31 October 2014 www.bdo.lu TAX TRANSPARENCY: OECD AUTOMATIC EXCHANGE OF INFORMATION AGREEMENT SIGNED IN BERLIN By 1 January 2016, Luxembourg financial institutions must have their IT systems adapted in order to be able in 2017 to exchange information on financial accounts held directly or indirectly by EU and non EU residents. On 29 October, the “Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information” (MCAA) prepared by the OECD has been signed in Berlin. This landmark agreement gives birth to an international automatic exchange of information (AEOI). The first exchanges should occur between tax authorities in 2017 and should cover interest, dividends and gross sales proceeds received (directly and indirectly) in 2016 by residents of participating countries. The balance or value of the financial accounts would also have to be communicated by the financial institutions. As for FATCA and the amended Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC) (please refer to our Tax Alert of last 15 October 2014 in this respect), financial institutions required to provide information are not only banks but also insurance companies, investment funds or any other investment vehicle. Therefore, in the future, Luxembourg financial institutions might be subject to 3 different reporting obligations: - FATCA for U.S. clients, - the revised DAC for clients resident in the E.U., and - the OECD AEOI for clients resident in a participating country other than the U.S. or an E.U. Member State. The Luxembourg financial institutions will have to be able to manage the addition of new countries participating to the OECD AEOI. The genesis of the automatic exchange of information U.S. FATCA. In 2010, the United States enacted FATCA, which introduced a comprehensive AOEI by requiring non-U.S. financial institutions to provide annually U.S. tax authorities with data on the financial accounts maintained directly or indirectly by persons considered as U.S. for U.S. tax purposes. E.U. revised DAC. In 2013, a number of European countries (the G5 composed of France, Germany, Italy, Spain and the U.K.) announced their intention to develop a multilateral AEOI, based on FATCA principles. This initiative ended up with the revision of the E.U. DAC. OECD AEOI. The G20 Finance Ministers and Central Banks Governors endorsed in 2013 the European initiative. In September 2014, the G20 approved the global AEOI standard known as the "Standard for Automatic Exchange of Financial Account Information - Common Reporting Standard” (CRS) developed by the OECD (which actually will be used as well as the standard for the DAC reporting purposes). The MCAA is the international agreement activating the OECD AEOI. What has been signed in Berlin? On 28 and 29 October 2014 was held in Berlin the 7th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum is the international body ensuring the implementation of the internationally agreed standards of transparency and exchange of information in tax matters. The current standard is the exchange upon request as provided by article 26 of the OECD Model Tax Convention. Through the peer review process, the Global Forum is monitoring the effectiveness in each jurisdiction of this kind of exchange of information. The signature of the MCAA adds automatic reporting to the international exchange of information processes. At the Global Forum meeting, 51 jurisdictions signed the MCAA which is a multilateral framework agreement. The MCAA specifies the principles concerning the information that will be automatically exchanged and the timing of the reporting. The CRS document provides for the details. While the MCAA is multilateral, the actual AEOI will be bilateral and will come into effect between the participating countries that notify their readiness. Amongst the 51 signatories (click here for the list of countries), the early adopters have pledged to work towards a first reporting by September 2017. The others signatories are expected to follow in 2018. 31 October 2014 www.bdo.lu Luxembourg, alongside Gibraltar and the U.K. Crown Dependencies and overseas territories, is one of the early adopter signatories. Other international financial centres, such as Hong Kong, Monaco, Singapore or Switzerland, have not yet signed the MCAA but have committed to implement the CRS and begin the transmission of information by the end of 2018. In total, 93 jurisdictions (including the 51 signatories) have committed to implement the CRS, with 58 for first exchanges in 2017 and 35 in 2018 (click here for the current list of commitments). An updated status report shall be presented to the G20 at the next summit in Brisbane, on 15-16 November 2014. The jurisdictions that have committed but not yet signed – or any other jurisdiction – may join the process at a later stage by signing the MCAA or bilateral agreements. During the press conference following the signing ceremony, questions have been asked regarding the U.S. position. Indeed, the U.S. have not signed the MCAA nor even committed to the CRS. An equivalent level of reciprocal automatic exchange of information from the U.S. is expected to be performed via the FATCA IGAs signed with partner jurisdictions. However, currently, the U.S. does not have any legal instrument to enforce U.S. financial institutions to collect data necessary for reciprocal exchanges under an IGA. It is only on 30 July 2014 that the Treasury Department’s Financial Crimes Enforcement Network issued a notice of proposed rules requiring U.S. financial institutions to collect such data. Therefore the road to full reciprocity with the U.S. seems still to be quite long. What’s next and some outstanding questions When to be ready? Financial institutions might have to adapt their systems in order to be able in 2017 to extract for their database all the information relating to 2016 that needs to be transmitted. For OECD AEOI purposes, an account of a person resident in a participating country would be a preexisting account if it was opened on or before 31 December 2015. For a resident of a participating country, a new account would be an account opened as from 1 January 2016. Therefore, new account opening procedures will have to be introduced by 1 January 2016 in order to record the tax residence of the accountholders. The due diligence procedure is comparable to the one imposed by FATCA to detect US reportable accounts. The due diligence procedures for pre-existing high value individual accounts (i.e. higher than $1.000.000) will need to be completed by 31 December 2016, whereas the due diligence for pre-existing low value individual accounts (including those lower than $50.000 as there is no de minimis for pre-existing individual accounts) and for entity accounts will need to be completed by 31 December 2017. As for the exchange of information upon request, the Global Forum intends to establish a peer review process to ensure effective implementation of the OECD AEOI. Regarding Luxembourg and the other E.U. Member States, it will be interesting to see how the Global Forum will interact with the E.U. Commission in monitoring the E.U. jurisdictions. Common interpretation of terms may certainly need to be worked out as well in order to avoid inconsistency for European financial institutions. We shall keep you updated on significant developments as they arise. If you would like to discuss any aspect of the AEOI (FATCA, DAC or OECD AEOI) in more detail, please contact your usual BDO adviser or the BDO operational tax team. Bertrand Pradalier Sylvie Maestri Gerdy Roose Tax Manager Tax Director Tax Partner +352 45 123 517 +352 45 123 589 +352 45 123 371 [email protected] [email protected] [email protected] This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Please contact the appropriate BDO Member Firm to discuss these matters in the context of your particular circumstances. 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