Out-Law News | 14 Feb 2014 | 3:23 pm | 3 min. read
The common reporting standard will require financial institutions and brokers to report information to their own jurisdiction and this information will in turn be passed on to other relevant countries automatically each year. It is not designed to replace any existing basis or any other means of information exchange, but instead intends to supplement current measures. It applies to financial accounts and sets out the due diligence which financial institutions will need to follow in order to comply.
OECD Secretary-General Angel Gurría said: "This is a real game changer. Globalisation 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."
Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-Law, said: "What we are moving to is a standard reporting model that explains how a country is going to exchange its tax information with other countries, and in what format. It doesn't actually contradict any other initiatives, though in practice it may supersede elements of existing information exchange agreements."
The common reporting standard will result in similar reporting obligations across all countries, meaning that the sharing of tax information between states should be easier to collect as a result of matching domestic and international legal obligations. The plans expressly build upon, and intend to complement, similar global initiatives which are currently underway, such as the US Foreign Account Tax Compliance Act (FATCA) which the OECD said has had a "catalytic role" in the move towards automatic exchange of information.
"One of the biggest challenges for a financial institution is complying with different legal requirements in different jurisdictions, so the way the OECD is trying to tackle tax information exchange through a common reporting standard is a positive step, and suggests that lessons have been learnt following the practical difficulties some countries faced in implementing FATCA," Self said.
The OECD said that more than 40 countries (1-page / 221KB PDF) have agreed to adopt the standard, including the UK, the Crown Dependencies and the Overseas Territories.
Reg Day, another tax expert at Pinsent Masons, said that the effectiveness of information exchange will depend on the specific country in question, but on the whole, will result in more power for tax authorities to successfully track down any illegal tax evaders.
"With information being supplied directly, tax authorities will now need to use virtually no resources to obtain information which previously appeared well hidden," Day said. "In the UK, this is coupled with the increasing sophistication of HMRC in the ways that it can link pieces of tax information together, and its powers to seize funds where it can prove tax evasion are also very strong."
However, Self said that she did not think that these measures would do much for the fight against tax evasion in less developed countries.
"Many OECD countries will be reluctant to sign up to information exchange with less developed countries which do not have the legal and basic processing capacities to keep the information confidential and use it only for the purposes for which it's been collected and I suspect the OECD will need to go further, perhaps providing withholding tax mechanisms to enable less developed countries to collect tax," she said.
Day said that whilst the common reporting standard will affect banks and financial institutions first, individual clients should also make sure that their tax compliance is "robust" and up to date.
"If this is the case, then there will be nothing to fear from exchange of information, although there may be a catch up exercise which has to be gone through and it should be recognised that there are some people who are perfectly willing to comply with all their tax obligations, but have very strong attachments to privacy," he said.
The standard was developed by the OECD together with G20 countries and will be formally presented for the endorsement of G20 finance ministers during a 22-23 February meeting in Sydney, Australia. The G20 invited the OECD to develop a global standard on automatic exchange of information in 2013.