“With the implementation of FATCA and the adoption of CRS, more and more countries are adhering to the MCMAA and signing the MCAA, agreeing to exchange financial information in an automatic and systemized manner. As a result, the compliance departments of institutions are standardizing their due diligence procedures and making them more rigorous and demanding, involving a growing number of KYC information.”
Confused? It is no wonder.
The adoption of acronyms to identify the most important projects related to fiscal transparency and exchange of financial information over recent years has made even small talk between tax experts practically indecipherable for those who are not up to speed in this area. The problem is that these acronyms affect the international operation of these companies, not only because they make the companies more transparent, but because they lead to a series of procedures that make operation difficult and time-consuming.
In fact, it used to be that bank confidentiality was the norm and tax information was exchanged between the authorities of different countries only occasionally and within the scope of certain very specific information requests. Today, the opposite is true and the norm is that financial information is now automatically and systematically exchanged between tax authorities, even by countries considered to be tax havens. To start, a report is drawn up by the financial institutions of each country and sent to the tax authorities of their own country, who in turn share this information with the tax authorities of the relevant countries.
This is one of the main reasons why today financial institutions require more and more information regarding companies, shareholders and beneficiaries who wish to open bank accounts, making this process extremely meticulous and time consuming. As a corporate services provider, and despite not being an entity that is obliged to report, NEWCO is duty-bound to comply with all applicable legislation, in particular with respect to money laundering and financing of terrorism, and consequently implements rigorous due diligence procedures.
Get to know the most significant terminology related to transparency and exchanges of tax information, along with how this can affect your international tax planning strategy:
- FATCA – Foreign Account Tax Compliance Act: US legislation that seeks to improve compliance with tax legislation by US persons with accounts and financial assets abroad. It was developed in the USA in 2010, but it came into force in July 2014. In 2012, five European Union countries (United Kingdom, Germany, France, Italy and Spain) not only consented to exchange information with US authorities on the basis of FATCA, but also agreed to exchange information automatically between each other. FATCA has therefore served as a catalyst for automatically exchanging financial information within a multilateral context because its model was the basis for creating a Common Reporting Standard that is currently the standard for automatic information exchange on practically a global scale.
- MCMAA – Multilateral Convention on Mutual Administrative Assistance in Tax Matters: an instrument developed in 1988 by the OECD and the Council of Europe, reviewed by Protocol in 2010. It is currently the broadest multilateral instrument for all forms of fiscal cooperation and prevention of tax evasion and avoidance, which is a top priority for all countries. The revision in 2010 sought to update the various provisions of the Convention so that they could incorporate new international standards regarding the exchange of taxation information. The Convention seeks to allow several types of administrative cooperation between States in the form of information exchange (upon request and automatically and spontaneously), simultaneous fiscal controls, fiscal verifications abroad, assistance in collecting and serving documents, taking into account the prevention of international tax evasion and fraud, together with general non-compliant behaviour with respect to taxation duties.
- CRS – Common Reporting Standard: Standard developed by the OECD in 2014, at the request of G20 countries. It establishes norms for obtaining financial information and subsequent exchange of information with other jurisdictions automatically and systematically. The CRS defines the type of financial information that should be obtained and exchanged, the financial institutions that are obliged to report, and the different types of accounts and taxpayers, as well as establishing standard due diligence procedures that should be followed by financial institutions. Over 90 jurisdictions have already agreed to exchange information on the basis of the CRS. The European Union has adopted the CRS through changes to the Directive on Administrative Cooperation (DAC2) and as such the CRS has come into force for the entire European Union as of 1 January 2016.
- MCAA – Multilateral Competent Authority Agreement involving authorities that are competent to exchange information in accordance with the CRS: a multilateral instrument that is legally based on article 6 of the MCMAA, which has a standardized and efficient mechanism for automatically exchanging information between jurisdictions on the basis of the CRS. Avoids establishment of bilateral agreements between jurisdictions. In February 2016, 79 jurisdictions had signed this Agreement, undertaking to automatically begin exchanging information as of September 2017 or 2018, depending on each particular case.
- Directive on Administrative Cooperation (DAC2) – Directive 2014/107/EU, which changes the provisions of Directive 2011/16 regarding obligatory automatic information exchange between tax authorities, implementing the standard developed by the OECD for this purpose (CRS) and broadening the scope of application of this exchange to include interest, dividends and other types of income. Directive 2014/107/EU came into force on 1 January 2016.
- Compliance: the persons responsible for compliance guarantee perfect operation of the institution’s Internal Control System, seeking to reduce risks according to the complexity of its business, along with disseminating the culture of controls in order to ensure compliance with laws, standards, usage and customs recognized by the market, along with existing internal and external regulations.
- Due diligence: obtaining information and facts on clients that allows the institution to assess the level of risk that such a client poses, namely in terms of financing terrorism and money laundering. Today, this process also includes all the information that is needed for the institution to report to the tax authorities of the respective country, which will subsequently exchange the information automatically with the authorities of the client’s country of residence, provided they are jurisdictions that have implemented the CRS, FACTA or similar legislation.
As European Union countries and OECD members, Portugal and Malta are subject to Directive 2014/2014/107/EU and to implementation of the CRS. Portugal still has not transferred the provisions of the Community Directive to its legal framework, but this regime has been a reality for all European Union Member States since 1 January 2016. Malta has transferred the Directive to domestic law through Legal Notice LN 384 of 2015, taking effect as of 1 January 2016.