NEW PROPOSAL DEVELOPED UNDER THE AUSPICES OF OECD
The Organisation for Economic Cooperation and Development (OECD) is making efforts to implement a new international standard to report on financial activities - called the “Common Reporting Standard for the Automatic Exchange of Tax Information (CRS)”. The proposal being considered by Federal Treasury is to have Australia become a party to CRS.
If Australia becomes a party to the CRS, Australian financial institutions (broadly defined) will have to report on the financial activities and dealings they have with most, if not all, foreign nationals.
‘Broadly defined’ financial institutions includes not only banks, building societies and credit unions but also custodial institutions, some brokers, exchange traded funds, most investment entities (collectives) and insurance companies which issue investment linked life insurance or annuity contracts.
Support for the proposed new OECD standard was mentioned by The Economist on June 28 2014. In the article ‘FATCA’s flaws, it stated:
“America should also embrace the OECD’s efforts, already backed by more than 50 countries, to create a truly multilateral system in which tax information on residents’ accounts and certain investments is shared annually. For that to work, America would need to hand over data similar to those which it demands from others – something it has hitherto appeared reluctant to do."
This new standard was endorsed by G20 finance ministers and central bank governors at their meeting in February 2014. Further technical details including a commentary to ensure consistent application and operation of the CRS internationally are currently being finalised and will be presented to G20 finance ministers at their September 2014 meeting.
AUSTRALIAN FOREIGN NATIONAL IMPLICATIONS
If Australia decides to adopt the common reporting standard, then financial institutions will be required to undertake due diligence to identify and then report financial account information about all non-residents to the Australian Tax Office (ATO).
Currently more than 50 countries have committed to implement the “common reporting standard”. If Australia decides to participate, that will also mean information about Australian non-residents in overseas jurisdictions will be reported back to the ATO.
Fortunately the common reporting standard is structured along the same lines as the due diligence requirements under FATCA as modified by the Australia-US inter-governmental agreement (which is designed to make it easier for Australian financial institutions to comply with FATCA).
However, it is important to note that the range of financial institutions which may be required to report under the common reporting standard could well be greater than under FATCA. This is principally because the “carve-outs” under FATCA for Australian financial institutions which only have local customer bases or low value accounts, currently are not specifically classified as exempt under the common reporting standard. No doubt there will be a push for consistency across the board in this regard, although there are countervailing arguments in this regard, some of which are referred to in the Treasury Discussion Paper.
REVIEW OF IMPLEMENTATION OF FATCA
As from 1 July 2014 financial institutions in Australia have started to implement new customer due diligence procedures on “US Persons” as required by FATCA. There is a staged introduction of FATCA with levels of due diligence increasing over a number of years. Under FATCA, most Australian financial institutions (and financial institutions worldwide) are required to report to their local tax authority on their dealings with, and the financial affairs of, “US Persons”. This expression includes a citizen of the US (and other individuals with a connection to the US) and defined “US Entities”.
The international scope and reach of this new US legislation is breathtaking.
It is already having a major impact internationally as stated by The Economist magazine in the above mentioned article:
“Going after tax dodgers is understandable. But FATCA, which will take effect on July 1st, is overkill.
America is the only large economy to tax its citizens on everything they earn anywhere in the world. FATCA’s purpose is to ensure that not a centime or rouble that a “US person” has stashed away goes undetected by the IRS. In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax …”
The Economist article also makes some interesting further observations about the impact of FATCA:
- There are estimated to be 7 million Americans living abroad likely to be affected by FATCA
- A record 2,999 “exasperated” ex-pats renounced their citizenship or Green Cards in 2013. More than 1,000 did so in the first quarter of 2014. This is compared to the situation before FATCA where the number was a few hundred a year
- More than 77,000 financial firms have signed up and registered with America’s internal revenue service (IRS)
- About 80 countries have struck agreements with America
to allow the financial firms to hand over data
- A Dutch American has already sued a Dutch lender, using anti-discrimination laws. The lender had pre-emptively shut down his account and the accounts of 149 others. The Dutch American won.
As Australian financial institutions implement new procedures to comply with FATCA, they need to consider how their customer due diligence procedures and processes would need to further change if the Australian Government decides to adopt and participate in the “common reporting standard”, which will require Australian financial institutions to report on all foreign nationals. And how to manage customer expectations and dissatisfaction will need to be factored into the equation.
Disclaimer: The information contained in this e-alert/update is not advice and should not be relied upon as legal advice. Hunt & Hunt recommends that if you have a matter that is legal, or has legal implications, you consult with your legal adviser.