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OECD provides global standard for automatic exchange of financial account information

February 18, 2014

The Organization for Economic Cooperation and Development (OECD) has released a global standard for automatic exchange of financial account information, including a Common Reporting and Due Diligence Standard (CRS) and a Model Competent Authority Agreement (CAA). The OECD said that the common standard is intended to be utilized by jurisdictions wishing to automatically exchange financial account information and is intended to avoid the proliferation of multiple standards that could increase compliance burdens on financial institutions and governments.

FATCA. On Mar. 18, 2010, the Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474, the “Foreign Account Tax Compliance Act” or FATCA) to the Code. Chapter 4 requires withholding agents to withhold 30% of certain payments to foreign financial institutions unless they had entered into a agreement with IRS to, among other things, report certain information with respect to U.S. accounts. The withholding rules are essentially a mechanism to enforce new reporting requirements. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities.

The FATCA provisions are generally effective for payments made after Dec. 31, 2012, but their implementation has been delayed and phased in over several years. Regs provide for a phased implementation of the FATCA requirements over the period beginning on Jan. 1, 2014 and continuing through 2017. Treasury and IRS have provided revised timelines for implementing various FATCA requirements with the goal of a more orderly implementation of FATCA (see Weekly Alert ¶  6  07/18/2013).

Global standard for exchange of tax information. On April 19, 2013, the G-20, the group of finance ministers and central bank governors of the world’s 20 biggest economies, called on jurisdictions to move towards exchanging information automatically with their treaty partners and strongly encouraged all countries to become signatories to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The G-20 comments came after the OECD released their report updating the G-20 finance ministers on the organization’s work to improve transparency and the exchange of tax information. The report also tackled offshore tax evasion and avoidance.

On Sept. 5, 2013, the OECD, an international economic organization of thirty-four countries, presented the G-20 with a proposed blueprint for the automatic exchange of information on a multilateral basis that would use FATCA as its foundation. The G-20 subsequently called on the OECD to formally present a single global standard for the automatic exchange of information by February of 2014 and the finalization of technicalities by mid-2014.

CRS. The CRS contains the reporting and due diligence rules and is designed with a broad scope across three dimensions. First, financial information on reportable accounts will encompass all categories of investment income (e.g. interest, dividends, income from certain insurance contracts, and similar income), account balances, and sales proceeds from financial assets. Second, the rules will not only apply to banks, but other types of financial institutions, such as brokers, collective investment vehicles, and certain insurance companies. Third, accounts held by both individuals and entities will be reportable, and the standard includes a requirement to look through passive entities to report on individuals that control such entities.

The OECD also said that a common standard on a robust set of due diligence procedures would be required by financial institutions to identify reportable accounts and obtain account-holder identifying information.

CAA. The OECD report also contained a model CAA that will be required to be translated into domestic law that will provide for the exchange of information under existing legal instruments such as income tax treaties. The OECD said that because implementation would rely on domestic law, it was important that consistency is applied across jurisdictions to avoid unnecessary costs and complexity for financial institutions.

The text of the CAA contains several “whereas clauses” and seven sections (Section 1: definitions; Section 2: types of information to be exchanged; Section 3: time and manner of exchange; Section 4: collaboration on compliance and enforcement; Section 5: confidentiality and safeguards; Sections 6 and 7: consultations between competent authorities and amendments to the agreement) providing for the exchange of information. The whereas clauses contain representations on domestic reporting and due diligence rules, as well as on confidentiality, safeguards and the existence of the necessary exchange of information.

While the agreement is drafted in a reciprocal format, the OECD acknowledged that there may be instances where it may be desirable for a jurisdiction to enter into a non-reciprocal agreement. In such instances, the report said that the model CAA could be adapted into a non-reciprocal format.

Additional technical details to become available. The OECD said that it had not yet provided a detailed commentary to ensure the consistent application of the automatic exchange of information standard, nor was information and guidance available for technical solutions associated with compatible transmission systems and a standard format for reporting and exchange. The report said that such work was ongoing, and that the commentary and the technical solutions should be completed by mid-2014.