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OECD on the Road to Killing Bank Secrecy: Still Challenging Work Ahead for Banks in 2017

by internationaldirector

Written By: Morgan Jones – Corporate Finance

January 1, 2017, symbolizes the beginning of a new era in the fight against tax evasion. The Standard for Automatic Exchange of Financial Account Information in Tax Matters will finally be put in place. Following the imposition by the United States of the FATCA (Foreign Account Tax Compliance Act) in 2014, the OECD (Organisation for Economic Co-operation and Development) decided to implement its own version of FATCA. In an innovative attempt, OECD has targeted mainly individuals seeking to circumvent tax authorities and who place their money abroad. The new OECD rules allow tax administrations to have a systematic knowledge of the financial assets held abroad by its tax residents. To date, 87 countries have joined the Multilateral Competent Authority Agreement (MCAA), a multilateral treaty designed to implement the CRS (Common Reporting Standard). The precursors, including France, the United Kingdom and Germany, adopted the CRS on January 1, 2016. These countries will submit their first reports in September 2017.

The CRS represents the automatic exchange of information on non-resident financial accounts held by financial institutions between tax authorities throughout the world. Although the concept of exchange of information between tax authorities is not an innovative idea, this exchange has been carried out so far on request and on a bilateral basis. All participating governments have agreed to exchange the information on an automatic basis within the framework of the CRS. This exchange will be carried out on an annual basis and, in principle, between all administrations that have acceded to the CRS, without being obliged to go through negotiations of bilateral treaties.

Other offshore financial centers, such as the Cayman Islands, the British Virgin Islands, Guernsey and Jersey, have also implemented the CRS. It is interesting, and not surprising, to note that countries such as Singapore, Hong Kong and the United Arab Emirates—main competitors in the financial-services industry—have opted for the “bilateral” approach. In other words, they are committed to implementing the CRS, but in their own way and through bilateral agreements with the countries with which they wish to exchange such information.

Financial institutions impacted by the international Common Reporting Standard regulations have much work to do in 2017 to meet OECD rules’ compliance.

As KPMG’s recent survey of 146 high-level tax and compliance professionals for the year 2016 shows, 40 percent of financial institutions worldwide have either taken only preliminary steps or are just beginning to focus on what needs to be done to comply with the requirements of the CRS. In total, almost 100 jurisdictions committed to implement the CRS on or before January 1, 2017.

“Given the potential reputation and financial risks of non-compliance, it’s crucial that financial institutions place a high priority on meeting compliance deadlines in all jurisdictions in which they do business,” said Mr Michael Plowgian, a principal in the international tax practice of KPMG LLP and former senior advisor at the OECD. He added, “With many more jurisdictions implementing the CRS during 2017, meeting compliance deadlines in all jurisdictions will continue to be a major challenge.”

Many difficulties arise in the implementation of the new OECD regulation.

Firstly, to implement the automatic exchange of information, CRS is based on the complex and combined action of different actors:

  • Account-holders must declare their residences for tax purposes to determine whether they are considered as “non-residents” through self-certification.
  • Financial institutions must report annually to their local tax authorities their “non-resident” customers, their account balances and the financial incomes they have received in the year.
  • Tax authorities of the participating countries must transmit this information to the tax authorities of the countries of tax residence of clients, which is the subject of this declaration.

Secondly, CRS and FATCA reports differ, obliging financial institutions to maintain two processes.

Thirdly, non-financial institutions are also concerned, as they have to analyze if they have among their groups or clients financial institutions. They have to make sure, for instance, that any clients that are financial institutions are complying with the rules.

Finally, countries also have very different approaches from one another. Some countries and tax administrations (such as in the United Kingdom) issue guidance for financial and non-financial institutions. But other countries let financial institutions understand and interpret the OECD regulations on their own. At the end, the result of their efforts to declare clients and their accounts may be inconsistent from one declaration to another.


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