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Haydon
Perryman
FATCA vs GATCA
The Background of the Automatic
Exchange of Information
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On Monday 21st July the OECD released the full version of a new global standard
for the automatic exchange of information between jurisdictions. [311 pages.]
G20 Leaders at their meeting in September 2013 fully endorsed the OECD proposal
for a truly global model for automatic exchange of information and invited the
OECD, working with G20 countries, to develop such a new single standard for
automatic exchange of information, including the technical modalities, to better
fight tax evasion and ensure tax compliance.
The Standard, developed in response to the G20 request and approved by the OECD
Council on 15 July 2014, calls on jurisdictions to obtain information from their
financial institutions and automatically exchange that information with other
jurisdictions on an annual basis. It sets out the financial account information to be
exchanged, the financial institutions required to report, the different types of
accounts and taxpayers covered, as well as common due diligence procedures to be
followed by financial institutions.
The Background of the Automatic
Exchange of Information
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Part I gives an overview of the Standard. Part II contains the text of the Model
Competent Authority Agreement (Model CAA) and the Common Reporting and Due
Diligence Standard (CRS). Part III contains the Commentaries on the Model CAA and
the CRS as well as a number of Annexes.
Collectively these form the Automatic Exchange of Information (AEOI) informally
known as “GATCA”.
The Standard draws extensively on earlier work of the OECD in the area of automatic
exchange of information. It incorporates progress made within the European Union,
as well as global anti-money laundering standards, with the intergovernmental
implementation of the Foreign Account Tax Compliance Act (FATCA) having acted as
a catalyst for the move towards automatic exchange of information in a multilateral
context.
The Background of the Automatic
Exchange of Information
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Presenting the new standard, OECD Secretary-General Angel Gurría said: "This is a
real game changer. Globalization of the world's financial system has made it
increasingly simple for people to make, hold and manage investments outside their
country of residence. This new standard on automatic exchange of information will
ramp up international tax co-operation, putting governments back on a more even
footing as they seek to protect the integrity of their tax systems and fight tax
evasion."
Gurria said, “The G20 mandated the OECD to work with G20 and OECD countries
and stakeholders toward the development of an ambitious information exchange
model that would help governments fight tax fraud and tax evasion; today’s launch
moves us closer to a world in which tax cheats have nowhere left to hide.”
Legal and operational basis for
exchange of information
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Different legal basis for automatic exchange of information already exist. Whilst
bilateral treaties such as those based on Article 26 of the OECD Model Tax
Convention permit such exchanges, it may be more efficient to establish automatic
exchange relationships on the basis of a multilateral exchange instrument. The
Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the
“Convention”), as amended in 2011, is such an instrument. It provides for all forms
of administrative co-operation, contains strict rules on confidentiality and proper
use of information, and permits automatic exchange of information.
67 Countries have signed by the convention but not all have signed the amending
protocol.
http://www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf
Potential Obstacles to the USA
signing the amended protocol
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These are similar to the challenges for by the US Treasury in getting the FATCA IGAs
into US law, namely,
• 4th Amendment (data protection)
• 8th Amendment (excessive fines or cruel and unusual punishments including
torture)
• Circumventing the Senate’s role in ratifying the Agreements
Of these obstacles, perhaps the third is the most credible.
Impact on the USD
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Impact on the USD and the link to reciprocity.
Without reciprocity from the US will the US remain one of the largest secrecy
jurisdictions in the world and if so would the money flow into the US or out of the
US?
How we know GATCA/FATCA will not damage the USD.
The UK implemented FATCA without transition from July 1, 2014 with no discernable
impact on GBP.
Rapid evolution of GATCA
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• With a mandate from the G20 the OECD developed the standard. In February
2014 the standard was endorsed by the OECD Council and the Finance Ministers
of the G20.
• On September 20th and 21st the standard will be formally presented to the G20 in
Australia for ratification.
• On November 21st there will be a Convention which brings together than 120
Countries and Jurisdictions where there will be a signing ceremony.
Differences between FATCA the
IGAs and GATCA
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Quoting from the OECD’s Brief on AEOI of July 21, 2014:
“Question: What are the main differences between the Standard and FATCA?
“Answer: The Standard consists of a fully reciprocal automatic exchange system
from which US specificities have been removed. For instance, it is based on
residence and unlike FATCA does not refer to citizenship. Terms, concepts and
approaches have been standardized allowing countries to use the system without
having to negotiate individual annexes. Unlike FATCA, the Standard does not
provide for thresholds for pre-existing individual accounts, but it includes a
residence address test building on the EU savings directive. It also provides for a
simplified indicia search for such accounts. Finally, it has special rules dealing with
certain investment entities where they are based in jurisdictions that do not
participate in automatic exchange under the standard.”
Differences between FATCA the
IGAs and GATCA (Cont.)
Topic
Reportable Persons and Entities
Basis of Tax Jurisdiction
Legal Entity Classification
US Treasury FATCA
US Citizens
Citizenship
US Bespoke (31)
Primary Keys
GIIN/TIN/ITIN
IGAs
US Citizens
US Citizens
IGA Bespoke (e.g. UK does not
recognize OD-FFIs)
GIIN/TIN/ITIN
De minimis rules
Exempt product and entities
Entities and Individuals
As per US Treasury Exemptions
Entities and Individuals
IGA Annex II Exemptions
Withholding
Applies
Account can be opened before self
certification
True (earlier of 90 days or
withholdable event)
Applies only in exceptional
circumstances outside of local law
True (earlier of 90 days or
withholdable event)
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AEOI
Residency in all Reportable Countries
Residency
AEOI Bespoke (few)
Registered Company #, GLEIs,
GIIN/TIN/ITIN
Pre-existing accounts for entities only
Similar to US Treasury exemption but
includes no IGA Annex II exemptions
Does not apply
False
Basis of determination of reportable Beneficial Ownership at 10%
Passive NFFEs
Temporal basis for determining high End of year/period
or low value account balances
Competent authority to whom to
One: US IRS
report
Controlling Persons based on local
law %.
End of year/period or average (e.g.
Mexico)
One: US IRS (Model 2) OR Local
Competent Authority (Model 2)
Controlling Persons based on local
law %.
End of year/period or average
Single/plural tax jurisdictions
1: the IRS
Reporting currency
USD
1: the IRS (the exception being the
UK)
USD
Basis of Self Certification
Rules based
Principles Based
Principles Based
Tax advice for customers (regarding
completion of the Self Certification)
No tax advice
No tax advice
Tax advice expected and OECD to
facilitate
Many: to the competent authority of
every Jurisdictional Competent
Authority
Many
Local Currency
Timelines for implementation
• Commences 2016
• Information Exchange September 2017
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The following are recommendations for coping with
FATCA, the IGAs and AEOI.
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Multiple Tax Jurisdictions per natural person. Many customers fall under more than one tax jurisdiction.
Institutions should build capacity to cope with a customer falling within the tax jurisdiction of 3 to 4
jurisdictions.
Not all the IGAs have all the US Tax Code Chapter Four Classifications. The AEOI has substantially fewer.
However, all 31 classifications are captured under Chapter Four so it makes sense to be able to map them to
the IGAs and AEOI. For example, in the UK there is no concept of an Owner Documented FFI.
Consider not applying the de-minimis rules to natural persons. Although FATCA and the IGAs allows for the
application of de-minimis thresholds for natural persons, AEOI does not.
No onboarding before self certification. While US Treasury FATCA and the IGAs do allow for it, AEOI does not.
Retail Banks in particular will struggle to obtain self certifications before onboarding is completed but the
weather vane appears to be pointing at prohibiting opening new accounts with prior self certification.
Build a reporting solution that can report in both local currency and USD. AEOI requires reporting in local
currency.
Substitutes for the US centric W9 and W8 series. The requirements under the IGAs and AEOI Common
Reporting Standard (CRS) appear to be far less onerous than those of US Treasury FATCA. It may be advisable to
study the CRS develop a substitute that navigates a practical path between complying with these regulations
and at the same time is not an overly burdensome customer experience.
Substitutes for W-8/9 are already in advanced planning by both OECD and EU – ISDs (investor self-declarations).
The following are recommendations for coping with
FATCA, the IGAs and AEOI.
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Having said that opinions vary on the use of substitutes, it appears that in the US the perception is that it is in
W8 or W9 world. Outside the US the perception is the contrary. This poses a question “Will US Withholding
Agents accept anything other that a W8 or a W9?”
This is an important point to resolve because if the OECD and the EU is working on substitutes, will the US
accept them?
Further, some see a future where customers have to complete three self certifications:
•
•
•
W9/W8 series
EU Savings Directive series
OECD series
Perhaps the regulators need to work together to establish one self certification that all the regulators will
accept.
What is particularly interesting is that the AEOI appears to offer a paradigm shift towards offering customers
advice when completing their self certifications. More interesting still is the anticipation that the OECD will
facilitate this.
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Thank you
Haydon Perryman
Web: www.haydonperryman.com
Email: haydon@haydonperryman.com