Academic journal article Business Law International

New Global Information Exchange Regimes and the Impact on the Financial Industry Worldwide

Academic journal article Business Law International

New Global Information Exchange Regimes and the Impact on the Financial Industry Worldwide

Article excerpt


The various global information exchange regimes either in force now or coming into force in the course of the next few years, with exact timing depending upon each jurisdiction, are proving a source of increased administration to the financial industry worldwide. This is especially the case for entities such as investment funds, which are not the target of these regimes nor are they likely to receive investment from those the new laws seek to identify, but which must nonetheless bear a burden of compliance that seems disproportionate to their role in the investment industry. Further, information exchange rules have created an entirely new lexicon for those affected in order to identify precisely what they are required to do, when and in which jurisdiction.

Those in the financial sector now need to manage carefully the process of communicating to investors what information they need and why. Requests for seemingly irrelevant details are rarely welcome and, although the system is becoming better understood, this remains an area in which financial entities must approach customers in a well-informed manner and a number of times.

All information exchange regimes have a common aim: to identify residents of one jurisdiction who may be concealing their assets, and thus their taxable income and gains, in another jurisdiction. In the broadest terms, Mr Smith, a United Kingdom resident, may have a securities account in Brazil, from which income and gains are received. If he conceals such income and gains from, for example, the UK tax authorities, then there is a limited prospect of such authorities discovering the account's existence. Therefore, the idea with information exchange is that Brazilian banks report to their tax authorities details of their foreign account holders, and the Brazilian tax authorities share this information with other tax authorities, including HM Revenue and Customs (HMRC) in the UK, which is thus alerted to Mr Smith's account. On a global scale, the idea is that participating countries receive information regarding those who are resident in their jurisdiction but with financial accounts elsewhere, and provide information on those with accounts in their jurisdiction but who are resident elsewhere. Domestic law identifies institutions obliged to report this information to the tax authorities for exchange.

Foreign Account Tax Compliance Act

The first law to be enacted leading to the concept of information exchange was not originally intended as an exchange. This was the Foreign Account Tax Compliance Act (FATCA), the original United States legislation requiring foreign financial institutions (FFIs under FATCA, also referred to as FIs more generally) to identify US account holders and report their details to the Internal Revenue Service (IRS) on penalty of a widely applicable 30 per cent withholding tax for failure to do so. Therefore, there was no question of any kind of exchange or the option of reporting domestically. The US authorities simply imposed draconian withholding taxes if targeted entities did not supply the information they required on US residents.

However, the concept of exchange gradually developed. Mostjurisdictions now comply with FATCA through an intergovernmental agreement (IGA). All IGAs limit due diligence procedures required to identify US account holders. Model 1 IGAs require FIs to report information on US account holders to their own domestic tax authorities, which will then share this information with the IRS. Under Model 2 IGAs, FIs still report to the IRS but the information provided is more limited. US account holders who do not volunteer their information have their balances and number of accounts involved reported 'collectively'. The IRS must then identify and pursue individuals through the Model 2 jurisdiction government. This is generally to address banking secrecy laws and, thus, jurisdictions such as Switzerland currently have a Model 2 IGA, although, interestingly, there is talk of switching to the Model 1 form. …

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