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Global FATCA coming soon to a country near you

The automatic exchange of financial information is a key focus for numerous tax authorities. A number of proposed initiatives range from the US’s FATCA and the OECD’s plans to the EU’s plans to revise the Savings Directive.

The recent financial crisis and the subsequent need for countries to repair their balance sheets led to an international focus on improving tax collection. This spilled over into the mainstream media with headlines of high profile tax-related investigations of financial institutions, John Doe summons and cases involving stolen data showing evidence of non-reported income and assets held in offshore bank accounts. In response, tax authorities have turned their attention to the use of automatic exchange of information, or AEOI, as a tool to help combat tax evasion. If residence countries can identify offshore financial accounts and income flows, it will be easier to check taxpayer tax returns for completeness as well as acting as a deterrent in its own right.

The US’s Foreign Account Tax Compliance Act (FATCA) has also contributed to this international focus on the AEOI. At its simplest, FATCA, deters tax non-compliance by US taxpayers with foreign accounts through requiring information reporting by financial institutions. To make this happen in certain countries, the US has entered into, and will continue to enter into, intergovernmental agreements (IGAs) that will, among other things, overcome issues of local data privacy and allow for the flow of relevant reportable information to the US either from the relevant country’s tax administration (that is, government to government under a so-called Model 1 IGA) or directly from the reporting financial institution. The legislation has changed the landscape. Countries that had previously refused to exchange taxpayer information, have shifted their position and removed some of the barriers to a multilateral AEOI system.

This shift in the landscape has also contributed to a number of recent high profile announcements including:

  • the European Commission’s (EC) efforts to reinvigorate efforts to amend the Savings Directive (EUSD) and proposing amendments to the Directive on Administrative Cooperation (DAC);
  • the G5’s (France, Germany, Italy, Spain and the UK) plans to develop an AEOI pilot leveraging FATCA; and
  • the OECD’s proposals to develop an AEOI solution.

These initiatives all have a common theme: the requirement to report customer financial information that will be exchanged on a multilateral basis with participating partner jurisdictions.

As such this has contributed to a confusing picture with a number of initiatives proposed by a number of groups who possess a common membership.

EU Savings Directive
The EC has long had an interest in the AEOI and the 2003 adoption of the EUSD, with its requirements for EU paying agents to report details of savings income payments made to individuals and certain entities resident in other member states, was the first significant AEOI initiative. A number of flaws have been identified with the EUSD and this led to the EC in 2008 proposing detailed amendments to it to resolve these issues. The proposals had three key aims:

  • removing opportunities for individuals to circumvent the EUSD by using interposed entities or arrangements which are not taxed on their income. This is to be achieved by determining the effective beneficial owner of interest payments;
  • extending the scope to include income equivalent to interest payments; and
  • ensuring a level playing field between all investment funds or schemes independently of their legal form. This would now broadly capture all types of collective investment.

However, the proposed amendments stalled, with Austria and Luxembourg both being reported as blocking any amendments that would result in automatic information exchange – both countries had negotiated a transitional period under the EUSD in which they could apply a withholding regime instead of reporting. However, this position started to look untenable once both countries announced their intent to sign an IGA with the US after FATCA. This, together with the political will noted above, resulted in EU leaders, including Austria and Luxembourg, calling at the May meeting of the European Council in May 2013 for the adoption of the revised EUSD by the end of 2013. However, at the recent ECOFIN meeting on 15 November it seems that agreement was not reached on adopting the revised directive. The post-meeting press release stated the intent to discuss the issue again in the near future and the presidency expectation is that agreement is still possible before the end of the year.

EU Directive on Administrative Cooperation
In addition to the EUSD, the EU has another reporting scheme in place through the Directive on Administrative Cooperation (DAC). The DAC came into force from January 1 2013 and covers, among other things, the automatic exchange of available information on five categories of income:

  • income from employment;

  • directors’ fees;

  • life insurance products;
  • pensions; and
  • immovable property.

It was expected that possible extensions to reporting would be reviewed in 2017. However, the EC accelerated this process by issuing proposals in June that will, assuming they are adopted, extend the categories of reportable income to:

  • dividends;
  • capital gains;
  • any other income generated with respect to the assets held in a financial account; and
  • any amount with respect to which the financial institution is the obligor or debtor including redemption payments

One significant point to note is that the five pre-existing reportable categories of income are subject to automatic exchange only if the information is ‘available’. This exception will not apply to the proposed new categories, that is, AEOI will be mandatory.

The proposal should in part be seen as a reaction to FATCA. As the associated information released by the EC explains, the intention is to ensure a consistent EU approach to information exchange and that the coverage of the information to be exchanged between member states is just as wide as FATCA. This, thereby avoids the need for the most favoured nation clause (provided for under the DAC) to be invoked. This clause would mean that member states would be bound to provide, to any EU partner that requests it, the same level of information that they provide third countries, if this is more than provided for under EU law. The concern here is that if the clause were invoked it could lead to different approaches being taken at a country level and we understand that the EC is keen to ensure standardisation of approach.

The proposed amendments to the DAC will need to go through the usual EU ratification process and the next steps will be for this to be presented to the European Parliament and Council. Adoption may occur after the Council has received the opinion of the European Parliament and voted unanimously.

The EC view appears to be that the DAC and the EUSD are complementary. A significant concern with the above proposals – leaving to one side the overriding concern of multiple reporting covering similar themes – is the inclusion of capital gains as a reportable item. Capital gains computations are likely to be complex. Unlike the other reportable income categories, it is not a relatively simple matter of reporting an income payment. A major issue will be situations where the reporting financial institution has incomplete information and so cannot compute an accurate gains calculation.

Key relevant information will include original acquisition price and it is not that likely that the financial institution will possess this where they have either had no need to record this data or the asset has been transferred from another provider. Beneficial owners may have multiple relationships with financial institutions and therefore financial institutions may have an incomplete view of client holdings. This may be significant in terms of how to calculate the base cost with complexity likely to arise over matching rules.

Over and above this are rules to do with elections and reliefs that may apply in a capital gains context. If the intent is to have usable correct data to enable the tax authority to match against taxpayer returns, it is not clear that the financial intermediary will be in any position to do this without significant interaction with the taxpayer. Clearly an argument can be made that capital gains reporting should be eliminated and a partial compromise would be to report gross proceeds.

As well as the technical difficulties comes a wider issue: should the EC recognise the OECD’s interest in this area and either simply defer to that work or conform their proposals so that it follows any solution developed? Promising noises have been made in this regard and at the recent informal ECOFIN meeting in September the Lithuanian Finance Minister and chairman of the ECOFIN Council said: “Our main challenge is to continue the progress in development of automatic information exchange system in the EU and coordinate it with the OECD progress”. Business will hope this results in true harmonisation.

OECD plans to develop a multilateral AEOI system
Perhaps the most significant of all the initiatives outlined above is the OECD’s plans. These have rapidly moved forward after the June 18 2013 release of its “A step change in transparency” report. This report was prepared at the request of the G8 presidency, and followed the G20 Finance ministers’ endorsement in April 2013 of the AEOI as an expected future standard. It is understood that the G5’s plans to develop a pilot AEOI scheme will follow the OECD’s plans. Meetings took place at the OECD in the middle of October to discuss how to progress at a more operative level plans to develop a model competent authority agreement and a common reporting standard with a view to putting this to the OECD’s Committee for Fiscal Affairs (CFA) for approval by early 2014. Industry responses to this have been generally supportive in that the OECD is seen as best placed to develop a true global standard.

The OECD has recognised the work performed as a result of FATCA and stated that: "the…Model 1 IGA contains a number of key features of an effective automatic exchange model. This, along with the fact that governments and financial institutions around the world are already investing to implement it, makes the Model 1 IGA a logical basis on which to build."


The report sets out four main implementation steps and associated recommendations that would be needed to make this all happen:

  1. Enact broad framework legislation: legislation adopted to implement the Model 1 IGA and the associated domestic reporting obligations should be enacted on a broad basis that allows additional jurisdictions to be subsequently added without the requirement to amend primary legislation separately each time a new agreement is entered into.
  2. Elect a legal basis for the exchange of information: bilateral treaties such as those based on article 26 of the OECD Model Tax Convention permit such exchanges. However, it may be more efficient to establish AEOI relationships through a multilateral information exchange instrument such as the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention).
  3. Adapt the scope of the reporting and due diligence requirements and coordinate guidance to ensure consistency and reduce cost. This would be achieved through developing a standardised model for AEOI built on the foundations of the Model 1 IGA but with appropriate amendments to support a standardised multilateral model which addresses the needs of all participating jurisdictions and remains administrable for both financial institutions and participating jurisdictions. These amendments could remove US specificities that are not needed or feasible for a multilateral approach, dealing with any different effective dates from those used for the Model 1 IGA and building on what already exists, such as in the EU context and in the area of anti-money laundering standards. Amendments to the Model 1 IGA could consider thresholds, exceptions to reportable accountholders, due diligence procedures and exceptions to reporting financial institutions. Some challenges are likely to emerge relating to how to minimise costs through the use of appropriate thresholds, exclusions from reporting and grandfathering, with different national governments having different views. Deviations from FATCA may identify challenges for leveraging opportunities for re-using processes developed for FATCA purposes and therefore give rise to additional costs to comply.
  4. Develop common or compatible IT standards. The OECD has already facilitated a lot of work in this area through assisting the development of a reporting format for implementing the Model 1 IGA, based on Standard Transmission Format. It incorporates many elements of FISC 153, the standard used within the EUSD. The reporting schema and a first version of the related instructions could be finalised in the second half of 2013.


Encouraging convergence
Financial institutions will be focusing on a number of key points:

  • Will the OECD manage to keep the number of operational differences between FATCA and the OECD’s proposal to a minimum? Deviations will increase costs of implementation and could give rise to practical issues as solutions, processes and procedures will need to be developed.
  • A key hope is that the final outcome is uniformity. If countries take a pick and mix approach to the proposals (for example, variations in terms of thresholds and reporting protocols) this is likely to increase costs for global financial institutions as they will need to both identify those variations and then spend time and resources in seeking to comply.
  • The OECD secretariat will need to manage countries with differing views on important issues such as thresholds or what it means to be low risk. Proportionality should be borne in mind and reporting of income where this is a very low risk of non-tax compliance has a low utility value.
  • The OECD had indicated that it will identify synergies between the common reporting standard and the Treaty Relief and Compliance Enhancement (TRACE) project, which is focused on how to simplify the process by which portfolio cross-border investors claim reduced rates of withholding tax pursuant to either a double tax treaty or under relevant domestic law. However, this identification exercise will be performed after agreement of the common reporting standard and as such this could be an opportunity wasted as picking this up at a later time may mean potential avenues will be closed.

A situation with multiple initiatives and groups issuing AEOI proposals or amendments to existing regimes is clearly not optimal. A better situation would be a uniform reporting solution whereby financial institutions would work to one set of rules irrespective of the reportable jurisdiction, person or income category. The OECD is working to a demanding timetable that requires the submission of a solution to the CFA in early 2014. This could then see a wave of early adopting countries and the first submission of reports in 2016. This first-mover advantage may be crucial and result in the OECD’s work becoming the de facto global standard if enough countries move forward and adopt it. If this happens, this would largely eliminate the need for the proposed amendments to the DAC.

A question would also exist as to whether, recognising a more comprehensive regime would then exist, the EUSD should at a future point be retired. That said, what is not entirely clear at this point is how the various initiatives will all converge, though the signs are encouraging.

Financial institutions should continue with their FATCA implementation plans but keep a watching brief on this developing story. Once operative details become more certain, FATCA programmes should be transformed into more general AEOI programmes to leverage existing resources and governance structures.

Paul Radcliffe (pradcliffe@uk.ey.com) is a director in EY’s EMEIA financial services tax practice.

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