OECD introduces further investor reporting

30 Oct, 2014

Financial institutions including fund managers will need to up the ante on client due diligence and bolster investor reporting following the Organisation for Economic Cooperation and Development's (OECD) agreement on the automatic exchange of information.

The OECD's Common Reporting Standard (CRS) will force national authorities in the 51 signatory states to collect and exchange information on taxpayers’ assets, bank accounts and interest payments outside of their home countries as part of the global clampdown on tax evasion in what appears to be a replication of the Foreign Account Tax Compliance Act (FATCA) in the US.

“Implementing the agreement will impose complex new due diligence and automatic reporting requirements on financial institutions doing business in the signatory jurisdictions.  From 2016, these institutions will need to implement new customer on-boarding processes, gather new information and documentation on existing account holders, and put in place systems to report required information to the proper government entities. Equally important, non-financial multinationals will also need to determine their status under the CRS and how they are affected,” said Tom Aston, financial services tax partner at KPMG.

Fund domiciles including the Cayman Islands, the British Virgin Islands, Switzerland and Liechtenstein have all thrown their weight behind the initiative. However, the US is not a signatory.  “For governments, they will likely need to enact legislation or regulations to implement the Multilateral Competent Authority Agreement in their jurisdictions.  For financial institutions, they will be working hard to get customer due-diligence procedures in place by January 1, 2016 – less than 15 months from now – and then will turn to meet the deadline for the first reporting of information about non-resident account holders as required in 2017,” said Aston.  

CRS is the latest anti-tax avoidance initiative being put forward by global regulators. The UK is in the process of creating its own FATCA whereby there will be an automatic exchange of information about UK residents with accounts in the Crown Dependencies, and this is likely to be implemented from 2016. Meanwhile, China is pushing ahead with its Foreign Asset Reporting Requirements (FARRs) which will force its wealthy citizens to publish details of their offshore holdings. 

There is, however, a risk that some of these initiatives could overlap, resulting in duplicative reporting and added costs for financial institutions.

Even the flagship initiative – FATCA – has had a troubled implementation.  Intergovernmental Agreements (IGAs) have added to delays. IGAs,  designed to make FATCA more palatable to third countries, many of whom were alarmed at the breadth of information the Internal Revenue Service was demanding, vary by country and there is likely to be confusion. Foreign financial institutions operating out of multiple jurisdictions will also be required to be fully compliant with the IGA in each of those countries. Codifying IGAs into national legislation is likely to be a time-consuming process too.

Other outstanding issues surrounding FATCA remain. The definition of what constitutes US indicia, the criteria for identifying a US person, is not clear-cut.  "Most people would believe a passport should suffice to clarify this. However, this is not the case. Under the FATCA rules, an individual who holds a mailing address within the US, or has power of attorney of account in the US, or who has lived in the US for a substantial time, could fall under the FATCA definition of a US person. If an individual has not properly revoked their Green Card, they too could be ensnared.  An individual living outside of the US but whose parents were born in the US could even be caught out. In other words, Winston Churchill, for example, would have been deemed an American under FATCA,” said Ross McGill, managing director at GlobeTax in London.  

COOConnect will be publishing a guide to regulatory reporting shortly, and will cover FATCA reporting. To view the COOConnect Guide to derivatives reporting in Europe, please click here. To view the COOConnnect Guide to AIFMD, please click here

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