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Treasury & Capital Markets
Super-sizing FATCA
Banks are being made key enablers in global tax policy anew
Christoph Kober 24 Dec 2014
 
 Yip  

Informally referred to as GATCA (the global version of FATCA), the Automatic Exchange of Information framework was first proposed in February and refined in July this year by the Organization for Economic Cooperation and Development (OECD). Similar to FATCA, it seeks to expose individuals who transferred assets outside of their home jurisdiction to evade tax liability on these assets there. Also like FATCA, the onus of reporting financial account information of their (foreign) clients – including holder details, balances and movements – will fall on financial institutions.


Unlike FATCA, the piece of regulation is not the initiative of a single country. Under GATCA, any country will be able to enter into intergovernmental agreements (IGAs) with other jurisdictions that provide the basis for exchanging account information. Mostly devised under the aegis of the OECD so far, over 60 countries have already committed to the standard. A total of 44 are so-called early adopters, aiming to begin monitoring new accounts in January 2016 and exchanging information with other countries as early as September 2017.


According to Wolters Kluwer Financial Services, the risk and compliance consultant, nine Asian countries have publicly voiced support for GATCA, including China, Hong Kong and Singapore. India and South Korea have agreed to be early adopters.


“There are many countries that suffer from severe capital flight and want to know who are the ones responsible,” explains Robert Payne, a director at Amicorp, the financial administration services provider. “It will be in their interest to enter into GATCA arrangements with other countries and this network will become like a spider web of relationships spanning the globe. I don’t think we can envisage what the net effect of GATCA will be in 2016 but as a result, I can assure that the ability of institutional, individual and corporate investors to hide money will end in 2016.”


While tax disharmony and evasion have been major issues at the OECD since at least the 1980s, only the advent of FATCA has made it possible to move ahead with plans to exchange account details of their country’s residents across jurisdictions.


Explains Payne: “FATCA was designed to build upon the [OECD’s] reporting protocol [and] proposed between countries that are aligned with the US and utilize the US dollar and securities heavily. They agreed to exchange information on banking and financial capacities of their citizens, but the problem was that most US people, when investing overseas, do not do so in their own names. So they created an ingenious method of identifying and utilizing entities, formed by US citizens [by making financial institutions around the world (1) register with the IRS and (2) report on their US customers that include US-owned foreign entities].”


“The OECD was tremendously instrumental in bringing to light what needs to be done, but they never came up with the methodology of how to do it. All the US did with FATCA was to take OECD’s example and apply their methodology to uncover the facts they need.”


Now, in turn, the OECD has learned from the US and applies the same methodology globally.

 

 
  Carr

Tight deadline
While the reporting standard proposed by the OECD in July avoids proliferation of customs defining the exchange of data, countries will be free to agree on variations in their intergovernmental agreements. GATCA will also differ from FATCA in a number of ways and include stricter account opening requirements, reciprocity arrangements and bank account thresholds, among others.


The prospect of a global web of bilateral treaties governing the exchange of account information sends shivers down bank executives’ spines. Financial institutions in those countries that have committed to the fast-track implementation of GATCA will need to have new onboarding procedures in place by January 1 2016, and pre-existing due diligence completed by December 2017, explains Florence Carr, Asia-Pacific FATCA lead in EY’s advisory services team. “This timeline is very tight indeed.”


Experts agree that there is little hope of postponement of GATCA deadlines. “If you consider the speed with which the different stages of FATCA are being rolled out, I don’t think a 2016 implementation for the OECD’s global version is too ambitious,” comments Patrick Yip, Deloitte’s national financial services tax leader for China.


Banks should approach GATCA as an extension of FATCA, suggests Wouter Delbaere, Asia strategy manager at Wolters Kluwer Financial Services. “GATCA needs to be approached from two perspectives: the commonalities and differences to FATCA,” he says. “The best way forward, we believe, is to employ a centralized platform that addresses FATCA, GATCA and future regulations in this area of compliance. Such a platform must be flexible to account for country-specific modifications.”


A majority of banks in Asia are still struggling with FATCA, he notes, with many of them having started the process of becoming compliant just this year. “They lack clarity about IGAs and how to best manage data,” he explains. “While GATCA will be different from FATCA in many respects, these challenges will continue to apply. So if we take the experience of FATCA as a basis, we should anticipate FIs (financial institutions) to face many challenges.”
Banks’ operating costs are now skyrocketing as a result of FATCA, warns Payne. “They have had to hire and train new people, develop new IT systems etc. Depositors will pay for these in the end. With GATCA coming into place, a whole other compliance layer has now been introduced.”


According to Carr at EY, it is possible to leverage existing FATCA capabilities for the new set of regulations as well, particularly when countries have signed model 1 IGAs with the US IRS. Model 1 IGAs compare to model 2 IGAs in that financial institutions report account information of US taxpayers to their own government, which will then exchange this information at a government level with the US IRS. A model 2 IGA, like the one negotiated between Hong Kong and the US, requires financial institutions to report the relevant information to the US IRS directly.


With IT systems and know-your-customer processes set up to extract specific account details and share them with different parties, the major piece of work will be to identify the indicia that needs to be collected from investors and customers, Carr says. The volume of data to be reported will also be much larger than under FATCA, which only had one party to report to (the IRS or the jurisdictions’ local government in place of the IRS).

 

 
Delbaire  

The beginning of the end
Yip at Deloitte notes that banks have incurred the initial pain and costs associated with becoming FATCA compliant and that adding new countries to these systems should not inflict as much pain on these institutions.
He also doubts that the number of intergovernmental treaty arrangements will in fact be impractical to manage. “The so-called spider web systems of bilateral treaties spanning most of the world may not be too realistic. There are a limited number of global financial centres and I would expect that many of the GATCA arrangements will focus on these. In Asia, these would include Hong Kong and Singapore especially.”


According to a senior UK tax official at the HM revenue and customs department who spoke on condition of anonymity, it would be imprudent for the country to pursue bilateral exchange of information agreements with some jurisdictions – specifically those where a history of political turbulence suggest that any financial information the UK would share as part of the reciprocity agreement could “fall into the wrong hands”. These include some Middle Eastern as well as Caribbean countries, he adds.


If such a strategy of avoiding arrangements with high risk countries finds followers among other nations pushing the GATCA agenda, some jurisdictions will be able to retain their status as tax havens that do not share account information. However, the UK official warns, investors are not well advised to put their assets in these jurisdictions anyway. Like the figurative sword of Damocles hovering over their fortunes, a change in government in these countries could easily result in a sudden hike of withholding taxes, for instance, which makes the transfer to other shores possible only at a heavy loss to investors.


The UK will actively seek to arrange automatic exchange of account information with jurisdictions including Hong Kong and Singapore, the official also confirmed.


“2016 may not see the end of so-called tax havens and tax evasion by individuals or institutions,” sums up Yip, “but it will be the beginning of the end.”

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