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This article was first published on LexisPSL Tax on 10 April 2014. Click here for a free trial of LexisPSL.

Global tax reporting--the alphabet soup of regulation

10/04/2014 Tax analysis: Jason Collins, partner at Pinsent Masons LLP, looks at the key issues arising from the revision of the European Union Savings Directive (EUSD) and examines the relationship between the various global tax information sharing regimes.

Original news
EU adopts amending directive on taxation of savings income, LNB News 21/03/2014 108 The European Council has adopted amendments to the European Union Savings Directive 2003/48/EC extending its scope to cover investment funds, pensions and innovative financial instruments, as well as payments made through structures such as trusts and foundations. Member states will have until 1 January 2016 to transpose the EUSDinto national legislation.

How is the EUSD being revised?

The EUSD is being strengthened by the adoption of a new directive aimed at enabling the member states to better clamp down on tax fraud and evasion. The EUSD requires financial institutions to report or withhold tax on interest payments. The text enlarges the scope of the EUSD and now covers new types of savings income and products that generate interest or equivalent income. It includes life insurance contracts, as well as a broader coverage of investment funds. Tax authorities, using a 'look-through' approach, will be required to take steps to identify who is benefiting from interest payments.

Why were these changes thought necessary?

The changes were thought necessary to prevent loopholes being exploited. For example, individuals can circumvent the EUSD by using an interposed legal person (eg foundation) or arrangement (eg trust) in order to avoid reporting and withholding on the receipt of interest. In addition, the EUSD can be circumvented by using financial products that had similar characteristics to the payment of interest, but were not legally classified as such.

It has taken six years to reach this stage--why has it taken so long?
The EUSD applies within the EU and is extended by EU agreements providing equivalent measures with five neighbouring European 'third' (ie non-EU) countries, as well as the dependencies of the UK and Netherlands. In 2008 an amending proposal was made to close the loopholes, but progress had been slow because certain EU member states would not move forward unless the five European third countries agreed to implement equivalent measures.

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What has happened to allow it to finally be adopted?

In May 2013 the EU Commission was given a mandate to negotiate stronger arrangements with the third countries in order to revise existing equivalent agreements. On 11 March 2014, the Commission presented at the Ecofin Council encouraging reports on the progress of these negotiations with a view to reaching agreement before the end of the year, giving member states sufficient comfort on progress to support changes to the EUSD.

What assurances have Luxembourg and Austria been given?

Austria and Luxembourg are allowed, for a transitional period only, to apply a special withholding tax instead of exchanging information. Luxembourg has, however, committed to exchanging information from 1 January 2015.

There is a heavy emphasis, following FATCA, on the automatic exchange of tax information (AEOTI) as a solution to abusive global tax evasion and avoidance--why?
Until now, tax information exchange has been largely 'on request'--meaning that one tax authority has to have an individual taxpayer in its sights already. FATCA and the other similar AEOTI regimes will help tax authorities undertake financial profiling in order to better identify substantial risks to tax collection. Many tax authorities will invest in substantial IT infrastructure in order to process the data effectively. The UK has invested heavily in a data management system called 'Connect' allowing the UK tax authority to match pieces of data to individuals in order to build a financial picture and make decisions about which taxpayers it needs to investigate.

What obstacles does AEOTI face?

While the US has driven AEOTI through, other countries are looking to come on board. In order to minimise administrative burdens on financial institutions, the Organisation for Economic Co-operation and Development (OECD) has developed a 'Common Reporting Standard' (CRS) for global AEOTI. So far 43 countries have signed up to exchange information between themselves according to the standard. Another obstacle recognised by the CRS is data security, with countries allowed to opt-out of sending data to a particular country if there are concerns that the confidentiality of the data would not be adequately safeguarded. The US is leading work to adopt common standards on data security. However, the principal obstacle is in persuading countries, including international financial centres, around the world to adopt the CRS. The US has managed to achieve AEOTI by using the threat of a withholding tax on US source payments to compel global financial institutions to report on any US persons they have as account holders. The UK and other countries are not using force and are seeking consensus to try to get financial institutions to report on their citizens. The EU ought to consider whether it could follow the US path and threaten a withholding on all EU source payments in order to make more countries comply.

How do the requirements of the new EUSD and the OECD's CRS compare?
The data exchanged under the EUSD overlaps data to be exchanged under the CRS--although the CRS is much wider-ranging and covers, for example, the receipt of dividends, sale proceeds and distributions form a trust.

How does the US FATCA regime fit in?

The CRS and FATCA are broadly identical, although there are differences--the principal difference being the need to identify residency and citizenship for FATCA purposes, but just residence for the CRS (which reflects that the US taxes on the basis of citizenship and residence).

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What challenges (if any) do the new EUSD/CRS/FATCA regimes pose for business?
The intention is that all EU member states will adopt the CRS in due course. This will mean that financial institutions in the EU will be subject to more than one type of reporting: o o o FATCA for US persons CRS for signatory countries, and EUSD for EU and certain third country persons

Most institutions would welcome just a single standard, and the EUSD is unlikely to survive in the long term as the CRS is implemented across the EU. The US is unlikely to give up FATCA and move to the CRS for the time being, but the vision is that the CRS will ultimately become a single, global standard.

What will you be advising your clients in respect of this development?

Financial institutions are having to enhance their know your client programmes, so businesses and individuals can be expected to have to provide more information. Financial institutions will have to investigate the residency of personal account holders and the ownership of entity account holders which are investment type vehicles. Trading businesses will not have to identify their ownership, but will need to be able to certify that they are in fact trading. FATCA can also have an impact on drafting of commercial agreements. However, the main impact will be on individuals who hold wealth, directly or through a structure, in a country in which they are not resident. They will need to make sure that their tax affairs are up to date--in particular to make sure that the data which is exchanged is consistent with what is stated on tax returns. Interviewed by Sarah Perry. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.