EXPERT VIEW: "TRACE’ing" The Future Of FATCA - Dion Global Solutions

Colin Camp

Dion Global Solutions

2 January 2014

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 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 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.