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Jan. 23 — The growth of global tax transparency is expected to leap ahead in 2015—meaning companies, individual taxpayers and financial institutions must exercise new levels of caution, practitioners told Bloomberg BNA.
With more than 100 intergovernmental agreements under the Foreign Account Tax Compliance Act and dozens of countries signing on to participate in the Organization for Economic Cooperation and Development's common reporting standard, the groundwork is being laid for a new level of cross-border information sharing, they said.
Those movements are also taking place alongside the OECD's base erosion and profit shifting project and growing international cooperation on audits and enforcement, experts said in a series of interviews.
“I think the world's changing,” said Alan Granwell, of counsel with Sharp Partners PA. “The significant issue is global transparency. Look at where we were a few years ago. We were nowhere. I think the difference is really incredible.”
As more countries seek ways to protect their tax bases and crack down on what they see as cross-border evasion, income being taxed more than once is a distinct possibility, one about which both experts and U.S. officials have voiced concerns.
Internal Revenue Service Commissioner John Koskinen said in December that the U.S. will keep working with other countries to ensure multinational corporations don't face double taxation as global efforts to share information across borders multiply.
Given all the forces at play, he said at a global tax symposium, multinational companies around the world “are likely to discover that transactions that were up until now taxed by no country could instead be taxed simultaneously by two or more countries.” The U.S. will continue to raise that issue strongly in its work with other nations on tax transparency, he said.
Michael Mundaca, co-director of the National Tax Department at EY LLP, said he thinks double taxation is “a significant risk” as some countries choose to base individual legislation on proposals originally made by the OECD to be considered multilaterally.
Multinational corporations need to monitor global developments closely to keep tabs on how they may be affected, and shouldn't hesitate to make their voices heard, Mundaca said.
“Companies need to understand what the positions are of the various countries, and look at their own structures to see what their risks might be,” he told Bloomberg BNA. “It's important to seek out opportunities to influence adoption and take steps to ensure that various organizations and governments understand the risks of double taxation.”
The need for real coordination between countries is great, said Mundaca, a former Treasury assistant secretary for tax policy. “I think there's clearly a recognition of that issue,” he said. “But the OECD can only make recommendations. It can't in form or substance require any of its members to take action to address those concerns.”
FATCA—which will create big administrative challenges for banks and withholding agents in 2015—is one of the key drivers for cross-border transparency. Treasury Department officials have called the OECD's common reporting standard “the multilateralization of FATCA.”
Philip West, a former Treasury international tax counsel and now chairman of Steptoe & Johnson LLP, said he thinks FATCA and international tax compliance will continue to be a major focus for the IRS and Treasury in 2015.
The law requires foreign financial institutions to report their U.S.-owned accounts to the IRS or face, in some cases, a 30 percent withholding tax on their U.S.-source income. The U.S. has more than 100 agreements in effect with other nations to allow that information to be shared between governments—cooperation that practitioners said helps set the stage for talks on all facets of global taxation.
“To say there's been a watershed change is an understatement,” said John Staples, managing partner of the U.S. office of Burt, Staples & Maner LLP. “There's been a sea change in all of this.”
Those agreements themselves create challenges for those trying to comply with FATCA even as they represent growing transparency, practitioners said.
Many have been signed, but the struggle continues in some nations to pass the legislation many need to sign the accords.
The IRS said in December that jurisdictions with IGAs in substance will have more time to get the pacts signed if they can demonstrate “firm resolve” to finalize them—subject to a monthly review.
Practitioners praised this move by the IRS and said it will help keep channels open for agreements that have been in negotiations for many months. “It was absolutely the right decision,” said Jonathan Jackel, a partner at Burt, Staples & Maner. “Why would you blow up all of the progress you've made by just shutting the door?”
Susan Grbic, a tax partner at WeiserMazars LLP, said financial institutions do have concerns about IGAs changing or not getting to the finish line, and said the guidance allowing more time to reach agreements helped many breathe a sigh of relief. “I think in general it was very positive news to see that guidance,” she said. “It prevented panic attacks.”
Even so, experts said, with the uncertainty of some not signed, and some differences from jurisdiction to jurisdiction, the IGA universe may be tough for many financial institutions to navigate in the coming year.
Laurie Hatten-Boyd, a principal in the Washington National Tax practice of KPMG LLP, said although some entities expect to be carved out from the reporting requirements in forthcoming agreements, they can't be sure until the pacts are finalized. In turn, they don't know how to respond when banks and others ask them for FATCA documentation.
Even those entities that do know they will be considered foreign financial institutions under pending agreements aren't sure what's ahead, she said. They can't move forward until they get more guidance. “It really is a struggle for those impacted entities,” Hatten-Boyd said.
Hatten-Boyd and other practitioners said this is just one of the challenges facing financial institutions and withholding agents working to comply with FATCA in 2015. Consistency is key, she said.
“We've got a steep learning curve that we're all feeling,” Hatten-Boyd said. Even though the differences between the jurisdictions can be “just nuances,” she said, “in the tax world, a nuance can be catastrophic. When you're in the operations department, some of those little nuances can be very important.”
Sharp Partners' Granwell said, “it would be good if it could all be conformed. You've got FATCA, you've got IGAs, you've got regulations. Banks have to put systems in place to deal with this and they're all a little different.”
Many practitioners said as a rule, banks and financial institutions have made enormous efforts to get ready for the next stage of reporting expected in 2015, and many are optimistic despite some worries.
“I think many institutions are in pretty good shape,” Jackel said. “They had a plan and they worked through their plan. Many are on schedule and they've done what they need to do.” The question remains, however, “Is it the best version? Is it as good as it could be?” he told Bloomberg BNA. “We won't find that out for sure until we've gone through a few cycles of reporting.”
Staples said, “A lot of institutions feel that they have made a lot of efforts to comply. But there is concern that they have taken on a lot of regulatory exposure. It's bound to cause a lot of concern, because the downside of getting it wrong can be quite significant. The bells and whistles are incredibly complex. There are a lot of areas that remain undefined and a lot that remain challenges. People worry that even though they're making their best efforts, it won't be good enough.”
WeiserMazars' Grbic said she is cautiously optimistic about the rollout of FATCA in 2015, with March 15 kicking off the staggered implementation of several new phases of reporting.
“It's the real start,” she said. “It's exciting that it's happening. This is the beginning of real FATCA, of fully implementing and working out wrinkles and discrepancies between the different types of reporting that will be required.”
Grbic and other practitioners said taxpayers welcomed another set of guidance issued by the IRS in May 2014 to provide some FATCA relief to taxpayers—but remain watchful going forward.
Notice 2014-33 offered a two-year transition period of light enforcement for taxpayers who are making good-faith efforts to comply. But practitioners said questions remain about what will meet that standard in the eyes of IRS agents.
“What they've said is, ‘Put your best foot forward and we won't have a heavy hand on penalties,' ” Jackel said. “But that remains to be seen. It's at their discretion.”
Revenue agents have a lot of leeway, he said. “It's really the people on the line who have to understand the rules and how far they should be going. We just don't have any experience with that yet.”
As financial institutions and withholding agents work to implement the details of FATCA, many said the legislation has helped to fuel the momentum of the common reporting standard for the automatic exchange of tax information that the OECD unveiled in July 2014—and in fact may serve as a model for how that exchange may be done.
The IRS launched the system Jan. 12 that foreign banks and tax authorities will use to send U.S. account information to this country under FATCA, known as the International Data Exchange Service. Koskinen called the system a milestone and said the U.S. also could use its double-encrypted mechanism to send data to other countries in cases involving reciprocal IGAs.
John Harrington, a former Treasury international tax counsel and now a partner with Dentons LLP, said the system “reflects an approach that will be used more globally” to ensure information sent between governments is kept safe.
“That's going to be an important part of global information exchange,” he said. The data that will be transmitted—such as names, account numbers and balances—is highly valuable, Harrington said. “It's extraordinarily important that it be protected.”
He said the launch of the system is a symbol that the era of global tax transparency is finally taking off, even though it may still experience a bumpy road ahead.
“Up until now, FATCA and the common reporting standard have all been conceptual,” Harrington told Bloomberg BNA. “There isn't a practice of actually doing it, actually exchanging information on this kind of scale. This really is groundbreaking.”
He and other practitioners said while the movement toward a common reporting standard continues to gather steam internationally, implementation may still prove difficult. Forty countries have agreed to adopt CRS early, but the U.S. isn't among them.
Treasury officials have said while the U.S. strongly supports CRS, putting the regime in place in this country could take several years due to the legislative fixes necessary.
Denise Hintzke, global tax leader of the Foreign Account Tax Compliance Initiative at Deloitte Tax LLP, told Bloomberg BNA the U.S. faces political hurdles getting the changes to local law that would allow it to participate, which could in turn lead to difficulties for U.S. entities.
“What that means is that the U.S. will be a non-participating country, and non-members get negative treatment,” she said. It is possible U.S. investment funds might also get negative treatment as a result, with the possibility that foreign financial institutions could be reluctant to deal with U.S. funds.
EY's Mundaca said these forces are all combining with the OECD's base erosion and profit shifting project to create an environment where companies might face multiple levels of tax on the same income—particular as some countries are moving on their own to implement BEPS-type proposals with a lack of uniformity.
One example might be the taxation of intangible assets, Mundaca said. “Different countries may have different views as to where value is created,” he said. “This raises significantly the threat of double taxation.”
He said as global efforts to increase transparency continue, a significant piece of that is governments trying to figure out appropriate ways to tax “very mobile capital.” That is difficult to implement in practice, Mundaca said, and other countries may be looking at U.S. tax laws for a way forward.
“The story will be, what are countries going to do using U.S. law as a model?” he said.
Practitioners said another area of global cooperation where taxpayers need to be mindful is enforcement.
Granwell said cross-border audits are on the rise and more countries are working together to examine the same taxpayer. “We’re concerned not only about the audit in the U.S., but the U.S. can spontaneously send information to other countries,” he said. “If you’re in an international audit, you’ve got to worry about cross-border transfers of information. You can’t look at the U.S. anymore, you’ve got to look to see if there’s an exposure where the information might go cross-border somewhere. It’s a very different dynamic.”
Granwell said FATCA and BEPS are “really changing international tax practice. People now are very cognizant that their information could end up somewhere else. I think it’s a major change. We’ll see where it all ends up.”
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