According to the plans of the OECD, by the end of September 2017 at least 66 countries, including Poland, will exchange information about bank accounts of individuals. This does not necessarily mean the end of banking secrecy in all the countries of the world. Jurisdictions, which strongly deny admission of standard, are the ones where the validity and ensuring a strict banking secrecy are an important factor in making banking transactions.
Development of standard
The OECD is an international organization bringing together economic profile of 34 highly developed and democratic state, founded in 1960 under the Convention on the Organisation for Economic Co-operation and Development. Its aim is to support Member States in achieving the highest possible level of economic growth and standard of living of citizens. For the tax matters, there is Fiscal Committee supported by Policy Center and Tax Administration. In addition, there are forums, working groups and other bodies established to deal with the problems of tax law.
OECD acquis includes agreements and codes of conduct such as the Model Convention on Double Taxation on which are based tax bilateral agreements between Member States, multilateral agreements of Community, Codes for Capital Movements and Invisible Transaction, recommendations, resolutions and declarations which are instruments of informal pressure. In addition, the OECD develops and implements common guidelines and standards in the various sectors of the economy, as discussed here standard for the exchange of tax information. The impact on the behavior of OECD countries is greater than commonly believed, and it is not limited only to the impact on Member States, but concerns a total of about 100 countries. In recent years, the OECD has devoted much attention to the analysis of the tax systems of individual countries in order to identify the so-called „tax havens”, and the collective voice of OCED countries has become a tool of pressure on the „tax havens” to reduce their tax advantages offered to foreign investors.
Contrary to the assertions encountered that Common Reporting Standard (CRS) is a response to FATCA agreement, the OECD has a long history of support for closer cooperation in the field of taxation and any form of tax information exchange. Multilateral Convention on Mutual Administrative Assistance in Tax Matters and Article 26 of the OECD Model Convention on Income and on Capital constitutes the basis for all forms of tax information exchange. A breakthrough towards greater fiscal transparency occurred in 2009, when the exchange of tax information on request is considered to be an international standard. The OECD has also developed the standard regarding agreements on the exchange of tax information (TIEA), pursuant to which the Contracting States shall assist each other by exchanging information that may be relevant i.e. to determine, assess and collect taxes for the recovery and enforcement of tax arrears, as well as in investigation or prosecution of tax matters in criminal tax offenses. Then the restructured Global Forum on Transparency and Exchange of Information for Tax Purposes began monitoring the implementation of standards through peer evaluation.
The next step was the G-8 summit in June 2013, where leaders of the eight countries committed themselves to establish a mechanism for automatic exchange of tax information, which then met with the granting of a mandate by the G-20 summit. The standard was approved by the finance ministers of the peak in February 2014, and then by the OECD Council on July 15 .
On September 22, 2014, in Australia, the Global Forum on Transparency and Exchange of Information for Tax Purposes provided a Roadmap to Working Group for Development of the G-20. It concerns the participation of developing countries in the new standard of the OECD and seems to be a further step to reduce tax avoidance in the world.
What is the new standard about?
The main elements of a new consolidated version of the standard, except for guidelines for States and instructions of secure data transmission, there are information important from the point of view of the taxpayer, meaning – what is the exact subject of the exchange. First of all, financial institutions will be subject to reporting to the treasury the information on all kinds of investment income, including interest income, dividends, sales of financial assets and capital flows, with some insurance contracts and the like, and will have to provide information about the balances of bank accounts. The definition of financial institutions has been expanded. Mandatory reporting is to affect not only banks, but also brokers, investment funds, custody and depository institutions, as well as some insurance companies, etc. (unless there is a low risk of being used for tax avoidance or exemption from the reporting and exchange of information). Participation of state authorities in obtaining detailed information on the bank accounts of domestic financial institutions has also increased. Exchange with other jurisdictions will be automatic and annual, and the only deviation from this process is foreseen in order to protect the confidentiality of information.
Two of the information are especially relevant to bank customers. The first of them introduces the principle that all these rules and responsibilities will apply to accounts of not only individuals, but also legal persons, including trusts and foundations. The second is the fact resulting from CRS that the standard requires the provision of information about who is the person or entity that actually exercises control over a legal person.
Published document also contains new versions of the agreements: Competent Authority Agreement („CAA”) and Common Reporting Standard („CRS”), previously issued in February this year. Standard CAA was created for the needs of countries wishing to join the exchange of information in order to accelerate the negotiation of terms and conditions. It is worth to note that this is only a model solution, hence before the adoption of the agreement, individual countries will be able to negotiate a number of amendments. CRS, however, refers to the rules of reporting and due diligence on financial institutions.
The planned scheme of providing with information
Under the proposed provisions, financial institutions will be required to capture information regarding the accounts existing on December 31, 2015. A detailed scheme used for the exchange of information is as follows: accounts open on December 31, 2015 will be in the category of „pre-existing” accounts and won’t be subject to the new procedure. They will be under verification, althought a bit later.
CRS does not define how far- reaching the „pre-existing” accounts will be as subject to verification, only indicates that these are the accounts which has already existed on 31 December 2015. In addition, it divides the accounts on those with more and those with less accumulated capital, where the limit is defined by the threshold of $ 1 000,000.00. For „pre-existing” accounts of legal persons, CRS maintained a de minimis threshold of $ 250,000.00 – an account of a lower balance are not reported.
In relation to the new accounts (open after January 1, 2016) de minimis has not been introduced, thus all of them are subject to reporting. Each bank account opened after 1st of January 2016 in a country that has agreed to implement the standard, is to be subject to the new procedure, which will be identified through the tax residence of the account holder.
In a similar way, by the end of 2016 the tracing will cover „pre-existing” accounts, on which has been placed considerable financial resources, and till 31 December 2017 – those with less accumulated capital. In the case of accounts that have been closed, so far CRS does not provide for the reporting requirement balances, but only requires notification of the fact that the account has been closed.
First exchange of information on new accounts and existing ones, according to the new standard, is scheduled for the end of September 2017 – with the adnotation that at the beginning this exchange will only covers account of individuals, while the exchange of other bank accounts, corporate accounts etc., will start no later than September 2018.
CRS vs. FATCA
For comparison, the FATCA (Foreign Account Tax Compliance Act), which is an American Act of 2010 on the disclosure of information for tax purposes of foreign financial accounts, it is assumed that the financial institutions around the world will provide information to the United States of cash deposited in bank accounts of American taxpayers. This US law is designed to prevent tax evasion by US citizens using offshore banking facilities. FATCA creates a new tax information and reporting and withholding regime, designed to gain information about US persons rather than to raise revenu. FATCA imposes a 30% withholding tax on payments of US source income made to non-US financial institutions unless they enter into an agreement with the US Internal Revenue Service (IRS) and disclose information about their US account holders.
The good news for financial institutions is that the standard presented by the OECD – CRS – is similar to FATCA, thus it should be theoretically possible to use the existing and planned processes and systems of FATCA. However, the data required by the standard of the OECD are different, which means that the magnitude of reporting may be substantially higher under the regime of CRS.
CRS covers by its influence a larger number of accounts than FATCA. Instead of the usual identification of only US citizens or residents, financial institutions will be required to determine the status of tax resident of all its customers being subject to reporting. In addition, many of the limitations of de minimis aid under FATCA are not included in the CRS. Financial institutions will therefore be required to report a much greater amount of information to the competent authorities. This means that due to the increased scope of the information required by CRS, financial institutions will have to reconsider its approach to FATCA, in order to adequately address the requirements of the OECD standard.
In addition, a much more complicated may be setting tax residence, and financial institutions will certainly demand a clear indication by the competent national authorities, clear guidance and interpretation to help customers to determine their tax residence without unnecessary mistakes.
Although the standard has no direct legal force, it is expected that its adoption into national legal systems will be compatible with the model of CAA and CRS, especially in the implementation of bilateral agreements. The desire and the will of adoption tend to be strong, since more than 40 countries has already confirmed its acceptance.
As noted on the occasion of FATCA, agreement on and implementation of the standard are the time-consuming process. Experience shows that it is unlikely that all jurisdictions declaring a desire to join the standard now, will eventually be able to do it and implement the agreement in their legal systems. CRS is mainly based on self-certification submitted by customers. Financial institutions are required to assess the merits of the certification of their own on the basis of other information collected from the customer. However, one must bear in mind that the provisions relating to tax residence in different countries are complex and differ from each other, because the process of effective implementation may not be as simple as it may seem to be.
Next steps – a need for compromise
In addition, the OECD is also working on an amendment to its recommendations on voluntary disclosure by taxpayers of their income to tax authorities. The analysis carried out by the OECD since 2009 shows that more than half a million taxpayers voluntarily disclosed their income and capital hidden from tax authorities. The countries have identified in this way more than 37 billion of euros due to such voluntary information programs, and to which OECD encourages all the other countries.
OECD countries introduce by themselves increasingly restrictive regulations and tax controls. For example, Ireland will specifically look into cashless transactions on accounts, payment cards, and implemented through payment terminals. On the other hand, there are commonly placed limits on the use of cash for transactions – eg., in Italy, you can pay in cash up to the amount of € 999.99, the higher amount may be paid only by debit card, credit, bank transfer or check. For failure to comply with these rules there are penalties provided of up to 40% of the paid amount (minimum penalty is € 3,000). Poland instead planns to introduce by 2015 the control of income up to 10 years. At the same time countries promote the payment of taxes on all income and the effective taxation.
New standard of automatic exchange of information on accounts for tax purposes already has been accepted by 66 countries and dependent territories, including all OECD members. In this group, amongs the others, there are Switzerland, Liechtenstein and Singapore, thus countres used to attract a foreign capital thanks to a developed banking secrecy. Recently, Hong Kong, Macau and Mauritius, previously declaring their strong opposition with respect to the standard, have opted for its adoption in the future. Over 40 countries, including Poland, have already committed to the implementation of the OECD standards – specific, ambitious timetable for the first automatic exchange of information in 2017-including the OECD countries and non-OECD countries. OECD expects, however, that there may be even 120 signatory countries after all.
Does the acceptance of OECD standard means the inevitable end of banking secrecy in all jurisdictions? Not really – there are still jurisdictions not willing to join such exchange of tax information as prescribed by standard, at least at the moment. Thois group of jurisdictions which strongly deny admission of standards includes i.e. Panama, Uruguay and Dubai – called „the new Switzerland”. Also,the so called „havens” scattered across the Indian and Pacific Oceans, as St. Lucia, Brunei, Dominica and Vanuatu, where the validity and ensuring of strict banking secrecy is an important factor in making banking transactions. The Bahamas, which in theory are in negotiations with the OECD, has very skeptical approach to automatic exchange of tax information. The Minister of Finance, Ryan Pinder, officially expressed his doubts as to the practical results, which is to bring CRS, particularly in relation to developing countries. He also confirmed that the Bahamas will argue as long as they can, protecting its reputation as a trustworthy international financial center.
Given the growing global support for the OECD standard the above mentioned jurisdictions may meet with increased pressure on the adoption and implementation of standards in the future. To do this, however, they would need to introduce legislation that implements automatic exchange of information, because the current one in these jurisdictions do not exist. In addition, they would need also to increase the administrative and human resources costs for the effective and practical implementation of the standard, which is in fact not only the cost, but also a long period of reorganization of the tax administration and the legalization of such exchange of information. Therefore, there should not be concerns regarding the total loss of banking secrecy. In addition, certain jurisdictions, even those that opt in for the standard, continues to offer the most anonymous banking systems, in which a bank does not know his client. An example is the Japanese account of the natsu-in seal, identifying bank customers through the seal.
OECD activities are seen as a further step to strengthen tax audit, but the proposed standard leaves some gaps which could have consequences with respect to developing countries, while allowing „tax havens” and their clients to get around the new rules. In line with the standard, any party of CAA may arbitrarily refrain from exchanging information with the indicated countries. Typically, this will apply to poorer countries, developing countries, in respect of which tax havens, and not only, delayed the signing of bilateral tax treaties. Ability to veto with no reason regarding the exchange of information by each country, provides really for no mechanism to allow developing countries to temporarily suspend themselves or resign from the requirement to provide the information. Developing countries will be forced to collect and share information, a process which may prove to be too costly and difficult – so just to take part in the scheme. Developing countries are, once more, left with crumbs: promises about capacity building, but so far nothing to ensure that the likes of Switzerland do not only sign treaties with the mighty, powerful countries, and try to wriggle out of bits they do not like. Poorer, more vulnerable nations will remain victims of predatory Swiss (and many other) bankers. On the other hand, tax havens will have to provide information, but they can choose not to receive any in return. In this way, the offshore centers will be able to focus its activities on developing countries, which in fact may not be covered by the standard. It seems that the OECD’s stomach does not seem to be in the fight to do everything to help poorer countries benefit from transparency: witness their tax chief’s statement in July that “most (developing countries) are not yet ready and most of them don’t want [automatic information exchange]”. As long as there are taxes, taxpayers are looking for and will look for solutions to optimize financial situation, no doubt about that.
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”. In view of the above, it may be found that such model of automatic information exchange is considered to be the most effective.
Such changes were expected in the light of the global financial crisis and widespread tax evasion. CRS is a response to the increasing control of illegal income. The next step will be probably a control of cash flows between the accounts of taxpayers, additional taxes and penalties for income non-taxed in previous years.
The global trend to control cash flow and capital may effect in an increase of the importance of non-bank asset storage systems, such as electronic money or gold, as well as it may push a large number of taxpayers to the underground/grey economy zone.
Aleksandra Danielewicz, Attorney-at-law trainee
Robert Nogacki, Legal Advisor, the owner of Skarbiec Law Firm