities
The standard developed by the OECD is very similar in nature to FATCA. Reporting financial institutions will automatically exchange information on reportable and financial account information, using common reporting and due diligence procedures. Accordingly, from a US reporting perspective, a significant amount of information is already exchanged by the US, the new guidelines outlined by the OECD do not result in any significant change from a US tax perspective at this point in time. Additionally, in the absence of a pronouncement from the US Internal Revenue Service (IRS) it is unclear whether US corporate tax departments would need to provide additional information (presumably by completing new tax forms developed by the IRS) to fulfill any new information requirements under the OECD’s automatic exchange of information programme.
As an observer to the OECD and part of the G20, India fully endorses and has been a major supporter of the automatic exchange of information. India has agreed to implement the standard with a common timeline of 2017 and some regulators in India have already started planning for the implementation of the common reporting standard.
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According to the OECD, 40 jurisdictions committed to the standard in May 2014 with a view to start automatic exchange information in 2017. Automatic exchange of information is therefore more of a reality than ever. These new norms are being implemented quite quickly. Depending on the legal framework (OECD, FATCA, EU level), and despite the similarity in nature of all these instruments, processes and requirements might be slightly different. Reporting institutions definitely need to be ready.
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