There is no doubt that the world is definitely walking towards full tax transparency. Although tax transparency regimes are not new, their effectiveness has dramatically improved in the past several years, and 2017 presents a milestone in the subject.
Launched in 2001, the US Qualified Intermediary (QI) Agreement led the change from domestic reporting to far-reaching international exchange of information requirements between financial institutions and the US government, opening up the discussion worldwide which quickly gained interest in the European Union.
The US QI Agreement has been enhanced over the years and was improved upon by the introduction of the US Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA has been extensively criticised, although it has been adopted by Ireland as well as many countries worldwide as local law. In addition, in a mere few years since its emergence onto the global scene, FATCA was reproduced and built upon in several instances, for example:
The industry only started implementing the Foreign Account Tax Compliance Act in 2014, therefore has only had brief experience with the extensive operational requirements of FATCA, CDOT and the DAC. 2017 brings not only new FATCA challenges in relation to maintaining US Taxpayer Identification Number (TINs), but the behemoth obligation that is the first year of CRS reporting. For the first time in history, 54 countries will exchange detailed information about financial account holders with at least one other country – and some may exchange it with all 54 countries. In 2018, this number will rise to at least 101 countries.
The expectation is that with CRS, tax authorities other than the US will also be able to track and hold accountable tax evaders – both individuals and entities.
This Automatic Exchange of Information (AEoI) is only possible due to the requirements imposed on financial institutions to collect identification and financial account data from its customers as a daily practice, as well as to maintain all compliance aspects required. This trend is expected to continue.
Tax authorities are anticipating having access to information for the identification of beneficial owners and controlling persons of intermediary structures which is also expected to be obtained by financial institutions for Anti-Money Laundering (AML) purposes. That is the subject of Procedure 2016/0209/CNS, a Council Directive Proposal of the European Commission to amend the 4th Anti-Money-Laundering Directive (Directive 2011/16/EU), which intends to combine DAC and AML procedures.
As a result of the expansion of the tax transparency lens of governments from 2017, many jurisdictions, including Ireland, are giving taxpayers one last opportunity to disclose existing tax liabilities under a voluntary disclosure policy, specific details of which were included in the recent Finance Bill.
With so many compliance and reporting obligations and continued developments, it’s no surprise that financial services businesses are struggling to keep up to date and put effective governance and solutions in place.
However, doing this is vital now more than ever, as Revenue authorities plan for compliance examinations.
For FATCA and CRS purposes, for example, the responsiveness of customers may vary drastically depending on the adopted client facing strategy, which should include an ongoing programme to ensure staff are well trained and customers have access to updated information, such as a helpline or a list of FAQs. Realistically, successful client facing strategies are not practical if the business does not maintain a coordinated and robust source of implementation and maintenance procedures for AEoI compliance – where possible, combined with KYC/AML procedures.
During a recent AEoI-focused webcast held by EY with over 1,000 global participants, polling showed that the financial services industry is willing to comply with Foreign Account Tax Compliance Act and CRS, but only 16.5% consider themselves ready to comply and migrate to having processes in place for business as usual. A slightly higher percentage, 17.2%, declared that they need to assess their situation and take action, since they are just getting started.
Now that we have learnt lessons from the 2014 and 2015 year-end Foreign Account Tax Compliance Act reporting, it is time to focus on solutions to get ready for FATCA and CRS 2016 year-end reporting season, which will require a drastically higher volume of information to be reported.
It is imperative for financial institutions to take a good look at the processes and systems currently in place for AEoI compliance to evaluate whether they’re working effectively and able to stand up to the strict expectations of government, while also agile enough to prepare for the challenges that will inevitably arise as the global shift to tax transparency continues to grow and evolve.
This article was originally published in Finance Dublin in January 2017