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The Common Reporting Standard: Automatic Information Exchange Goes Global

June 1, 2017

Automatic exchange of information for tax law enforcement purposes started first in Europe with the EU Savings Tax Directive, went international with the US Foreign Accounts Tax Compliance Act, and, from 2017, will go global with the recently-agreed Common Reporting Standard, the subject of this feature.

The Common Reporting Standard (CRS) provides for annual automatic exchange between governments of financial account information. The Standard sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

In a sense, the CRS is not a "new" initiative started from a blank canvas. Many of the systems that will enable information to the sent and received under the Standard are already in place under existing information exchange protocols. The CRS will essentially piggy-back off these mechanisms. What is new is that governments around the world have accepted the need for such information to be exchanged automatically.

Against a backdrop of rising public anger about tax avoidance and evasion, stoked by media reports about the tax planning techniques used by wealthy individuals and corporations, the G20 finance ministers endorsed automatic exchange as the new tax transparency standard on April 19, 2013. In June that year, the G8 welcomed the OECD Secretary General report “A step change in tax transparency” which set out the concrete steps that needed to be undertaken to put a global model of automatic exchange in practice. The G20 leaders then committed to automatic exchange of information as the new global standard in September 2013.

With a common global reporting standard, international information exchange systems will be standardized, lowing administrative costs for all concerned. At present, there are numerous procedures in place for tax authorities to exchange information with each other. These include bilateral double taxation avoidance agreements, regional initiatives like the European Savings Tax Directive, and international agreements such as the OECD Multilateral Convention. "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," the OECD states.

Countries that have signed up to the CRS will exchange information "automatically" with one another. This represents something of a step change in international tax enforcement.

Traditionally, information about an individual or business has been sent from one tax authority to another on request, based on evidence that tax fraud or some other crime has taken place. The EU could be said to have led the way on automatic information exchange under its Savings Tax Directive. However, the United States Foreign Account Tax Compliance Act (FATCA) was the real game-changer in international tax compliance, in that it became the first global automatic exchange of information program, and the inspiration behind the CRS.

In summary, "automatic" exchange of information will entail the systematic and periodic transmission of "bulk" taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income or asset information. The information exchanged is normally collected in the source country on a routine basis, generally through reporting of the payments by financial institutions and other payers.

While there are technical similarities between the CRS and FATCA, there are some key differences:

  • US-specific rules have been removed from the Common Reporting Standard. For instance, FATCA, is based on US citizenship, a concept fundamental to the US tax system
  • the CRS is based on residence.
  • the CRS does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive
  • the CRS has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in automatic exchange under the standard.

The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account.

Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement that financial institutions "look through" passive entities to report on the relevant controlling persons.

The financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they present a low risk of being used for evading tax and are excluded from reporting.

The OECD assures us that the standard contains specific rules on the confidentiality of the information exchanged and that the underlying international legal exchange instruments already contain safeguards in this regard. Where these standards are not met (whether in law or in practice), countries will not exchange information automatically. Time will tell how watertight the system is in practice, however.

It is envisaged that the first automatic information exchanges under the CRS will begin in 2017. However, the OECD itself admits that the current timetable is "ambitious" because many countries, especially in the developing world, do not currently have the administrative and technical mechanisms in place to meet the standard, nor the resources to build them. Therefore, with the assistance of the rich countries, it will probably take several more years before the CRS is a truly global information exchange network.

LWM is a Luxembourg based Service Company specialised in Corporate and Family Office Services. It includes the setting-up and the administration of companies domiciled both in Luxembourg and elsewhere in the world.

(From left to right) Mr. Eric Leclerc, Founding Partner of LWM and Mr. Leopold Kenens, Family Officer and Relationship Manager, Asia, LWM

LWM is a Luxembourg based Service Company specialised in Corporate and Family Office Services.

It includes the setting-up and the administration of companies domiciled both in Luxembourg and elsewhere in the world.

LWM takes care of all the stages in a company's business life: development of a corporate object, incorporation of the company, contacts with local authorities and banks together with the carrying-out of all legal requirements in relation to the administration of the company (domiciliation, book-keeping, annual reports, holding of shareholders meetings and board meetings, accomplishment of legal formalities).

The scope of Family Office activities covers various professional services including inheritance and family law aspects, corporate structure and corporate governance, contractual arrangements, as well as tax planning, financial services, and accounting support;

LWM’s endeavour is to provide full and high quality Family office services and company administration with a personalised approach.

Eric Leclerc
Founding Partner of LWM

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