Catch one, catch all

Having been kicked into motion by FATCA in the US, financial information exchange now looks set to move to a global standard - but could this actually be a good thing? Dave Waller investigates

The world loves American exports. From ubiquitous coffee chains and sportswear brands to increasingly loud and bombastic Hollywood blockbusters, it seems we can"t get enough of American "culture". And whenever you have someone setting trends you are going to have imitators.

While film lovers would be unlikely to queue for tickets for a story about international tax standards, America has taken a lead role in that world too. In 2010, the US introduced the Foreign Account Tax Compliance Act (FATCA), in a bid to clamp down on tax evaders and money launderers; now the OECD is hitching itself to that wagon and rolling out an equivalent standard for the rest of the world.

The OECD"s Common Reporting Standard for Automatic Exchange of Financial Account Information (CRS) was endorsed by the G20 in February. Like FATCA, it"s designed to improve the tax transparency of overseas account holders by improving the sharing of information across borders to the authorities [see page 84]. The OECD is expected to present its commentary on the new standard to the G20 in September - with the potentially ambitious view of having it all signed and sealed by the end of the year, and the first bilateral agreements in place by the end of 2015.

Having a common standard certainly makes sense on the face of it. The rise of FATCA had prompted fears within the financial services industry of a wave of copycat lawmaking among other nations - a legislative free-for-all that would lack consistency and therefore leave businesses having to report reams of different client information to all these different authorities. In theory, a common standard makes it far easier for everyone to play along.

Yet it"s not quite as simple as that. For starters, thanks to quirks in the US tax system (it issues its taxes based on citizenship rather than residency, unlike almost every other country in the world), the CRS won"t be quite as "common" a standard as intended, and any company with clients in the US and elsewhere will have to file separate reports for FATCA too. Meanwhile companies in the Crown Dependencies may also have to report separately for the UK"s own equivalent to FATCA, the inter-governmental agreement (IGA), as it also features some technicalities that may not fit with the CRS.

“It took the US with its economic clout to catalyse the international community into introducing tax information exchange automatically rather than on request,” explains William Byrne, Head of Technical at Jersey Finance. “Now, as and when Jersey signs its first CRS agreement, any Jersey business that has UK-resident customers, US citizen customers, those resident elsewhere in the EU and those who fall under the CRS, will have four sets of reports to run. They"ll have the US FATCA, UK IGA, the EU Savings Directive, and the CRS. It"s all a cost, and that will be borne by customers.”

Indeed, with industry still scrambling under the time pressure of getting ready for FATCA and the UK"s IGA, the greatest concern is over how much the regime will set them back. Complying to each standard will mean having to search their client databases for the different sets of information demanded by the tax authorities. And that will involve costly new systems and training.

“That"s where the heartache is,” says Tony Mancini, Head of Tax at KPMG in Guernsey. “Service providers are required to look at each client structure individually and see how they should be treated. Some trusts are running thousands of clients. They will have to look at client structures and see how each one fits on the spectrum, looking at those controlling it and the accounts in that structure. Funds will have to look at all the investors and all its incomes. It"s doable, but it"s a huge job.”

Devil in the detail

While businesses will try to automate as much of this work as possible, if their customer data happens to be stored in, say, PDF format, and therefore not automatically searchable, the task of reporting becomes heavily labour-intensive. Especially with the level of accuracy required - you can"t go sending the wrong information for the Jersey tax authorities to exchange with the US, as over-estimating someone"s assets could lead to an uncomfortable investigation.

Such is the cost pressure in an already expensive compliance environment, it"s actually proving too much for some smaller businesses. “The fiduciary industry has seen a lot of consolidation across the islands,” says Fiona Le Poidevin, Chief Executive at Guernsey Finance. “And that"s a symptom of these extra costs: you need critical mass to cope with the extra regulation and compliance demands.”

The good news is that while each standard may well require sending slightly different information to the local tax authority, the vast majority should be broadly the same, and will perhaps involve simply filling out extra fields where required.

“The key is for companies to future-proof their systems,” says Wendy Martin, Tax Executive Director at E&Y. “This is the new normal, and we"re telling clients to ensure that the systems they"re creating now can cope with developments down the line. Sensible companies will do that. Some may not have the resources and may find themselves scrambling later. FATCA isn"t rocket science, but it is technical, and companies can find it a struggle. The key is to put in place steps and a plan for the next 12 to 18 months.”

Yet while the new legislation does come with its share of pain, its effects may be far from disastrous. This "new normal" is not only inevitable and unavoidable, it"s also one that may well benefit the Channel Islands, simply because the CRS has a global application and thus any reputable jurisdiction will be forced to bear the same costs.

“The worry lately has been the lack of a level playing field, where the Crown Dependencies are potentially losing out in dealing with the UK, for example, because of the cost associated with reporting for the IGA,” explains Le Poidevin. “Now at least everybody will be in the same boat.”

Colin Powell, Adviser to Jersey"s Chief Minister"s Department, takes a similar view. “Under the IGA you could have UK residents saying "If I move my affairs away from Jersey to jurisdiction X, I"ll be free of having to report everything". Now it will be: "I should base my business in the location with the best-quality services".”

And because the Channel Islands have comprehensive, compliant and professional services and a robust legal system, they do sit in a good position to prosper. Their success rests absolutely on reputation, so not being part of the most comprehensive transparency vehicles would hardly be a desirable option anyway. It"s not just the officials but industry who share that view. As Tony Mancini concludes: “With this level of reporting, the islands" detractors will have an even tougher time accusing them of harbouring tax evaders.”