Global tax transparency?

May 2, 2013

The global environment for tax transparency is changing at an unprecedented pace. In parallel with US FATCA and related intergovernmental agreements, the United Kingdom announced on 2 May that it secured commitments from Cayman, BVI, Bermuda, Isle of Man, Anguilla, Turks and Caicos and Montserrat to develop a multilateral agreement with the UK, France, Germany, Italy and Spain to share information on an automatic basis (with Jersey and Guernsey expected to follow). The model for this agreement is the US FATCA intergovernmental agreement.

The UK holds the G8 presidency this year and vigorously pursued these commitments to demonstrate progress on its tax and transparency agenda in advance of the G8 Leaders' Summit in June. The UK will seek agreement among G8 countries for co-ordinated action to increase transparency and tackle international tax evasion, which could then be adopted by G20. Will other countries follow making FATCA the global standard for automatic information exchange?

Background

The US adopted FATCA to curb tax evasion by US persons concealing assets abroad. FATCA generally imposes a 30% withholding tax on payments of certain types of US source income to foreign institutions (broadly defined and including trusts, companies, partnerships and funds) unless the foreign institution complies with automatic reporting obligations. Final regulations for FATCA were released on 17 January 2013.

Several EU countries (the UK, Spain, Germany, France, and Italy) requested that the US reciprocate by providing information on US accounts held by their residents. The US agreed and developed a model Intergovernmental Agreement (IGA) for reciprocal information exchange (a model non-reciprocal IGA has also been released). The IGA requires foreign financial institutions to report information to the US through their government and so addresses data protection concerns and also slightly eases the administrative burden on foreign institutions. Provided that a foreign financial institution and its government meet their obligations under the IGA, the 30% withholding tax will not apply.

US Treasury has signed IGAs including with the UK, Mexico (discussed below), Ireland, Switzerland and Spain. It is also negotiating IGAs with over 50 jurisdictions, though not all are based on the reciprocal model.

The Mexico-US IGA

On 19 November 2012, Mexico became the third country (after the UK and Denmark) to sign a reciprocal IGA with the US. The Mexico-US IGA, effective from 1 January 2013, will require the US to automatically provide the Mexican government with information on US accounts held by persons resident in Mexico including:

  1. identification data including the name, address and Mexican TIN (taxpayer identification number) of the Mexican account holder, the account number, and the name of the US financial institution where the account is held; and

  2. the gross amount of interest paid on depositary accounts, US source dividends, and certain other types of reportable US source income.

The US is required to send Mexico the information relating to calendar year 2013 no later than 30 September 2015, and within nine months of the end of the calendar year for 2014 and subsequent years. Mexico is required to keep confidential the information it receives.

Interestingly, under the Mexico-US IGA, the Mexican Tax Administration (SAT) can communicate directly with a US financial institution if the SAT believes that the US institution has made administrative or other minor errors in its reporting. However, the US would need to direct its communications to Mexican financial institutions through the SAT. Perhaps this protects Mexican banks from direct effective enforcement by the IRS.

The Mexico-US IGA is not, however, entirely reciprocal as Mexican financial institutions are required to report accounts held by non-US entities controlled by US persons. However, this look-through does not, subject to agency type relationships, appear to apply to US financial institutions so that accounts owned by foreign entities controlled by Mexican residents fall outside the IGA. This is a significant gap in US obligations towards Mexico. Will Mexico succeed in closing this gap in the future?

OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters

Argentina, Brazil, Colombia, Costa Rica and Mexico have all signed the Convention on Mutual Administrative Assistance in Tax Matters (the "Convention"), and it is in force in Argentina and Mexico.

Countries which are a party to the Convention are required to exchange information upon request from another party and to spontaneously send information to another party which it believes will be relevant to that other party. The Convention also permits countries to agree to automatically exchange information, which could facilitate FATCA IGAs between the US and other parties such as Argentina and Brazil. The Convention goes beyond most double tax agreements and tax information exchange agreements ("TIEA") by obliging parties to the Convention to assist each other with the recovery of tax claims.

Bilateral Agreements

In March, Brazil quickly approved the TIEA with the US that was originally signed in 2007. Brazil's banking community lobbied for this to facilitate a FATCA IGA with the US. Brazil also signed a TIEA with Cayman in March.

Peru has a TIEA with the US (in force since 1991) that could lead to a reciprocal IGA. Peru also expanded its tax treaty network in 2012 by signing a double tax agreement with Switzerland that contains the OECD standard information exchange provision.

FATCA IGA: A Global Standard?

Reciprocal information exchange under an IGA has the potential to move the global standard for information exchange from 'on request' to 'automatic'. The UK, France, Germany, Italy and Spain are moving in this direction through the commitment noted above by several British Overseas Territories and Crown Dependencies to develop a multilateral agreement based on US FATCA to exchange information on an automatic basis. Will Latin American jurisdictions like Mexico, Argentina and Brazil be able to extract automatic information exchange arrangements from the Caribbean offshore financial centres?

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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