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Global Tax Information Exchange: OECD Convention on Mutual Administrative Assistance in Tax Matters

This past Monday, October 15th, Switzerland signed the OECD Convention on Mutual Administrative Assistance in Tax Matters

According to Switzerland’s Ambassador to the OECD, Switzerland’s signature of the Convention “confirms Switzerland’s commitment to the global fight against tax fraud and tax evasion with a view to safeguarding the integrity and reputation of the country’s financial centre”.  What the ambassador did not mention is that signing the Convention is also an important step with regards to issues identified during Switzerland’s 2011 peer review process of the Global Forum on Transparency and Exchange of Information.  These issues still hovered over Switzerland as a possible unfair tax practice jurisdiction; signing the Convention and adhesion to its standards will go a long way to eliminating any risk of “blacklisting”.

This is not to say that Swiss banking and its financial industry does not yet face challenges, but it has faced these before.  After all, Swiss banks have been identifying and reporting on certain US accounts as “qualified intermediaries” of the IRS since 2001, withholding and remitting taxes under the European Union Savings Directive since 2005,  and more recently under the so-called Rubik agreement with the UK.  See Solving the Puzzle.  They are thus probably better geared up than most to accommodate multilateral reporting.

But back to the Convention.  It provides various forms of mutual tax assistance including assistance in:

  • exchanges on request,
  • spontaneous exchanges
  • support for tax examinations abroad
  • simultaneous tax examinations, and
  • assistance in tax collection.

It also provides signatories the option to undertake automatic exchanges of information per further agreement between individual parties.

As part of its July 2013 meeting, the G20 announced a plan on automatic exchange of information which supports the Convention.  Automatic exchange is generally defined as the  “systematic and periodic transmission of “bulk” taxpayer information by the source country to the residence country concerning various categories of income (e.g. dividends, interest, royalties, salaries, pensions, etc.).”

The next goals in automatic exchange include agreement on a workable definition as to what financial information is to be exchanged, as well as the development of an operational platform through which participating countries can effectively exchange the information, while considering the confidentiality and potential for misuse of information so exchanged.

[Note: following the G20’s announcement China signed the Convention to somewhat of a general surprise.]

A couple of weeks ago I was in London speaking at Osney Media’s “9th Withholding Tax Congress” which focused in significant part on FATCA.   For those of you who have not heard of it, the Foreign Account Tax Compliance Act is a US law which forces, amongst other things, “foreign financial institutions” (your local bank, broker, hedge fund, insurance company, etc.) to send information to the US Treasury Department or face a 30% withholding tax on various US source income.

[Note: Above certain thresholds, FATCA also requires US taxpayers to report “specified foreign assets” on Form 8938 or face a stiff penalty, but that is another discussion.]

The Osney conference was excellent with various industry leaders detailing what their institutions have done to get ready for FATCA, and various US tax experts reviewing the intricacies of the 550+ pages of Regulations which define the workings of FATCA.

But a competing theme emerged during this conference – multinational and automatic exchanges of information.  In fact, the conference organizers had had the foresight to invite Mr. Phiip Kerfs of the OECD Centre for Tax Policy and Administration who spoke about “International Developments in Automatic Exchange of Information.”  Mr. Kerfs spoke of course about Article 26 of the OECD Model Tax Convention –the “grandfather” of information exchange measures which provides that parties to a tax convention exchange information that is “foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws (of one of the contracting states) concerning taxes of every kind and description …”.  In Switzerland, Article 26 has been the object of significant debate and adopted by Switzerland in its tax treaties only since 2009.

But Mr. Kerfs focused on what is to come and educated us on two main areas: the “Common Reporting Standard” which is intended to define not only reporting rules, but domestic due diligence relating to the quality of the information reported, and a “Model Competent Authority Agreement” meant to help govern automatic exchanges on the basis of local legislation, reciprocity and mechanisms for dispute resolution.

What emerged from Mr. Kerfs presentation, and the Withholding Tax conference in general, was an inescapable conclusion that tax transparency has arrived and is here to stay.  Institutional participants certainly seemed in agreement that FATCA is just the beginning, and that the extraordinary efforts they are being asked to undertake to identify “U.S. Accounts” under FATCA will simply be the ordinary efforts that will be required to identify French, German, UK and even Chinese accounts in the tax information exchange world of tomorrow.

As one participant put it, the « know-your-customers rules » which were imposed on international institutions in the mid-to-late 1990s seemed cumbersome and excessive at the time, but are business as usual today.

Which brings me to my most important points:

  • financial privacy is a legitimate ambition of any taxpayer, which ambition should be supported by domestic laws and international agreements, but
  • the era of tax evasion supported by bank secrecy is at an end.

For taxpayers worldwide, this spells the need for sound and robust financial and estate planning intended to serve the taxpayer’s individual facts and goals; planning which can be implemented under the bright light of the midday sun.

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