Colin Camp, managing director, products and strategy, Dion Global Solutions, writes about a specific initiative designed to automate exchange of information for tax purposes.

Colin Camp, managing director,
products and strategy, Dion Global Solutions, writes about a specific
initiative designed to automate exchange of information for tax purposes, an
issue that takes on additional urgency with the advent of legislation such as
the US
FATCA Act.  The views expressed here are
not necessarily endorsed by this publication’s authors but it is very pleased
to share these thoughts with readers.

In the course of their Foreign Account Tax Compliance Act
compliance projects, financial institutions are now beginning to examine their
options for facing other FATCA-style legislation emanating from the OECD, the
EU or bilateral discussions at an international level.

There are over 3,000 tax treaties internationally, many of
which include information-sharing provisions, resulting in a mixed bag of
bilateral standards. FATCA has certainly been a game changer in this space and
some would say has opened the door for the OECD to launch its Treaty Relief and
Compliance Enhancement (TRACE) project, planned to harmonise these tax treaties
into a single information sharing regime and to automate tax withholding by “Authorised
Intermediaries”.

The TRACE initiative is designed to benefit all its
participants by standardising and automating the information exchange and
related processes. Under such an automatic exchange, information on all foreign
taxpayers’ data will be routinely transferred to their home governments, making
it far more difficult to hide assets from the relevant tax collector.

Back in July, finance ministers and central Bank Governors
commended the progress recently achieved in the area of tax transparency and
fully endorsed the OECD proposal for a multilateral and bilateral automatic
exchange of information.

Whilst TRACE is considered to be less onerous than FATCA in
terms of its demands on existing know your customer systems, there will be a
number of new requirements for financial institutions to consider. But just
what is TRACE and why do financial institutions need to pay attention to it?

What is TRACE?

At a follow-up Group of 20 countries’ meeting in September,
it was confirmed that a new Global Forum will be established as a mechanism to
monitor and review the implementation of the new standard on automatic exchange
of information and will be working with the OECD Task Force.

The TRACE programme has been devised and is being promoted
by the Organisation for Economic co-operation and Development. Its key features
are:

-- t is aimed at enhancing the ability of both source and
residence countries to ensure proper compliance with tax obligations;

-- It is effectively a standardised mechanism for claiming
Withholding Tax relief at source on portfolio investments which aims to reduce
administrative burden;

-- It proposes that relief will be provided at source as the
primary means of claiming relief support and will be on the basis of investor
self-declarations rather than residence certificates;

-- The system will allow “Authorised Intermediaries” to
claim exemptions/reduced rates of WHT on a pooled basis on behalf of their
customers that are portfolio investors;

-- Annual reporting will be required by AIs to the source
jurisdiction on the income paid to investors;

-- AIs will be subject to an independent review, similar to
the US’s Qualified Intermediary (QI) regime;

-- There will be an automatic exchange of information
between source country and residence country;

-- There will be standardisation of reporting and
documentation to minimise burdens. For example, efforts are already underway to
ensure that there is alignment between TRACE and FATCA for reporting and
transmission

What this means

So what does this mean for financial institutions already
facing the burden of implementing a FATCA compliance programme?

It is clear that tax avoidance is a major concern for most
governments today. The reluctance of countries to work together and share
information is a thing of the past. It is the financial community who will be
burdened with the task of providing a cross-border information reporting
platform to allow the policing and scrutiny of their clients’ profiles and tax
relevant information and transactions.

It is therefore vital that any FATCA compliance solutions
implemented today have flexible customer classification methods, rule-driven
reporting and case remediation that can adapt to changing directives.
Flexibility is not only important when it comes to reacting to future
developments, but to minimise the impact compliance will have on existing
systems. This is why a solution that can slot in alongside existing systems and
processes, and leverage the capabilities of existing core technologies while
generating significantly fewer implementation challenges will prove successful.

In summary, today’s compliance solution must support
tomorrow’s unknowns, to avoid a situation where multiple systems must be
deployed, or systems must be ripped out and replaced early in their life-cycle.