OECD: reports to G8 on global system of automatic exchange of tax information

June 21, 2013

On 18 June 2013, the OECD published a new report A Step Change in Tax Transparency, prepared at the request of the G8 for the Lough Erne Summit (Northern Ireland), outlining four concrete steps needed to put in place a global, secure and cost-effective model of automatic exchange of information.

The report says that, because tax evasion is a global issue, the model needs to have worldwide reach to avoid merely relocating the problem elsewhere.

The process also needs to be standardized to minimize costs for businesses and governments and to improve effectiveness.

A major breakthrough toward more transparency was accomplished in 2009, with information exchange upon request becoming the international standard and the restructured Global Forum on Exchange of Information and Transparency for Tax Purposes starting to monitor the implementation of the standard through peer reviews.

In April 2013, the G20 finance ministers endorsed automatic exchange of information for tax purposes as the expected new standard.

The report, prepared under the authority of the OECD Secretary General, sets out the key success factors for an effective model for automatic exchange, provides relevant background and outlines four concrete steps needed to put such a model into practice:

  • Enacting broad framework legislation to facilitate the expansion of a country’s network of partner jurisdictions
  • Selecting (or where necessary entering into) a legal basis for the exchange of information
  • Adapting the scope of reporting and due diligence requirements and coordinating guidance
  • Developing common or compatible IT standards

The report also provides potential time frames for each of the action items.

Key features of a standardized multilateral automatic exchange model on financial information

As a general matter, for a model for automatic exchange of financial information to be effective, it must be specifically designed with residence jurisdictions’ tax compliance in mind rather than be a byproduct of domestic reporting.

Further, it needs to be standardized so as to benefit the maximum number of residence jurisdictions and financial institutions while recognizing that certain issues remain to be decided by local implementation.

The advantage of standardization is process simplification, higher effectiveness and lower costs for all stakeholders concerned.

In 2012, the OECD delivered to the G20 the report Automatic Exchange of Information: What it is, How it works, Benefits, What remains to be done, which summarizes the key features of an effective model for automatic exchange.

The main success factors for effective automatic exchange are:

  • A common agreement on the scope of reporting and exchange and related due diligence procedures:
    • An effective model for automatic exchange of information requires an agreement on the scope of the information to be reported by domestic financial institutions and exchanged with residence jurisdictions. This will ensure that the reporting by financial institutions is aligned with the interests of the residence country. It will also increase the quality and predictability of the information that is being exchanged. The result will be significant opportunities for the residence country to enhance compliance and make optimal use of the information (e.g., through automatic matching with domestic compliance information and data analysis)
  • A legal basis for the domestic reporting and international exchange of information.
  • A standardized multilateral automatic exchange model requires a legal basis for:
      • The domestic reporting obligation and the exchange of the information. The reporting obligations will typically be included in domestic tax legislation, with due diligence procedures to ensure the quality of the data set out in regulations or guidance. There are different legal bases upon which automatic exchange could take place, and which already exist, including a bilateral treaty with a provision based on article 26 of the OECD Model (2010).The Nordic Convention also provides such a basis and, within the European Union, directives provide a specific legal framework for automatic exchange on interest income and certain other types of information between its 27 (soon 28) members
  • Common technical solutions
    • The development of common technical solutions for reporting and exchange of information is a critical element in a standardized exchange system – especially one that will be used by a large number of countries and financial institutions. Standardization will reduce the overall costs for governments and financial institutions

Implementing a model into practice

Key developments are already under way. Five European countries, each an OECD and EU member (France, Germany, Italy, Spain and the United Kingdom), developed the Model 1 IGA with the United States.

The Model 1 IGA provides for reporting by financial institutions to their local tax authorities, which then exchange the information on an automatic basis with the residence jurisdiction tax authorities.

This approach is consistent with the general architecture of automatic information exchange that is also used in the EU context, for instance for the Savings Directive (2003/48).

The Model 1 IGA contains a number of key features of an effective automatic exchange model.

This, along with the fact that governments and financial institutions around the world are already investing to implement it, makes the Model 1 IGA a logical basis on which to build.

These developments offer an opportunity to move toward a standardized model of automatic exchange of information and avoid the possibility of a fragmentation of standards, which would impose significantly higher costs on financial institutions and governments.

Four steps can now be taken (a number of them are already ongoing at the OECD) to implement a standardized multilateral model of automatic exchange:

Step 1: Enact broad framework legislation

Most jurisdictions will need to adopt legislation to implement the Model 1 IGA and, in particular, the domestic reporting obligations.

This presents an opportunity to create, in one step, a broader framework legislation facilitating the subsequent expansion of a country’s network of partner jurisdictions.

The framework legislation could allow the executive to expand reporting to account holders that are residents of other jurisdictions by way of regulation or administrative guidance, provided relevant conditions are met.

Step 2: Select a legal basis for the exchange of information

Different legal bases for automatic exchanges of information reported under a comprehensive reporting regime (i.e., covering different types of investment income and financial information, applying to individuals and certain entities, and covering a wide range of financial institutions) already exist.

While bilateral treaties such as those based on article 26 of the OECD Model (2010) permit such exchanges, it may be more efficient to establish automatic exchange relationships through a multilateral information 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 possible forms of administrative cooperation between states, contains strict rules on confidentiality and proper use, and permits automatic exchange of information.

One of its main advantages is its global reach: more than 60 countries, including all G20 countries, have either signed the convention or committed to do so, with further signatures expected before the September 2013 G20 Summit in St. Petersburg.

Step 3: Adapt the scope of the reporting and due diligence requirements and coordinate guidance to ensure consistency and reduce cost

Developing a standardized model for automatic exchange can draw on the Model 1 IGA, with amendments required to support a standardized multilateral model that addresses the needs of all participating jurisdictions and remains administrable for both financial institutions and participating jurisdictions.

These changes include simplifying the rules by removing US specificities that are not needed or feasible for a multilateral approach, dealing with any different effective dates from those used for the Model 1 IGA itself and building on what already exists for instance in the EU context and in the area of anti‐money laundering standards.

Work in this area started at the OECD in 2012 and is progressing rapidly.

OECD and G20 countries discussed draft proposals at their last meeting in March 2013 and the next meeting is scheduled for June.

For the purposes of illustration, examples of areas where such changes are needed include thresholds, exceptions to reportable account holders, due diligence procedures and exceptions to reporting financial institutions.

Step 4: Develop common or compatible IT standards

The reporting format

A standard format for the exchange of information is essential to ensure the model remains effective and administrable.

The OECD has brought together its member countries, the EU and representatives of the business community to assist in the development of a reporting format (schema) for implementing FATCA which is based on standard transmission format (STF – standard format for automatic exchange of tax information which was developed by the OECD and uses XML language) and incorporates many elements of FISC 153 (a standard that is used for the Savings Directive (2003/48)).

It is expected that this will be flexible enough to be used for reporting and exchange under a multilateral exchange model, subject to minor amendments.

Compatible transmission methods and agreed levels of encryption

Already a number of jurisdictions have experience in exchanging tax information through electronic means and using agreed encryption standards.

In its effort to prepare for FATCA implementation, the United States is working to develop a secure data exchange process that intends to allow jurisdictions to exchange data securely, based on agreed encryption protocols and software compatibility solutions.

This process could potentially be used by interested jurisdictions not only for exchange but also for data collection.

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