Sweden submits proposed FATCA and CRS legislation to the Parliament

On 13 October 2015, the Swedish Government submitted the proposal for legislation implementing CRS (Link – Swedish) to the Parliament. The proposed legislation is modelled after the FATCA implementation legislation and includes, as the central statute, the Act on Identification of Reportable Accounts for Automatic Exchange of Information and amendments to the Tax Procedural Act which provides for the facilitation of the reporting obligations.

In contrast to the FATCA implementation, the CRS rules require a notification to the Tax Agency by all FIs which are to report. The reporting will include all accounts held by non-residents, whether there will be an exchange of information under CRS or not. It is especially noteworthy that the Tax Agency, if it detects severe failures in an FI’s CRS reporting, or if an FI is not registered for purposes of CRS reporting, will be required to notify the Financial Supervisory Authority. The FSA is expected to use this information for regulatory compliance purposes, i.e for a reconsideration of the FI’s banking (or other) license or for its supervision of the AML legislation.

IRS publishes new FAQ on WP and WT Agreements

On 7 October 2015, the IRS published a new question to the FATCA Frequently Asked Questions (FAQs) concerning the effective dates of new withholding foreign trusts (WTs) and withholding foreign partnerships (WPs) (Link). According to the IRS´clarifications, entities that applied for WT or WP status and got approval on or after 1 April, will be considered as having a WT or WP agreement with effective date on 1 January of the following year. Instead, entities that applied for WT or WP status but received no reportable amount between 1 January and the date of their status approval, will be considered as having a WT or WP agreement with effective date of the date it is provided a EIN (on condition that it obtains a GIIN within 90 days of such approval – exception for retirement funds).

Gibraltar signs Competent Authority Arrangement with the U.S.

In late September 2015, Gibraltar signed a competent authority arrangement (“CAA”) with the U.S. in accordance with the previously signed IGA (Link). Α CAA is a bilateral agreement between the U.S. and a treaty partner to clarify or interpret treaty provisions. The CAA establishes the procedures for the automatic exchange obligations and for the exchange of information between the U.S. and Gibraltar (Link).

Netherlands publishes draft CRS and DAC law

On 11 September 2015, the State Secretary of Finance published the draft law for implementation of the Common Reporting Standard (‘CRS’) which was sent to the Dutch parliament for review. The package contains the draft law including explanatory notes. The amended EU Directive on Administrative Cooperation (‘EU DAC’) will also be implemented in the Netherlands through this law.

The EU DAC has been amended to include CRS provisions and, as an EU Directive, must be implemented by all EU member states through local laws.

The EU DAC limits the scope of implementation decisions made by individual member state governments. Therefore, the proposed Dutch law does not include any substantive deviations from the EU DAC. Most country-specific rules are expected to be included in Dutch CRS guidance, which is expected to be published before year-end. It appears that, where possible, existing requirements under FATCA  have been combined with CRS/EU DAC  requirements to reduce both complexity and the overall implementation burden.

In case of non-compliance, penalties may apply to the FI and its employees that are involved with CRS. Clients that deliberately submit incorrect self-certifications may also be subject to penalties. In severe cases of non-compliance criminal charges may apply.

Dutch CRS Law Observations

  • Status of legislation and guidance

The draft CRS law has been sent to Parliament and is expected to be effective as of 1 January 2016. The CRS guidance is expected to be published before year-end.

In various places, the draft CRS law refers to the EU DAC for further details on definitions. The CRS Commentary is recognized as being explanatory for both CRS and the EU DAC, and can be used to interpret the draft CRS law together with the explanatory notes to the draft CRS law.

The Ministry of Finance has conducted a Privacy Impact Assessment (‘PIA’) to assess whether CRS conflicts with existing Dutch privacy laws, which are based on the EU Data Protection Directive. The conclusion of the PIA and advice of the ‘College Bescherming Persoonsgegevens’ is that no conflict exists and, consequently, the CRS law can be implemented.

In the Netherlands CRS and the EU DAC are implemented in ‘The International Assistance in the Levying of Taxes Act’ (in Dutch: Wet op de internationale bijstandsverlening bij de heffing van belastingen). The Act already contains a number of obligations within the framework of international (spontaneous) exchange of  information. Once the parliamentary approval process is completed, the Netherlands should have all necessary legal provisions in place to enact CRS in the Netherlands.

The procedures for identification and reporting applicable to Financial Institutions (‘FIs’) will be laid down in a Decree that does not require parliamentary approval. In addition, further written guidance will be provided in the so-called joint FATCA and CRS Leidraad (hereafter: Dutch guidance). The Dutch guidance will be published as a response to implementation issues and will also provide further technical explanations to the draft CRS law. It is expected that the Decree and the Dutch guidance will be made available before the end of the year.

PwC Observation: Although the timing is tight, it seems that the relevant legislation will be in place before the first CRS deadline. FIs should take action to be CRS-compliant as from 1 January 2016.

  • Wider approach

The Netherlands has partially implemented the ‘Wider Approach’ in the draft CRS law. In short, the Wider Approach entails that FIs are allowed to request and record the tax residencies and Tax Identification Numbers of all clients instead of only the tax residencies of CRS partner jurisdictions of the Netherlands. Without the Wider Approach, FIs would have to go back to their clients each time the Netherlands enters into a new CRS Competent Authority Agreement with another country. 

The draft CRS law prescribes that FIs must obtain, upon account opening and in case of changes of circumstances, all tax residencies and all Tax Identification Numbers of a client. For Preexisting Accounts, the FI only has to approach clients that have indicia of a CRS partner jurisdiction of the Netherlands. ‎

PwC Observation: Implementation of the Wider Approach for new account opening is a welcome relief for FIs as it reduces the impact to both FIs and their customers. FIs that would like to apply the Wider Approach to Preexisting Accounts, as well as New Accounts, should consult with a data privacy specialist.

  • Financial Institutions under CRS

The draft CRS law contains less exemptions to the FI definition and provides for less deemed compliant statuses than FATCA. As such, some entities that were exempt under FATCA may now qualify as FI under CRS.

Although unrelated to the implementation of CRS under Dutch law, it is noted that CRS lacks approximately ten exemptions to the definition of FI compared to FATCA. Some examples are discussed below.

Under FATCA, it was possible to opt for a nonreporting member of a participating FFI group status. However, under CRS this status is not available. Consequently, these entities are likely to qualify as FI for CRS. Entities that opted under FATCA for this nonreporting member of a participating FFI group status may want to consider whether to align their FATCA status to the CRS status.

Another exemption that is available under FATCA but is not available in CRS is the non-financial group entity exclusion. CRS provides an equivalent exclusion which, however, only applies to certain Investment Entities. This means that non-financial groups may have entities that are Depository Institutions (i.e. treasury centers) which would be treated as FI whilst this is not the case under FATCA. Unless this is resolved in future law or (the Dutch) guidance, CRS will severely impact treasury centres and other entities performing financial activities within non-financial groups.

Lastly, FATCA contains an exemption for Investment Entities that are wholly owned by exempt beneficial owners. This status is primarily applied by mutual funds for joint account (‘FGR’) that only have pension funds as participants. Under CRS this status is not available, but other exemptions may apply. Consequently, entities that have opted for this FATCA status should carefully review their CRS status.

PwC Observation: Investment entities that opted for a nonreporting FI status under FATCA and treasury centres, cash pools and group financing companies that opted for the non-financial group exclusion under FATCA should carefully review their CRS status.

  • Exempt products

The draft list of exempt products under CRS is comparable to the list of exempt products under FATCA. The draft list has been sent to the European Commission for review and approval.

It is expected that the impact will be limited, as the list is comparable with the exempt product list under FATCA. However, under FATCA any funeral insurance policy with a premium of € 1,000 per year or less is exempt. This provision is not included in CRS. The products ‘nettolijfrente’ and ‘nettopensioen’ that were introduced in 2014 have not been ‎included in the list of exempt products. This means that Insurance companies that offer these products must fulfill the FATCA and CRS obligations for Financial Accounts. Pension funds that offer nettolijfrente and nettopensioen are likely to also have CRS obligations with respect to these products. Under Annex II of the Netherlands – US IGA pension funds enjoy a broad exemption for purposes of FATCA. The introduction of the nettolijfrente and nettopensioen may raise questions as to whether this broad exemption is future-proof.

PwC Observation: Insurance companies that offer funeral insurance policies and pension funds and insurance companies that offer nettopensioen and nettolijfrente policies should take action to implement CRS for these products. Pension funds should actively monitor any FATCA developments regarding nettolijfrente and nettopensioen.

  • Reporting method and timelines

Information about the reporting method and reporting timelines is not included in the draft CRS law and will be included in a manual issued by the Dutch tax authorities.

FIs need to report under CRS for the first time in 2017. The Dutch tax authorities will issue guidance on the timelines and provide for a reporting manual.  For FATCA, the Dutch tax authorities have recently indicated that (most) FIs need to submit their report for the calendar year 2015 prior to 11 February 2016.

PwC Observation:  Even though reporting is only required in 2017, FIs should prepare in the coming months to capture the data required for reporting over the calendar year 2016. We anticipate the method and timelines of CRS reporting to be similar to those for  FATCA reporting, however the volume of accounts reported is likely to be larger.

  • Enforcement and penalties

The 2016 Annual Budget provides information on the enforcement and penalty system to CRS.

Unlike FATCA, CRS does not contain a withholding tax sanction. Each country will have to take measures to ensure the effective implementation of CRS. The Netherlands introduces penalties for non-compliance with CRS in the 2016 Annual Budget. Penalties may apply for both the non-complying FI itself as well as for employees that are involved (managers and others), but also the person who is deliberately filing an incorrect self-certification. In case of deliberate non-compliance or gross negligence an administrative fine of (at most) € 20,250 may be imposed on any of these persons. Alternatively, criminal law proceedings may follow in more serious cases of non-compliance.

PwC Observation: Penalties may be imposed on any person involved with non-compliance. Financial Institutions should consider informing their customers that filing an incorrect self-certification might lead to penalties and / or criminal charges. Also employees of an FI might be subject to criminal prosecution. If an employee acts on its own accord to evade reporting under CRS, then that could lead to prosecution. The management of the FI may be prosecuted if it was known that the policies and procedures installed were insufficient to prevent evasion of CRS-reporting and no adequate measures were taken.

  • EU Savings Directive

In line with earlier remarks in European Union publications, the State Secretary of Finance noted that the European Savings Directive is expected to be withdrawn.

The EU Savings Directive was introduced in 2003 and became effective as from 1 July 2005. Only cross-border ‘interest’-payments to individuals resident in EU Member States and a few other countries are reportable. In March 2014 a revision of the EU Savings Directive was adopted, which is to be implemented in local law as per 1 January 2016 and taking effect as from 1 January 2017.

PwC Observation: CRS has a wider scope than the EU Savings Directive, it includes not only interest payments but more elaborate financial account information, and is also applicable to entity customers of FIs. Furthermore, CRS imposes obligations on almost all investment entities instead of only UCITS that invest in fixed income, and includes insurance products. Withdrawal of the European Savings Directive is a welcome relief for market participants, and a logical approach given the introduction of EU DAC, which surpasses the European Savings Directive in scope. If the withdrawal doesn’t occur, then duplicative but different requirements will be applicable to FIs. FIs will need to monitor developments in this respect.

Spain passes amendment to the General Tax Act to accommodate FATCA and CRS implementation

On 22 September 2015, the Spanish Parliament passed an amendment to the General Tax Act regulation, among other items, certain nuances on FATCA and CRS regimes in Spain.  Accordingly, the fundamental aspects of the measure are as follows:

  • Obligations for Financial Institutions and investors: The recently approved Additional Disposition has imposed onto FIs the obligation to identify the state of residence of their account holders following Directive 2014/107/EU, providing legal coverage to the obligations that were, until now, laid out in Regulations (this is a Constitutional requirement in Spain). Furthermore, those account holders are also obliged to provide such information to the Financial Institutions upon their request.
  • Penalty regime: Failure to comply with CRS obligations by both Financial Institutions and account holders will result in the imposition of the following penalties:
    • Failure to identify the state of residence of account holders by the relevant Financial Institution is penalized with a fine of 200 € per non-identified account holder / investor.
    • Whenever an account holder / investor provides false or incorrect information that gives rise to an erroneous identification of its residence, a penalty of 300 € shall be imposed on the account holder / investor.
  • Recalcitrant accounts (CRS/FATCA): Failure to provide the relevant information by account holders within 90 days from the request of the FI will result in the blocking of the account therefrom, until the moment the information is actually transferred to the FI. Given that due diligence procedure will be effective for calendar year 2015 with regard to FATCA reporting, accounts opened from 1 January 2015, will be suspended when no information has been provided by the investor within 60 days from 1 January 2016.
  • Conservation of documentation (CRS/FATCA): FIs will be obliged to retain the information collected regarding its account holders for a 4-year period from the closure of the account.
  • Data protection (CRS): FIs will be obliged to inform their clients that the information collected regarding their state of residence will be delivered to the Spanish Tax Administration before 31 January of the year in which the information is effectively transferred.

Kingdom of Bahrain extends reporting deadline with the U.S. to 30 September 2016

In a letter dated 12 October 2015, the Central Bank of Bahrain (CBB) announced that, based on an agreement with the U.S. Department of Treasury, it would be extending the FATCA reporting deadline from 30 September 2015 to 30 September 2016. Further, it noted that during this time financial institutions in Bahrain should be treated as complying with their FATCA obligations while Bahrain pursues the required internal procedures for entry into force of the IGA. However, the CBB requested all reporting financial institutions to be prepared to report to the CBB prior to 30 September 2016, as this information would need to be exchanged with the U.S. authorities on or before such date. For further information, visit the CBB’s website (Link).

New Zealand signs competent authority arrangements with the U.S.

On 8 October 2015, New Zealand signed two competent authority arrangements (“CAAs”) with the U.S. in accordance with the previously signed IGA (Link). Α CAA is a bilateral agreement between the U.S. and a treaty partner to clarify or interpret treaty provisions. These CAAs establish the procedures for the automatic exchange obligations and for the exchange of information between the U.S. and New Zealand (Link). The second CAA concerns the meaning of the term “resident in New Zealand” when applied to a Financial Institution that is a trust (except for a “unit trust” that is deemed to be a company for purposes of the Income Tax Act 2007) (Link).