The Organization for Economic Cooperation and Development published a new standard Thursday for the automatic exchange of tax information between tax authorities worldwide.
The development of the common reporting standard was mandated by the Group of 20 Nation leaders to reinforce action against tax evasion and inject greater trust and fairness into the international tax system, the OECD said.
“This is a real game changer. Globalization of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence,” said OECD Secretary-General Angel Gurría. “This new standard on automatic exchange of information will ramp up international tax cooperation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”
Developed by the OECD together with G20 countries, the standard calls on jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
A first step
The new standard is part of an ongoing transparency process, to which the Cayman Islands has committed early on.
Gonzalo Jalles, CEO of Cayman Finance, noted that Cayman signed up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters early in 2013, and was the first country outside Europe to commit to participate in a multilateral pilot for automatic exchange of information. “These actions are consistent with Cayman’s long history and ongoing commitment towards transparency. Cayman’s business is not based on a facilitation of tax evasion, therefore these initiatives should not be feared, as they will help Cayman clear the negative myths about our industry,” he said.
“The standards released today are another step in the long process that is just starting towards the effective implementation of this automatic exchange of information. The document does not contain major surprises and clearly identifies many of the challenges ahead in the implementation process,” Mr. Jalles added.
The common reporting standard draws on previous OECD work but it is also inspired by the U.S. Foreign Account Tax Compliance Act, which served as a catalyst in the G20 move toward automatic exchange of information in a multilateral context.
Automatic tax information exchange itself is not new to Cayman. “Cayman has been engaged in automatic exchange of information since 2005, for the purposes of the European Union Savings Directive,” said Duncan Nicol, director of the Department for International Tax Cooperation. With its early commitment to the G5 pilot, an initiative that now counts at least 35 interested parties, Cayman recognized that automatic tax information exchange is becoming the global standard, he said.
“The OECD’s release of the common reporting standard is therefore important because it does ensure a common, globally practiced standard to which countries will adhere. This is a significant development in the global effort against tax evasion.”
The standard consists of two components: the common reporting standard, which contains the reporting and due diligence rules, and a model Competent Authority Agreement, which sets out detailed rules for the exchange of information.
The OECD said the standard is designed with a broad scope. The financial information that will be reported in connection with reportable accounts includes all types of investment income, such as interest, dividends and income from certain insurance contracts, as well as account balances and sales proceeds from financial assets.
Reportable accounts, in turn, include accounts held by individuals and by entities such as trusts and foundations. The standard contains a requirement to look into passive entities to report on the individuals who ultimately control these entities.
However, not everyone is entirely satisfied with the new tax information reporting standard.
John Christensen, executive director of the Tax Justice Network, said, “While the Tax Justice Network welcomes the shift towards automatic information exchange, we have reservations about potential loopholes involving offshore trusts, foundations and similar devices, and we also have concerns that the new standard does not adequately address the needs of poorer non-OECD countries, whose citizens are the main victims of tax havens.”
The advocacy group said in a statement that the standard contains many positive elements but falls short of what is required. In particular, developing countries are likely to be excluded because they are expected to provide “reciprocal” information exchange. Even though most active tax havens are in wealthy countries, developing countries would need to “sacrifice scarce resources to set up arrangements to collect the information to be exchanged.”
The standard, while technically useful, also contains loopholes which must be closed, the Tax Justice Network said. Not only are freeports, safety deposit boxes and other kinds of storage mechanisms excluded from the standard, there are also no sanctions for recalcitrant jurisdiction, the advocacy group noted.
The OECD will formally present the standard for the endorsement of G20 finance ministers during a Feb. 22-23 meeting in Sydney, Australia. The OECD is expected to deliver a detailed commentary on the new standard, as well as technical solutions to implement the information exchanges, during a meeting of G20 finance ministers in September.
More than 40 countries have committed to early adoption of the standard. The Global Forum on Transparency and Exchange of Information for Tax Purposes, which brings together 121 jurisdictions worldwide, has been mandated by the G20 to monitor and review implementation of the standard. Cayman is a member of the Forum’s Transparency and Exchange of Information group.