The Biggest Tax Haven of Them All? The U.S., FATCA and the CRS

The world of international tax is currently awash with acronyms and abbreviations – FATCA, BEPS, CBCR, AEOI and CRS. Of these, CRS has had the least resonance in the United States – not surprisingly, given that the U.S. is standing aloof from this OECD initiative to which 96 other jurisdictions have committed.

So what is CRS?

It’s the Common Reporting Standard, drawn up by the OECD in 2014 at the request of the G20, for automatic exchange of financial account information between jurisdictions (for the full text, see here). In other words, CRS is a kind of global FATCA, although it differs from FATCA in not having a de minimis exclusion for pre-existing accounts held by individuals. CRS is not part of BEPS, but it is part of that same post-financial crisis drive to maximize tax revenues through combating evasion and avoidance. Indeed, it’s perhaps best seen as the anti-evasion counterpart to the anti-avoidance BEPS project. It’s not to be confused with CBCR (country-by-country-reporting) or spontaneous exchange of tax rulings, both of which are part of BEPS.

The CRS seeks to replace the traditional ‘on request’ type of exchange, provided for in double tax treaties and standalone Tax Information Exchange Agreements, with automatic exchange. Like FATCA, which inspired it, CRS requires disclosure by financial institutions not only of information about accounts held by non-residents, but also about those held by entities controlled by non-residents.

The key international instrument for implementing the CRS is the Multilateral Competent Authority Agreement (MCAA) which the OECD opened for signature in October 2014. As of February 2016, 80 jurisdictions had signed up to it (for the list, see here), committing themselves to a first exchange of information under the CRS by either September 2017 or 2018. Domestic legislation to implement CRS has already been enacted in around 50 signatory countries (see here and here).

Within the EU, CRS is being implemented – lock, stock and barrel – under a Directive commonly known as DAC 2. The Member States were required to give effect to this in their domestic legislation by January 1, 2016. The U.K. was ahead of the game, implementing the CRS and DAC 2 (as well as re-enacting FATCA) in one fell swoop last year in the International Tax Compliance Regulations.

In addition to the 80 countries that have signed the MCAA, a further 16 have been included by the OECD on a list of countries committed to the implementation of the CRS. Until very recently, the list of committed jurisdictions included Panama, but at the beginning of March the OECD removed Panama from the list after it announced six principles that would govern its implementation of automatic exchange of information – an announcement that the OECD regarded as “a step backwards” from Panama’s previous commitment to the CRS (see here). As a result, the OECD has now placed Panama on a list of four countries (the others are Bahrain, Nauru and Vanuatu) that it describes as not having indicated a timeline, or not yet committed, to implement the CRS.

But the country most conspicuous by its absence from the list of CRS-committed jurisdictions is none other than the world’s biggest financial centre – the U.S. – which seems to be taking the view that it doesn’t need to engage with the CRS because FATCA does the same job. The flaw in that argument is that FACTA does the same job as the CRS only when it comes to disclosure to the U.S. by countries that have signed up to FATCA IGAs. Whereas the IGAs require disclosure to the US of information relating to accounts held by non-US entities controlled by U.S. citizens, there is no requirement for the U.S. to disclose the same sort of information in respect of U.S. entities controlled by residents of its IGA partners. This is for one very obvious reason – unlike many of its FATCA-partner jurisdictions, the U.S. has no legislation requiring banks to collect information on the beneficial owners of companies and trusts. As Bob Stack, U.S. Treasury Deputy Assistant Secretary (International Tax Affairs), noted last year with an almost British degree of understatement: “It’s a little awkward for the U.S. to have a standard around the world that we don’t ourselves satisfy.”

The FATCA Model 1A IGAs seek to address this lack of reciprocity through the inclusion of a rather wishy-washy ‘commitment’ by the U.S. to advocate and support the enactment of legislation that would enable it to share with its IGA partners the same information about their residents that FATCA requires foreign banks to disclose about U.S. citizens. For the time being, this seems to have satisfied the OECD. Rather than placing the U.S. on the naughty-boy list of jurisdictions that haven’t committed to the CRS, the OECD has instead added this footnote to its ‘Status of Commitments’ document:

“The United States has indicated that it is undertaking automatic information exchanges pursuant to FATCA from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions to do so. The Model 1A IGAs entered into by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions. They also include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve such equivalent levels of reciprocal automatic exchange.”

That’s all fine and dandy, but in the meantime (and in this case, the meantime may well be a very long time indeed given the vested interest that some U.S. states have in upholding the secrecy afforded by their company-formation rules) the lack of reciprocity in FATCA leaves a massive US-shaped hole in the emerging global framework for automatic exchange. The upshot is that the U.S. could be about to become the biggest tax haven of them all.

According to some reports, this process is already well under way. “After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners”, Bloomberg reported in January:

“By resisting new global disclosure standards, the U.S. is creating a hot new market, becoming the go-to place to stash foreign wealth. Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world’s rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.”

The irony of the situation has not been lost on at least one foreign observer – a Swiss lawyer quoted in the Bloomberg report:

“How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour. That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”

This is one aspect of his legacy that President Obama may not care to dwell on.

By Dr Craig Rose, Technical Editor, Global Tax Guide

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