With the spotlight on offshore financial centres in the wake of the Panama Papers revelations, Stephanie Paiva Sanderson, corporate attorney and chairwoman of the Industry/Government Joint Committee on Fatca and the Common Reporting Standard explains Bermuda's participation in the global effort to increase tax transparency in part 1 of a 2 part series.
Fatca and CDOT
There has been an ever increasing trend in recent years towards global co-operation against tax evasion. With that comes a sea of acronyms! Many would agree that the wave of change began with the US Foreign Account Tax Compliance Act (Fatca). Bermuda entered into a Model 2 Intergovernmental Agreement with the US in 2013 which requires Bermuda financial institutions to identify US persons and report directly to the Internal Revenue Service.
Since the introduction of Fatca Bermuda has seen the roll-out of the UK's version, largely known as "CDOT" or "UK Fatca", which closely followed the US model. CDOT requires the automatic exchange of information between tax authorities in relation to taxpayers in the UK and its Crown Dependencies and Overseas Territories. Reporting under the regime will be made directly to the UK tax office, Her Majesty's Revenue and Customs (HMRC), by Bermuda financial institutions.
CDOT will be relatively short-lived as the OECD's Common Reporting Standard has in the meantime come to fruition with CRS reporting due by September 2017. Nonetheless, financial institutions will need to comply with CDOT while it is still in place with CDOT reporting due by September 2016.
The Common Reporting Standard
The CRS was developed by the Organisation for Economic Co-operation and Development and draws on Fatca's intergovernmental approach as well as work done by the Financial Action Task Force, the inter-governmental body concerned with combating money laundering and terrorist financing, in relation to beneficial ownership. The CRS requires regular cross border automatic exchange of information between governments in respect of account information reported by financial institutions.
It is important to be aware of the differences between the CRS and Fatca. For example Fatca's taxation identification is based on citizenship whereas the CRS regime is based on tax residency. It is also important to note that the US has not yet adopted the CRS and so the Fatca regime will continue (for now) to run alongside the CRS.
To date, 98 jurisdictions have committed to the CRS and Bermuda was one of the first to embrace the regime as part of the "early adopter" group that signed the multilateral convention in October 2014. Under the CRS, financial institutions in Bermuda, including investment funds, will have been required from 1 January 2016 to perform due diligence and collect certain information on new account holders including their tax residency and tax identification numbers.
Participating jurisdictions are peer reviewed for compliance with the regime. Bermuda will be issuing regulations and guidance notes on the CRS and will be working on its reporting portal over the next year.
There are still some jurisdictions that have not committed to the CRS regime — for example, Panama and Bahrain. The US has so far only given a political commitment to pursue equivalent levels of reciprocal automatic exchange, which is a work in progress. The hope of those driving the international community's efforts is that ultimately international pressure will help create a truly global infrastructure for the automatic exchange of tax information. Angel Gurría, the OECD Secretary-General, stated: "Our standards on tax transparency are robust. They need to be effectively implemented worldwide, by everyone, with no exceptions, so there's nowhere left to hide." Global adoption and implementation are vital to the success of the scheme.
Previously published in The Royal Gazette
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