The new era of tax transparency in financial services

We are in the midst of a fundamental change to tax systems, worldwide. As governments respond

to fiscal pressures with the pursuit of individual and corporate taxation, never has the demand for increased transparency been greater. With governments taking collective and coordinated action to eradicate tax evasion, the legislative steps to close loopholes and raise revenue appear to be heading in one direction – increased tax reporting burdens.

This is a new era for both financial services and governments, who will need to join forces to harmonise and streamline the information flows to ensure that systems that are eventually introduced are effective.

The tax transparency topic is not entirely new. The Organisation for Economic Co-operation and Development (OECD), established more than 50 years ago, has and continues to provide a forum for governments to work together and find solutions to common problems. As far back as 2002, the OECD started to develop a Model Agreement on Exchange of Tax Information on Tax Matters. This opened a new avenue for countries to exchange tax information and, since then, we have faced a never ending spike of demands on tax transparency. In this regard, the European Union has implemented the following two directives:

1. The European Union SavingsDirective (EUSD), introduced in2005, requires financial institutionsin EU member states to reportinformation about individuals receivingsavings income outside their countryof residence for onward informationexchange between EU memberstate governments.

2. In 2011, the EU passed its Directiveon Administrative Cooperation in theField of Taxation. As direct taxationis not harmonised across the EU,the directive allows tax authoritieswithin the EU member statesto cooperate more closely onadministrative enquiries.We have also seen the increasing

use of the “limitation on benefits (LOBs)” articles in double tax treaties. These vary widely from treaty to treaty, but they effectively deny the benefits of the tax treaty to residents that do not meet certain additional tests.

These measures, however, were not addressing a perceived global problem and it was clear further collaboration to unify solutions and avoid, at all costs, governments taking unilateral action was necessary.

The EU Commission and G7/G8 and G20 governments have mandated the OECD to come up with an action plan to address these problems and propose solutions. The newly empowered OECD has subsequently proposed a number of multi-year developments and actions to create greater tax transparency.

The result is that we are now seeing structural changes in tax models that will inevitably reshape the way the world operates in the field of taxation. As described by OECD Secretary General Angel Gurría at the G20 summit in Australia in 2014, these changes bring a once-in-a-lifetime opportunity: “This is certainly the most prominent step towards modernisation of the international tax system in 100 years.”

The next couple of years will see two major new tax regulations become more of a reality, which will have a direct impact on the modus operandi of the financial services industry.

Developing the Common Reporting StandardsBoth the EUSD and the EU Directive on Administrative Cooperation in the Field of Taxation provided bilateral information upon request, but more was needed. Back in September 2013, the OECD proposed a global model for automatic exchange of information (AEOI) to the G20 Leaders, in order to fight tax evasion and ensure tax compliance. The G20 endorsed the initiative and, with the OECD’s leadership, a new single standard for automatic exchange of information was established – the Common Reporting Standard.

The standard requires countries to obtain financial account information from their local financial institutions and automatically exchange that information with other countries on an annual basis.

Unlike previous stand-alone developments, the Common Reporting Standard is unique, in that it incorporates the work of the OECD in the area of automatic exchange of information as well as the EU initiatives and the intergovernmental implementation of the Foreign Account Tax Compliance Act (FATCA).

This new standard for AEOI involves the systematic and periodic transmission of bulk taxpayer information by the source country of income to the taxpayer’s country of residence. In theory, this enables the resident country to check its tax records and verify that its taxpayers have accurately reported their foreign-

Mariano GiraltManaging Director, Head of Tax Services, EMEA

Lorraine White, Managing Director, Head of EMEA Securities Tax and US Tax Services

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sourced income. This essentially aids governments to focus their enquiries on specific taxpayers that may present issues and address any concerns about potential untaxed capital.

As of 1 March 2015, more than 50 countries, including all EU member states, have committed to adopt the Common Reporting Standard by 1 January 2016.

The Base Erosion and Profit Shifting (BEPS) ProjectThe BEPS Project outlines 15 actions to ensure corporations are allocating their profits in locations where economic activity takes place, thereby ensuring appropriate corporate tax is being paid. The OECD’s BEPS Action Plan has an ambitious timeline, expecting the 15 actions, with proposals culminating in a model multilateral agreement, to be finalised in three phases and completed by September 2014, October 2015 and December 2015. These actions will cover complex areas, such as preventing treaty abuse, hybrid-mismatches, transfer pricing and country by country reporting.

The Action Plan should give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed, while at the same time giving businesses

greater certainty and transparency in the application of international tax rules.

Of the reports delivered to date, the need for coordinated action cannot be emphasised more. Without this cooperation, countries may take unilateral approaches that may simply relocate the problems and increase uncertainties for business.

Are We Ready?These new legal instruments and requirements will exponentially increase the amount of data financial institutions, financial intermediaries and tax authorities will need to capture, store, assess, validate, report and utilise for tax purposes.

The looming question is: are we prepared for this? Are the financial service institutions ready to assume all the additional data requirements? Have future tax processes been considered and implemented efficiently? Are financial institutions thinking strategically? Are financial institutions and financial intermediaries prepared to collect data on behalf of tax authorities, and do they have a choice? Most importantly, are tax authorities equipped with resources and systems able to cope with the new avalanche of tax data and use it appropriately?

BNY MellonOne Canada SquareLondon, E14 5ALwww.bnymellon.com

There is no doubt that greater transparency provides greater value to our businesses and societies. It does, however, require increased accountability, better information on asset ownership and fair allocation of profits. In the 21st century, cross-border investment flows are a staple practice and more important than ever in a shrinking economy – a fact that needs to be recognised and considered for the future.

This will of course come at a price; the compliance costs will be borne by all. Worldwide, it would seem that millions of dollars will need to be invested in new technology and systems, new processes and resources to do the job.

Now more than ever, it is critical that all the impacted parties (governments, tax authorities, supranational bodies, advisors, financial institutions, financial intermediaries, etc) are truly connected. From BNY Mellon’s perspective, as a key financial institution, we embrace with responsibility the new era of tax transparency. We continue to invest in people and technology to ensure our organisation is compliant with the new legislation as well as, where possible, assist our clients to be compliant. We also work with various governments, working groups and committees to bring our expertise and experience in financial services and assist in the practical implementation of the new tax rules. We all want to make it work, let’s make it happen.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute investment advice, or any other business, tax or legal advice, and should not be relied upon as such.

For further information, please visit www.bnymellon.com, or follow us on Twitter@BNYMellon

ABOUT BNY MELLON

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of 31 March 2015, BNY Mellon had $28.5 trillion in assets under custody and/or administration, and $1.7 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).

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