Guernsey: Guernsey Is On Track For The Next Stage In Automatic Exchange Of Information

KEY POINTS

What is the issue?

Guernsey will be required to gather data for the calendar year 2016 for reporting under the Common Reporting Standard (CRS) in 2017.

What does it mean for me?

Practitioners should be aware that due diligence and reporting procedures are set to be amended and extended with effect from 2016.

What can I take away?

Guernsey, like other early adopters, is preparing legislative changes to implement the CRS, alongside the US Foreign Account Tax Compliance Act (FATCA), and will be transitioning out of UK CDOT (UK FATCA) in due course.

GUERNSEY IS ON TRACK FOR THE NEXT STAGE IN AUTOMATIC EXCHANGE OF INFORMATION

Financial institutions around the world have collectively breathed a sigh of relief, having filed their first set of tax-compliance reports with their local tax authorities under the US Foreign Account Tax Compliance Act (FATCA).1 Local tax authorities are now required to transmit these reports to the US Internal Revenue Service (IRS) by 30 September 2015. Both financial institutions and tax authorities are nevertheless aware that these reports represent the first stage of the long journey in automatic exchange of information (AEOI) for tax purposes. They are also aware that momentum will pick up over the next few months; legislation will be published to introduce AEOI in an increasing number of countries so that data can be collected from as early as 1 January 2016, in readiness for exchange from September 2017 by those countries that have committed to adopt the Common Reporting Standard (CRS) at the earliest opportunity (the early adopters).

The data to be collected is set out in the global standard developed by the OECD. The intention is that jurisdictions that participate in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC), which was developed jointly by the Council of Europe and the OECD, will be required to obtain financial information from their financial institutions, which they will automatically exchange with each other on an annual basis. The CRS sets out reporting and due diligence rules to be followed by financial institutions, and the Model Competent Authority Agreement (MCAA), of which there are bilateral and multilateral versions, contains rules on how the data collected is to be exchanged between tax authorities in participating jurisdictions.

The CRS builds on the FATCA regime and has been developed with the support of the Council of Europe. It is designed to be broad in scope, across three dimensions:

• The financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets.
• The financial institutions that are required to report under the CRS not only include banks and custodians but also other financial institutions, such as brokers, certain collective investment vehicles and certain insurance companies.
• Reportable accounts include accounts held by individuals and entities (including trusts and foundations), and the standard includes a requirement to look through passive entities to report on the individuals who are seen as ultimately behind these entities

This all appears very similar to reporting under FATCA, but how will the CRS be implemented in practice when the due diligence checks, reports and filings will need to encompass a large number of jurisdictions?

ARCHITECTURE

In common with the other Crown Dependencies, 2 and British Overseas Territories,3 Guernsey is not a sovereign state. Instead, the Crown, through the UK government, is responsible for Guernsey’s international relations. Thus, following the receipt of a formal request from Guernsey, the UK extended the MAC to Guernsey on 17 April 2014.4 The MAC was then approved by Guernsey with effect from 1 August 2014 as an international agreement providing the basis under domestic law for the obtainment and exchange of documents and information in relation to tax. As a result of these steps, Guernsey now has an overarching framework for the exchange of information with other jurisdictions that are participants in the MAC.

The UK, the Crown Dependencies and the Overseas Territories are for these purposes part of the same sovereign jurisdiction. Thus, as between Guernsey and the UK, the framework for exchanging information for the purposes of the MAC is the tax information exchange agreement (TIEA) that Guernsey and the UK signed in 2009. The TIEA was

initially designed to permit exchange of information on request, but was amended in October 2013 to facilitate AEOI between Guernsey and the UK. It is on the basis of this amended TIEA that data will be exchanged between the States of Guernsey Income Tax Office (ITO) and the UK’s HMRC for the purposes of UK CDOT, and, subsequently, with the UK under the CRS.

Guernsey has double-tax agreements (DTAs) with the other Crown Dependencies. These agreements provide a platform that will allow for AEOI pursuant to the CRS. In respect of the Overseas Territories, existing TIEAs will be revised to incorporate a framework for AEOI (along the lines of the MCAA), and, where there are no such TIEAs or DTAs with a jurisdiction, bilateral relationships will be created to facilitate the exchange of information for CRS purposes.

Therefore, Guernsey is poised to have in place a framework that enables AEOI pursuant to the CRS with all signatories of the MAC, and any other jurisdiction with which Guernsey has an intergovernmental agreement (IGA) incorporating MCAA provisions (whether a DTA, a TIEA or other bilateral agreement) that permits AEOI on the basis of the CRS.

JUSTIFYING NON-EXCHANGE

The MCAA requires a participating jurisdiction to notify the OECD’s co-ordinating body as to which countries will be its exchange partners. The expectation is that Guernsey, along with other early adopters, will exchange information with other similarly participating jurisdictions, unless there is an acceptable reason why it should not do so. Two possible reasons are as follows:

• The other jurisdiction has identified itself as not needing to receive data, perhaps because it has no direct tax system in place. Such jurisdictions will still provide data to Guernsey but will not receive data from Guernsey in return.
• Concerns over whether the other jurisdiction will adequately safeguard the confidentiality of the information it would otherwise receive from Guernsey under AEOI in respect of accounts maintained for residents in that jurisdiction.

The task of determining which account holders are resident in a participating jurisdiction for the purposes of the CRS will not be possible until financial institutions know with which jurisdictions their country will be exchanging CRS data. As a result, early adopters, including Guernsey, are consulting with their industries to gather evidence based observations (if any) in order to identify any jurisdictions in respect of which there may be concerns about confidentiality and data security.

Building on the current framework for jurisdictional peer reviews, it is anticipated that all countries participating in AEOI will, in due course, be reviewed through arrangements to be made by the co-ordinating body and the Global Forum on Transparency and Exchange of Information for Tax Purposes, to ensure that participating jurisdictions are complying with the CRS and are not using unreasonable or spurious grounds to refuse to exchange information.

Given that Guernsey has for many years, through bilateral agreements, exchanged information for the purposes of the EU Savings Directive with EU member states and has signed up to a number of TIEAs and DTAs with other jurisdictions, it would be consistent with Guernsey’s record to assume that it will implement AEOI with these same countries on the basis of equivalent reciprocity and provided such exchange would not be contrary to Guernsey’s public policy. The only difference would be the date from which due diligence reviews and the collection of data will commence, followed by the exchange of that data nine months after the end of the calendar year to which that information relates. For early adopters, first filings will be due by September 2017 and will relate to the calendar year commencing 1 January 2016. Countries that have committed to implement the CRS by 2018 are referred to as ‘rapid followers’.

TIMETABLE FOR EARLY ADOPTERS

As at the time of writing (August 2015), there are currently 61 signatories to the MCAA, including Guernsey. In common with other early adopters, Guernsey now faces an ambitious but achievable timetable:

• Pre-existing accounts will be those that are open on 31 December 2015 and new accounts will be those opened from 1 January 2016. Hence, new account opening procedures to record tax residence will need to be in place from 1 January 2016.
• The due diligence procedures for identifying high-value pre-existing individual accounts will need to be completed by 31 December 2016, while the due diligence for low-value pre-existing individual accounts and for entity accounts will need to be completed by 31 December 2017.
• The first exchange of information in relation to new accounts and pre-existing individual high-value accounts will take place by the end of September 2017.
• Information about pre-existing individual low-value accounts and entity accounts will first be exchanged either by the end of September 2017 or September 2018, depending on when fi nancial institutions identify them as reportable accounts.

PROGRESS SO FAR

Building on the guidance notes fi rst published on 31 January 2014, updated regularly since then and most recently on 30 April 2015, Guernsey is making good progress in putting in place the building blocks to achieve the above timetable. The ITO is also processing feedback received in response to its consultation with industry earlier this year and is actively engaging stakeholders on matters of policy, as well as technical and practical issues that need to be addressed to enable a smooth transition between the regimes.

For example, on 31 March 2015, Guernsey amended its domestic regulations, which brought into force under Guernsey law FATCA and UK CDOT (pursuant to the IGAs signed with the US and UK at the end of 2013). The amendments included the reversal of the automatic application of the de minimis thresholds below which financial accounts do not need to be reviewed, identifi ed or reported. As a result, an election is required by Guernsey financial institutions in order to apply the de minimis thresholds. Therefore, in practice, many financial institutions have opted not to apply the de minimis thresholds, knowing that CRS is on the horizon and does not include the same exemptions (except in the case of pre-existing entity accounts below USD250,000, in respect of which financial institutions must make an election). For these financial institutions, the lack of a de minimis exemption that exists under FATCA and UK CDOT but not the CRS will not present a problem.

This is in the lead-up to putting in place domestic legislation effective from 1 January 2016 to implement the CRS with identified partner jurisdictions alongside FATCA, and ultimately to phase out UK CDOT, once transition issues have been sensitively resolved. For financial institutions in Guernsey, the AEOI journey is now set to take them along multiple tracks at an accelerated rate, simultaneously.