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OECD global model of automatic exchange of financial account information commentaries released
Banking on Tax, Issue 13
On 21 July 2014, the Organisation for Economic Co-operation and Development (OECD) released the first edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters.
The document contains the Model Competent Authority Agreement (Model CAA), the Common Reporting Standard (CRS) and commentaries interpreting each section of the Model CAA and the CRS. It also includes seven Annexes containing model agreements, the CRS user guide and other documents.
The CRS draws extensively on the U.S. FATCA intergovernmental agreements (IGAs). However, the requirements for financial institutions (FIs) in countries that adopt the Model CAA (signatory countries) have been modified to reflect the multilateral nature of the CRS and to focus on tax residency.
FIs in signatory countries will need to modify their FATCA programs to ensure compliance with the CRS documentation, due diligence and reporting requirements.
Global model of automatic exchange of financial account information
The global model of automatic exchange of financial account information is based upon countries signing either a bilateral or a multilateral Model CAA. This provides the terms and conditions for the exchange of financial account information and the translation of the CRS into domestic law.
The Model CAA contains the type of information to be exchanged between signatory countries, the time and manner of exchange of financial account information, the requirement to collaborate on compliance, the enforcement requirements, as well as the confidentiality and safeguards that must be respected by the signatory countries.
The exchange of information required to be reported under the reporting and due diligence rules of the CRS can be done on an annual basis, or more frequently, using the information technology modalities described in the commentary to the Model CAA.
Safeguards to ensure the confidentiality of the information received include the legal framework required, practices and procedures for information security management, as well as compliance and sanctions to address a breach of confidentiality. These are described in detail in the commentary to the Model CAA.
To ensure compliance by signatory countries, a competent authority can suspend the CAA if there is significant non-compliance by another competent authority.
The CRS contains the documentation, due diligence and reporting standards to be implemented by FIs in signatory countries (reporting FIs). The general requirements are based on Annex I of the FATCA Model 1 IGA. However, there are significant differences, including:
- Scope of reporting FIs – Certain FIs that are treated as non-reporting FIs for FATCA are not similarly treated in the CRS. However, the CRS does allow the domestic law of a jurisdiction to treat low-risk entities as non-reporting FIs
- General reporting requirements – Similar to the FATCA Model 1 IGA, FIs will be required to report information on ‘Reportable Accounts’ (i.e. accounts held by individuals and entities that are ‘Reportable Persons’ and ‘Passive Non-Financial Entities’ (Passive NFEs) with ‘Controlling Persons’ that are Reportable Persons). However, the reporting requirements are based on the tax residency of the Reportable Person
- General documentation and due diligence requirements - Similar to Annex 1 of the FATCA Model 1 IGA, CRS describes due diligence procedures for ‘New Accounts’ and ‘Preexisting Accounts’ held by individuals and entities. However, there are significant modifications in the approach, such as differences in thresholds for account review and greater focus on residency (and elimination of references to citizenship). The system relies on FIs obtaining a ‘self-certification’ to determine the residency of an account holder and the commentary specifies the content of the self-certification. The U.S. W-8 or W-9 forms would generally not be acceptable for CRS purposes outside of the U.S.
- Effective implementation – Jurisdictions are expected to include specific provisions in their domestic legislation to impose sanctions for false self-certifications. In addition, jurisdictions are required to implement administrative procedures: (i) to verify the compliance of FIs with the reporting and due diligence procedures; (ii) to follow up with an FI when undocumented accounts are reported; and (iii) to ensure that entities defined as ‘Non-Reporting Financial Institutions’ and accounts defined as ‘Excluded Accounts’ continue to have a low risk of being used to evade tax.
The wider approach document extends the CRS due diligence procedures to cover all non-residents or residents of jurisdictions for which a particular jurisdiction already has an exchange of information instrument in place (also known as the ‘big bang’ approach). The purpose of this document is to allow FIs to avoid performing additional due diligence each time a new jurisdiction becomes a signatory to the CAA.
A group of countries, known as the ‘early adopters’, have committed to a start date for the CRS in 2016. Australia has not yet made any commitment to a particular start date.
Treasury discussion paper
The Australian government has not yet made any final decisions on implementation of the CRS in Australia. In June, the Australian Treasury released a discussion paper seeking industry input to assist the government with its decisions for CRS. The discussion paper asked questions on areas such as:
- FIs that should be covered
- The expected impact on FIs with multinational operations
- The accounts that should be reported
- The ‘big bang’ approach
- The use of current reporting mechanisms, such as the annual investment income report, for CRS reporting
- Alignment of CRS to AML/CTF customer due diligence requirements
- Timetable for implementation
- Expected costs of implementation.
In anticipation that Australia will implement the CRS, many FIs are beginning to consider the impact of CRS and its differences to FATCA. Many are also contributing to the consultation process.