Notes from the Recent OECD Meeting – TRACE and FATCA
|February 17, 2013||Posted by Jim Calvin under FATCA, Financial services industry, TRACE|
The OECD meeting in Paris earlier this week covered two key areas:
- TRACE Implementation
- Latest FATCA developments
The OECD has recently approved the implementation of the Treaty Relief and Compliance Enhancement (TRACE) program. Key features:
- TRACE is effectively a standardized mechanism for claiming WHT relief at source on portfolio investments which is aimed at reducing administrative burdens.
- Aimed at enhancing the ability of both source and residence countries to ensure proper compliance with tax obligations.
- In summary, relief would be provided at source as the primary means of claiming relief and would be on the basis of investor self-declarations rather than residence certificates.
- The system would allow ‘Authorised Intermediaries’ (AIs) to claim exemptions/reduced rates of WHT on a pooled basis on behalf of their customers that are portfolio investors.
- Annual reporting by AIs to the source jurisdiction on the income paid to investors – AIs would be subject to an independent review (similar to QI regime).
- Exchange of information between source country and residence country.
- Standardization of reporting and documentation to minimize burdens – efforts are underway to ensure that there is alignment between TRACE and FATCA for reporting and transmission, etc.
- The TRACE Group is now working on jurisdictional adoption of the AI system – various countries have indicated that they were examining adoption of it this year.
Additional details will be reviewed in a later post.
The IRS and US Treasury presented the latest developments with respect to FATCA, and there were some comments from the UK, Germany, Italy and the Netherlands. The key points:
- Acceptance on the part of the US that they have missed deadlines for delivering the final regulations and signing IGAs. The IRS recognized that the implementation timetable is challenging. They are confident that they will get a significant number of IGAs signed before January 1, 2014.
- A number of agreements have been signed or initialed – UK, Denmark, Mexico, Ireland, Spain, Norway, Italy and Switzerland (Model 2).
- Since the final regulations have been released, the IRS has reallocated staff to signing IGAs. They expect the process of signing IGAs to speed up primarily because now that the final regulations are out there is a firmer basis to agree what should be included in Annex II. Annex II may have a reduced role, and would primarily be used where the regulations do not cover a certain product or where additional certainty is required.
- The intention is that any definition that is available (or preferential) in the regulations will be available under an IGA; however, implementation is uncertain. One option is to provide the definition in future IGAs so other countries can access it through the MFN term.
- Note: The Annex I ‘cherry picking provision’ is limited to each full set of provisions (e.g. pre-existing individual accounts).
- Annex I of the IGA is relatively generic and so it is reasonable to interpret additional detail from the regulations; however, the intention was to provide flexibility to IGA partners to determine how to apply the rules (e.g., as the UK has done in its draft guidance).
- The regulations are aligned with IGA timelines for due diligence (e.g., a customer opens a new account which can be treated as pre-existing).
- There was confirmation that if a pre-existing account exists at the end of 2013, but has not yet been identified (e.g. through the electronic search), then the FI does not need to report it until it has been identified. Furthermore, the reporting will not be backdated.
- On registration, they are expecting to release a list of questions that will need to be answered on registration in the next couple of weeks (it is not considered an ‘application’). Registration is expected to take minutes rather than hours for each entity. The GIIN is likely to be used going forward as a wider identification number for information reporting (e.g., TRACE). In the case of Model 1 IGA countries, the IRS system will be used but there may be a local tax authority overlay on the front end of the portal.
- The IRS will be considering the interaction between reporting for QIs and FATCA and there is an intention to reconcile the regimes.
- The IRS and Model 1 countries are still considering coordination of enforcement which has wider implications as further global requirements are introduced.
- The electronic format for the universal reporting schema has broadly been agreed, and will be the same format to transfer data between countries under the IGA.
- In the UK, the HMRC is aiming for a mid-April deadline for releasing the final versions of their regulations and Guidance. The HMRC would also like to ensure a consistent application across all jurisdictions.
- The German government recognized that there was a significant implementation challenge with FATCA, and is hoping to have it in place by the end of the year.
- Italy has initialed an IGA, and is in the process of ratifying internally before validating the Italian translation with the US.
- In the Netherlands, the government is very close to initialing an IGA (expected in next few weeks), which will be legally binding, but there may be an extended ratification process.