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Globalization of FATCA

21st November 2014

Presenter: James Plummer

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Automatic exchange of information – direction of travel

FATF – Financial Action Task Force on

money laundering

EU Savings Directive (EUSD)

Final withholding tax agreements

QI system and US FATCA

TaxTransparency

Double Taxation Conventions

(DTC)/ Tax Information exchange Agreements

(TIEA)

Breadth of national measures

OECD Common Reporting Standard (CRS)

UK FATCA

Background

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OECD issues standard for global information exchange which has been widely endorsed

1. On 21 July 2014 the OECD issued the Standard for Automatic Exchange of Financial Information in Tax Matters.

2. The OECD on the rationale for automatic information exchange: As the world becomes increasingly globalised it is becoming easier for all taxpayers to make, hold and manage investments through financial institutions outside of their country of residence. Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction. Offshore tax evasion is a serious problem for jurisdictions all over the world, OECD and non‐OECD, small and large, developing and developed. Countries have a shared interest in maintaining the integrity of their tax systems. Cooperation between tax administrations is critical in the fight against tax evasion and in protecting the integrity of tax systems. A key aspect of that cooperation is exchange of information.

3. The Standard is a global “FATCA-like” automatic information exchange regime aimed at preventing off-shore tax evasion and maintaining the integrity of tax systems.

4. The Standard includes the Model Competent Authority Agreement (CAA), the Common Reporting Standard (CRS) and accompanying Commentaries.

5. Over 98 jurisdictions have committed to swiftly implement the CRS. Of those, more than half are “early adopter” jurisdictions which have committed to begin exchange of information by September 2017.

6. In early adopter jurisdictions, new account opening procedures will need to be in place from 1 January 2016.

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Background

Next steps for participating jurisdictions

1. Participating jurisdictions will be seeking to enter into CAAs to exchange information

2. It is expected that the first of these will be signed in the early Autumn of 2014

3. Jurisdictions will need to implement local law to bring the CRS into effect The CRS will need to be translated into domestic law, whereas the CAA can be executed within existing legal frameworks such as Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or the equivalent of Article 26 in a bilateral tax treaty. Before entering into a reciprocal agreement to exchange information automatically with another country, it is essential that the receiving country has the legal framework and administrative capacity and processes in place to ensure the confidentiality of the information received and that such information is only used for the purposes specifiedin the instrument.

4. The EU the Council Directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation between EU member states is designed to extend the scope for mandatory information exchange between tax administrations. The Directive effectively implements CRS and is intended to ensure a common adoption approach across the EU. The DAC sets out a common basis for the exchange of information and will remove the need for member states to agree to Competent Authority Agreements with one another. There are differences between the DAC and CRS.

5. Some jurisdictions (e.g. Australia, UK) have started a consultation process

Next steps for financial institutions

5. Financial institutions now have a new global compliance standard to implement and adhere to by 1 January 2016

6. Financial Institutions should consider the impact of the CRS and identify any synergies with their existing US FATCA programme

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The Common Reporting Standard

1. Blueprint for the automatic exchange of information issued by the OECD

2. The common reporting standard (CRS) covers:

i. Definitions;

ii. Types of information to exchange;

iii. The time and manner of exchange; and

iv. Confidentiality of data and safeguards that must be respected

3. However, it also states that “Given that implementation will be based on domestic law, it is important to ensure consistency in application across jurisdictions to avoid creating unnecessary costs and complexity for financial institutions in particular those with operations in more than one jurisdiction”

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OECD CRS: status of commitments

► Trinidad & Tobago

► Turks & Caicos* (EA)

► United Kingdom* (EA)

► Uruguay

On 29 October 2014, a number of jurisdictions confirmed their intended implementation timelines of the new global standard:

► India (EA)

► Ireland* (EA)

► Isle of Man* (EA)

► Italy* (EA)

► Jersey* (EA)

► Korea* (EA)

► Latvia* (EA)

► Liechtenstein* (EA)

► Lithuania* (EA)

► Anguilla* (EA)

► Argentina* (EA)

► Barbados (EA)

► Belgium* (EA)

► Bermuda* (EA)

► BVI* (EA)

► Bulgaria (EA)

► Cayman Islands* (EA)

► Chile

► Colombia* (EA)

► Croatia* (EA)

► Curacao* (EA)

► Cyprus* (EA)

► Czech Republic* (EA)

► Denmark* (EA)

► Dominica

► Estonia* (EA)

► Faroe Islands* (EA)

► Finland* (EA)

► France* (EA)

► Germany* (EA)

► Gibraltar* (EA)

► Greece* (EA)

► Greenland (EA)

► Guernsey* (EA)

► Hungary* (EA)

► Iceland* (EA)

► Luxembourg* (EA)

► Malta* (EA)

► Mauritius* (EA)

► Mexico* (EA)

► Montserrat* (EA)

► Netherlands* (EA)

► Niue

► Norway* (EA)

► Poland* (EA)

► Portugal* (EA)

► Romania* (EA)

► San Marino*

► Seychelles (EA)

► Slovakia* (EA)

► Slovenia* (EA)

► South Africa* (EA)

► Spain* (EA)

► Sweden* (EA)

Jurisdictions undertaking first exchanges by 2017

Jurisdictions undertaking first exchanges by 2018

► Albania*

► Andorra

► Antigua & Barbuda

► Aruba*

► Australia

► Austria*

► The Bahamas

► Belize

► Brazil

► Brunei

► Canada

► China

► Costa Rica

► Grenada

► Hong Kong

► Indonesia

► Israel

► Japan

► Marshall Islands

► Macau

► Malaysia

► Monaco

► New Zealand

► Qatar

► Russia

► Saint Kitts & Nevis

► Samoa (US)

► Saint Lucia

► Saint Vincent & the Grenadines

► Saudi Arabia

► Singapore

► Sint Maarten

► Switzerland (M1 intended)

► Turkey

► United Arab Emirates

Key dates for “early adopters”

1 January 2016 New account opening procedures to record tax residence to be in place from 1 January 2016

31 December 2016 Due diligence for identifying high-value pre-existing individual accounts to be completed

March 2017 First CRS reporting by financial institutions

September 2017 Exchange of information between Competent Authorities commences

31 December 2017 Due Diligence for identifying low-value pre-existing individual account and entity accounts to be completed

Key

EA – “Early Adopter Group” – see below for specific implementation timeline * - Signatory to the Multilateral Competent Authority Agreement

FATCA IGA classification

Green – Jurisdictions entered into an IGA model 1 (including in substance) Blue – Jurisdictions entered into IGA model 2 (including in substance) Grey – Jurisdictions under FATCA with no IGA

The impact of differences in CRS to IGA Model 1

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Total number of differences 185

Significant 41 22%

Medium 81 44%

Less significant 63 34%

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CRS: Similarities and differences to FATCACRS vs. FATCA

FATCA CRS

De minimis limits $50,000/$250,000 No de minimis (with the exception of pre-existing entities with a value lower than $250,000)

Indicia Focused on US citizenship Focused on tax residency

Due diligence Separate due diligence for pre-existing and new accounts, and for individuals and entities. Significantly different processes between FFI Agreement and Model 1 IGA

Due diligence modelled on IGA, but with a number of key differences

Who is an FI? Most financial institutions unless specifically exempted as being lower risk

FATCA exemption removed per CRS thus include smaller local entities excluded underFATCA => Flexibility for local guidance to define specific exemption for low risk entities

Account scope Most banking products unless low risk, some insurance, most asset management

Banking and Asset Mgmt. broadly similar, though regularly traded exemption removed. Many jurisdictions will have no back book exemption for Insurance

Reporting Primarily to US (some US reporting obligations to non-US).

Account balances from 2014, with income and sale proceeds phased in

Many-to-many, via local authority.

Account balances, income and sale proceeds from day one

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CRS: What is required?

1. CRS shares a number of similarities with FATCA, allowing, to a large extent, leverage of existing FATCA capabilities to support delivery.

2. The scale of change required will depend on the implementation approach adopted for FATCA

Gap to: Model 1 FATCA IGA

Overall client due diligence ► Possible need for dual FATCA and CRS classifications of both

(i) Reportable clients; and

(ii) Reportable accounts

Pre-existing individual identification

► Additional indicia checks required but only for high value accounts, or accounts where no current residence address held.

► De minimis limits removed

New individual identification ► Current self certification must be amended to cover all countries, rather than a ‘not US’ declaration

Pre-existing entity identification ► Minor changes to entity types – documentation standards and workflow largely preserved.

New entity identification ► A number of changes needed, including a self-certification on residency for all new entity accounts

Reporting ► Reporting to local authorities as under FATCA in a ‘many to many’ manner► No phased implementation, as seen under FATCA ► Multiple reporting formats issued by IRS, OECD and HMRC. Schemas broadly similar, but

some differences

Withholding ► No withholding requirement under CRS

Compliance ► As with Model 1 FATCA, compliance is under local law

Significant redesign required Process changes and new information requirements Minor or no redesign effort

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High-level gap analysis between FATCA IGA and OECD CRS

Area Sub Area Key differences Impact

General

TimelinePotentially staggered approach for CRS implementation as and when jurisdictions sign Competent Authority Agreements (CAA)

Complexity of implementation i.e. local v hub & spoke model

Reportable Jurisdictions

Increased scope of implementation with CRS currently supported by 67 jurisdictions

Legislative interpretation required in numerous locations

Specified/ Reportable Persons

Under the CRS, Reportable Person covers an increased scope of Individuals and Entities to be classified.

For the CRS, Financial Institutions in Non-Participating Jurisdictions will be deemed Passive Non-Financial Entities and the Controlling Person(s) will be required to be identified

Larger volumes of clients to classify and report on

May no longer rely on tactical approach

Non-compliant Financial Institutions (FIs)

Withholding tax deterrent not applied to FIs located in non-participating jurisdictions.

See Withholding section for further information

No withholding, but local enforcement powers

IGA/ Agreements

Potential for multi-lateral CRS Competent Authority Agreements

No direct reporting from FIs to other Competent Authorities under the CRS

Legislative interpretation required in numerous locations

Only one report required, but schema fields require analysis and may vary between locations

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High-level gap analysis between FATCA IGA and OECD CRS

Area Sub Area Key differences Impact

Financial

Institutions (FI)

Reporting Financial Institutions

Relevant Holding Companies and Treasury Companies are not deemed Reporting FIs under the CRS

Need to revisit entity classification

Non-reporting Financial Institutions

The definition of a Non-reporting FI is more limited under CRS

FIs with a local client base, low value accounts and non-profit organisations are not automatically exempt under the CRS

Deemed Compliant FIs are not replicated in the CRS although CRS allows low risk entities to be defined as exempt under local jurisdiction

FIs will require analysis for differences in classification between FATCA and the CRS

Area Sub Area Key differences Impact

Accounts

Financial AccountsProduct scope is broadly consistent (depository, custodial etc. )

Product analysis to be revisited, but will be largely similar

Excluded Accounts

The definition of an exempt product under CRS is narrower than under FATCA . eg. Certain low risk products are not exempt under CRS

Some products excluded under FATCA will be reportable under CRS

Industry variation Insurance: Back book exemption

Asset Management: Regularly traded exemptionWider scope than FATCA

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High-level gap analysis between FATCA IGA and OECD CRS

Area Sub Area Key differences Impact

Due Diligen

ce- Individuals

Individuals – Pre-existing Accounts

All pre-existing individual accounts are within scope under the CRS

Under CRS you can rely on residence address to determine tax residency, no need to undertake indicia search

Individuals – New Accounts

All New Individual Accounts are within scope under the CRS

Need to make amendments to all accounts onboarding

Self-certification - Individuals

Citizenship not required in CRS self-certificationRequire tax residency for all new accounts

Indicia search – Individuals

CRS could dramatically reduce the number of pre-existing individuals that need to be subject to full indicia review.

But note: continued need for enhanced review

Due Diligen

ce- Entitie

s

Entities – Pre-Existing Accounts

Under the CRS accounts exceeding $250,000 must be subjected to due diligence.

There is no upper threshold in CRS

Classifications differ to FATCA.

Some redesign likely to be required

Entities – New Accounts

No difference Cannot rely on W-series forms. Significant redesign effort may be required

Self-certification - Entities

Self-certification always required to identify tax residency for new entities for the CRS

Required to collect self certification on residency

Indicia search - Entities

No set indicia search published in CRS however information maintained for regulatory or customer relationship purposes may be relied upon

End result is expected to be similar to FATCA

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High-level gap analysis between FATCA IGA and OECD CRS

Area Sub Area Key differences Impact

Reporting &

Withholding

Reporting

Broadly similar, however, a comparative analysis of the IRS FATCA and OECD schema illustrates deviations in data elements between the two schemas, e.g. one third only appear in one of the schemas.

Volumes of reportable data and accounts will vastly increase

Unlikely to be able to rely on tactical reporting solution

Detailed analysis of the schemas required

Multiple data sources required to inform reporting engine

Withholding

No withholding under CRS. Implementing jurisdictions are expected to place local effective enforcement provisions to address non-compliance

No requirement to build withholding capability

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Gap analysis: FATCA and CRS

Definition FFI

Registration

Identification Ind. Acc.

Identification entity Acc.

Group requirements

Documentation

Reporting

Withholding

0

5

10

Perceived degree of Complexity

FATCA CRS

No withholding/penal withholding under

CRS

No phased implementation for

CRS; multiple reporting possible

No registration duties under CRS

FATCA allows group compliance, CRS not

CRS based on AML/KYC information, FATCA in addition on

US documents

No de minimis rules under CRS, search for

indicia of residency

No group concept and no deemed-compliant

FI under CRS

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Immediate next steps regarding the OECD CRS

1Establish CRS program governance

► Determine whether or not OECD/CRS is managed separately from FATCA program► Identify program sponsor and steering committee► Establish change management protocols and rapidly build stakeholder awareness ► Build an internal communications strategy including Board involvement

2Assess overall impact of CRS

► Map early adopter countries to group footprint► Understand CRS requirements, local privacy laws and agreements between jurisdictions► Determine impact of CRS to lines of business► Perform comparison of CRS requirements to existing FATCA program, identifying synergies where appropriate

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Define strategy and impact to current FATCA program

► Determine and document key assumptions and enterprise policy decisions► Local vs. central communication and decision making► Resource availability

4Plan CRS compliance efforts

► Establish workstreams ► Prioritize activities and secure resources► Define milestones and build work plans

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Determine strategic FATCA and CRS reporting platform

► Identify reporting solution strategy and approach► Central vs.de-centralized reporting implementation models► Identify solution alternatives