Financial advisers, banks and Americans with foreign income will doubtless be all too aware of FATCA, America’s controversial international tax enforcement program.
But it is an idea that has caught on globally. Enter the Common Reporting Standard (CRS), the global FATCA.
Arrangements have long been in place to enable countries to request information from one another about their taxpayers. But information exchanges were usually done on an ad hoc basis, and some jurisdictions turned out to be more cooperative than others.
The OECD and the European Union have argued for many years that only “automatic” information exchange will be effective in the fight against cross-border tax fraud. And after the financial crisis struck, and governments experienced crippling budget deficits, it didn’t take long before most of the developed world came on board. G20 finance ministers duly endorsed automatic exchange as the new tax transparency standard in 2013, and the OECD-developed CRS in 2014.
From Manual to Automatic Exchange
The CRS represents something of a step change in international tax enforcement. In summary, "automatic" exchange of information will entail the systematic and periodic transmission of "bulk" taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income or asset information. The information exchanged is collected on a routine basis, generally from financial institutions.
Information to be Exchanged
Information gathered from “reportable accounts” includes interest, dividends, account balance, income from certain insurance products, and sales proceeds and income from financial assets.
“Reportable accounts” include those held by individuals and entities, including trusts and foundations. Financial institutions are required to "look through" passive entities to report on the relevant controlling persons.
Those required to report include custodial institutions, depository institutions, investment entities, and specified insurance companies, unless they present a low risk of being used for evading tax and are excluded from reporting.
Some jurisdictions have committed to information exchanges under the CRS from 2017. Other signatories will start information exchanges from 2018 or 2019.
The Standard contains rules on the confidentiality of the information exchanged and the underlying international legal exchange instruments also contain privacy safeguards. Where these standards are not met, countries will not exchange information automatically.
The potential for privacy breaches is, however, one of the most controversial aspects of the CRS.