Global companies that hold account balances have a new FATCA-like regime to contend with after the Organization for Economic Co-Operation and Development finalized a new method to govern information exchange among more than 50 countries.
OECD is instituting the Common Reporting Standard as a huge step toward international tax cooperation and transparency, says Michael Plowgian, a principal in international tax for KPMG. While the United States is not a signing participant in the arrangement, subsidiaries or branches of U.S. entities will need to comply with the reporting requirements in the jurisdictions where authorities are signing on to the OECD plan, he says. “The fact that the U.S. has not implemented the Common Reporting Standard may actually create additional challenges for U.S.-based financial institutions in coordinating implementation across the various jurisdictions in which they do business.”
The Common Reporting Standard is the global answer to the Foreign Accounting Tax Compliance Act in the United States. Approved by Congress in 2010, FATCA requires U.S. taxpayers to report more information about their offshore holdings, but it also gives foreign financial institutions a huge incentive to report on those offshore holdings of U.S. citizens as well, so the Internal Revenue Service can compare notes and assess tax and penalties as necessary. Through intergovernmental agreements, the U.S. government partners with other jurisdictions to compel reporting and share information.
The CRS is significant for financial institutions in particular because they will face complex new customer due-diligence and reporting obligations in the 50-plus countries that are participating, says Plowgian. The countries must implement standardized customer due-diligence procedures and reporting requirements for their financial institutions to follow, he says, and to exchange information with other governments automatically.
The U.S. is not a participant in the CRS because it already has FATCA in place, but it will be up to other countries in the CRS process to determine for themselves if they regard the U.S. to be a participant. That has implications in terms of the kinds of information financial institutions and even the entities that deposit funds in them might face from jurisdictions that are participating, says Plowgian. Financial institutions abroad are likely to ask more questions about the individuals who control an entity’s accounts. As with FATCA in the United States, it will take time for the mechanics of the reporting process to settle in and for interpretations to be made, he says.
The reporting is set to begin in 2017 on 2015 account balances, says Plowgian, although jurisdictions still must issue guidance under the new standard before financial institutions can do their part. “The OECD guidance is pretty detailed, but the various jurisdictions can implement guidance and may tweak it,” he says. “The lack of any binding guidance is a serious issue for financial institutions.”