US and OECD showdown seen looming over CRS

A major showdown is looming over the US’s decision not to participate in the OECD’s Common Reporting Standard, according to observers of the ongoing efforts to introduce a global system for automatic exchange of tax-relevant financial information.

The US has said it doesn’t see the need for it to be a party to the CRS, because it already gets the information it needs through the Foreign Account Tax Compliance  Act, which has come into force over the last three years, and requires all non-US financial institutions to report to the IRS about any accounts they have that belong to Americans.

In obtaining the consent of foreign governments to allow information on US taxpayers to be collected in these jurisdictions’ institutions, the US ended up agreeing to numerous bilateral tax information exchange agreements.

However, last week the IFC Forum, a multi-jurisdictional private sector advocacy group that represents financial services and law firms in the world’s main financial services jurisdictions, warned that all of the world’s major financial centres must participate in the CRS if it is “to be effective” – including the US.

The IFC Forum said its statement was in response to a 20 February article in The Economist on the US decision not to join the CRS, entitled “The biggest loophole of All”.

“Either the US participates, or the system won’t work,” Richard Hay, counsel to the IFC Forum, told International Investment, explaining what he says is a growing belief among those involved in cross-border tax issues that the OECD is going to have to find a way to bring the US onboard if the CRS  is to work.

“The critical public policy issue is whether a global system that requires universality to work can operate without the participation of the largest financial services market in the world,” Hay, a London-based partner with the Stikeman Elliott law firm, said.

Given that most people don’t believe it can, he added, the question then will unavoidably become how the US can be persuaded to sign up to the CRS.

Because if it can’t, and the rest of the world were to go ahead with adopting the new reporting standard, Hay says the US would be in the somewhat ironic position of being able to become a tax haven – a phenomenon that some say has already begun to happen.

As reported here in January, the US has already begun to emerge “as a leading tax and secrecy haven for rich foreigners”, a Bloomberg report found, as the US, “by resisting new global disclosure standards…[is] 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 Bloomberg report added.

One of the problems at the moment is that the US is in the throes of an election, so Congress is not as focussed as it might otherwise be in matters like this. Explains Hay: “This is a disconnect between Congress, and [the US] Treasury. Treasury wants to do it [address the CRS vrs FATCA issue], but because it’s an election year, Congress has other things to do. They’re interested in collecting US tax, but not so interested in protecting the position of the rest of the world.”

Widespread take-up 

According to the IFC Forum, more than 90 jurisdictions have agreed to implement the CRS, including such financial centres as Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, Jersey and the Isle of Man. In the past, many of these jurisdictions have been criticised by politicians in the US, among other countries, for being “tax havens”.

In declining to sign-up to the CRS, the US has cited the existence of what it considers to be a sufficiently large network of intergovernmental information exchange agreements it already has in place around the world under FATCA. However, the IFC Forum argues that these bilateral FATCA agreeements fall short of being as comprehensive as the CRS. For example, the IFC Forum notes, the FATCA bilateral agreements fail to to include information on accounts which are indirectly owned.

“In order to be effective, CRS must be truly global,” Jack Marriott, chairman of the IFC Forum, said.

“Is it viable without participation from the world’s largest financial centre? Similar concerns apply to other proposed transparency measures, such as the availability of ultimate beneficial ownership information.”

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