The G-20’s April meeting in Washington set out the agenda for Leaders’ summit in September, and detailed their key legislative priorities.
Amongst the expected items on Basel III implementation, tax evasion featured surprisingly prominently. In the communique released last week, G20 ministers said that ‘more needs to be done to address the issues of international tax avoidance and evasion’ through the automatic exchange of tax-relevant bank information, and which should be adopted as the global standard.
Whilst FATCA remains the only tax legislation financial institutions are aware of (or concerned about), more and more jurisdictions are examining their options for FATCA-style legislation through the OECD, the EU and bilateral discussions at the international level.
FATCA has changed the game in the identification of tax evasion. Currently there are over 3000 tax treaties internationally that may include information sharing provisions, leading to a mish-mash of bilateral standards.
The OECD’s TRACE project is an attempt to harmonise these treaties into a single information sharing regime. TRACE, which stands for ‘Treaty Relief and Compliance Enhancement’, allows automated tax withholding by ‘Authorised Intermediaries’ who agree to automatic exchange of information.
If implemented, TRACE would become the ‘global FATCA’ working in favour of all participants, not just the IRS. Under an automatic exchange, governments would routinely transfer all foreign taxpayers’ data to their home governments, making it far more difficult to hide assets from the tax collector.
Whilst TRACE is considered to be less onerous than FATCA in terms of KYC requirements, there will be a number of new requirements for financial institutions to implement. In January 2013, the OECD’s CFA endorsed the TRACE ‘Implementation Package’ (a collection of harmonised treaty documents/agreements and reporting forms) and approved further work in two areas: 1) exploiting synergies between TRACE, FATCA and other tax reporting regimes; and 2) developing a plan for a multi-country adoption of the Authorised Intermediary system, and assisting countries’ progress towards adoption.
However, global take-up has been low and this currently remains an issue only at international treaty level. The key to this is likely to be the OECD’s ‘co-ordinating body’ of the ‘Multilateral Convention on Mutual Administrative Assistance in Tax Matters’. However, this is not yet in place. Supposedly, it will have the powers to interpret the agreement, modify the pact, resolve disputes and presumably define the standards for multilateral automatic tax information exchange.
Ultimately, TRACE is unlikely to make the financial regulation agenda until it becomes mandated by the G20 or through an EU directive. We’ll have to wait until the September G20 meeting to see what the future holds for firms.
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