On 8 December 2020 the OECD published a document entitled Automatic Exchange of Information: Guide on Promoting and Assessing Compliance by Financial Institutions. The guide has been put together with the help of the of the tax administrations of Canada, Singapore, the UK and US.
The Common Reporting Standard requires the automatic exchange of information between tax administrations in relation to financial accounts. Financial information is also exchanged under agreements related to the US Foreign Account Tax Compliance Act (FATCA) Act. If the financial information is to be exchanged in an efficient and useful manner the financial institutions and tax administrations must put in place adequate due diligence and reporting processes.
The OECD’s Forum on Tax Administration (FTA) has issued the document as guidance for tax administrations and financial institutions in relation to the requirement to monitor and ensure compliance with the reporting obligations.
Although tax administrations normally monitor taxpayer compliance they are generally less experienced in evaluating the implementation of third-party reporting regimes because the rules are mostly of a regulatory, rather than a tax nature. Collective work is therefore needed in the FTA to support tax administrations in identifying the factors needed for a compliance regime for financial institutions in the context of the common reporting standard and FATCA.
The report considers the initiatives that are available to tax administrations in supporting financial institutions in complying with their obligations under the common reporting standard. The initiatives discussed include education; service initiatives such as online information, telephone helplines and meetings with interested parties; and self-help tools such as entity classification and compliance guidelines self-review toolkits.
Risk-based approach
A risk-based approach to assessing compliance with the common reporting standard and FATCA can help tax administrations to identify potential regulatory non-compliance by ensuring the focus is on those financial institutions or areas of compliance that are at a higher risk of noncompliance. The types of compliance activities carried out by tax administrations would take into account their assessment of the risk of non-compliance by financial institutions with the reporting requirements. The guide sets out suggested procedures for risk identification and risk prioritisation. A root-cause analysis can be performed to identify the underlying factors that could result in non-compliance.
This analysis could guide the design of appropriate risk treatments including the design of targeted compliance activities including a combination of detection, prevention and corrective measures. Where the risk level is low education or outreach could be used to address common low-risk errors made by financial institutions.
Where the root cause analysis indicates that the risk level is relatively high and there may be a systematic issue involving one or more financial institutions, the tax administrations may look at more targeted compliance measures. These could involve issuing questionnaires, carrying out desk-based audits or conducting field visits to the offices of financial institutions.
Governance
To adequately carry out their obigations under the common reporting standard and FATCA the financial institutions must implement an appropriate governance structure. This should be regularly reviewed and reflected in the internal training programs and documentation practices within the financial institutions. By assessing and evaluating these areas tax administrations can understanding how financial institutions implement and monitor their compliance with the legislation and other guidance.
