In 2010 the US enacted the Foreign Account Tax Compliance Act (“FATCA”), which aims to reduce tax avoidance among US citizens by, among other things, requiring from 1 July 2014 onwards foreign financial institutions to report information about any US account holders to the IRS or else potentially suffer a withholding of 30% on certain payments.

In addition to FATCA, further international developments have recently taken place in relation to implementing regulations to unify the information exchange and tax reporting between countries on a global basis.

Background for introducing global tax legislation

Earlier this year, under the initiative of the then G8 and G20, the Organization for Economic Co-operation and Development (“OECD”) designed and issued a model Competent Authority Agreement (“CAA”) and Common Reporting Standard (“CRS”) to develop a global standard for the automatic exchange of financial account information for the purposes of increasing tax transparency.

For a long time, many governments have stressed the need to combat offshore tax evasion with a global solution. The publication of the model CAA and CRS is a significant step towards improving cross-border tax compliance as well as enhancing tax transparency between countries.

Overview of CAA and CRS

The proposed CRS will apply to financial institutions such as banks, custodians, collective investment vehicles and certain insurance companies. The aim of the CAA is to reduce tax evasion by taxpayers who use offshore financial accounts by enhancing information reporting to their local tax authorities who will then disclose the information to partner jurisdictions through the systematic and periodic exchange of taxpayer information. The financial information collected and exchanged covers income such as interests and dividends as well as account balances and sales proceeds from financial assets.

What is expected of financial institutions and governments?

The CRS has been modelled on the FATCA Model 1 Intergovernmental Agreement, including the account opening and due diligence requirements. It is hoped that this similarity will alleviate the compliance burden of financial institutions already subject to the increased costs of complying with the FATCA regulations. Institutions should be able to leverage on the existing and planned processes and system changes, with some amendments to the data required. On the other hand, some institutions will be concerned about further additional costs being imposed, as it is likely that the volume of reporting will increase significantly.

How will the CRS come into force and what are the expected implementation deadlines?

The OECD expects that the standards will be implemented in bilateral agreements and the CAA is intended to be executed within existing legal frameworks such as the Multinational Convention on Mutual Administrative Assistance in Tax Matters or Tax Information Exchange Agreements.

Currently over 40 jurisdictions are signing up for adoption in 2014, with deadlines stretched to 2015 for due diligence and 2016 for reporting. The final OECD commentary for guidance is expected during the second quarter of 2014, with more exact requirements and deadlines.

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Jerome Lussan

Jérôme de Lavenère Lussan is the CEO and founder of Laven. Jérôme’s background includes acting as a COO of a hedge fund and as a financial lawyer at Jones Day.

Jérôme has a broad degree of expertise in the hedge fund and fund management industry and is an advisor to many international financial services firms specialising in operations, legal and regulatory matters. He is a member of the Law Society of England and Wales, the International Tax Planning Association and of the CFA Society of the UK. Jérôme holds an LLB from University of Edinburgh.

In 2010 and 2011, Jérôme was named by Financial News as one of its 100 Rising Stars, and in 2011 and 2012 one of its 40 under 40 Rising Stars in Hedge Funds. He is the author of the FT Guide to Investing in Funds.

Website: www.lavenpartners.com


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