Available improvements in EUSTD and FATCA

57. While the CRS offers overall the best option for global AIE, special features of the amended EUSTD and FATCA provide better solutions to current loopholes of the CRS. These are the EUSTD’s Paying Agent Upon Receipt (PAUR) to report and identify beneficial owners trying to avoid reporting, as well as FATCA’s 10%

threshold for determining “substantial ownership” and its 30% withholding tax to promote participation.

Enhanced Anti-Avoidance: Amended EUSTD’s PAUR

58. The EUSTD’s “Paying Agent” is the agent required to report information (or withhold taxes) about the beneficial owner. It is similar to the CRS’s “Reporting

48 FI,” which is the agent in charge of reporting information about individual and entity account holders or controlling persons of Passive NFEs.

59. The Paying Agent system was improved to prevent reporting avoidance schemes. The EUSTD⁹⁰ assigns the obligation to report (or withhold taxes) to the agent (bank, entity or legal arrangement, depending on the case) which is in the best position to know who the beneficial owner (receiving the payment) is.

60. Some situations contemplated by the EUSTD’s Paying Agent rules are also addressed by the CRS. For instance, the obligation to look-through an intermediary entity established in a territory outside the scope, which was used to block the reporting. Specifically, these refer to those cases when the financial institution (e.g. bank) located in a “participating jurisdiction” (CRS) or “within the EU”

(EUSTD) has to “look-through” an intermediary entity or financial institution which is located outside the scope (either in a “non-participating jurisdiction” or “outside the EU”) to identify the “controlling person” (CRS) or “beneficial owner” (EUSTD).

This intermediary entity or financial institution would be considered a Passive NFE (CRS) or an untaxed entity or arrangement listed in a specific Annex or a passive financial institution (EUSTD).

61. However, the EUSTD offers an anti-avoidance scheme not available in the CRS: the Paying Agent Upon Receipt or Upon Distribution⁹¹. The EUSTD assigns the Paying Agent obligations to any untaxed entity or arrangement (e.g. a trust) effectively managed in the EU, even if it has bank accounts (in banks) located outside the EU. Whenever such entity receives a payment, it has to report (or withhold) about its beneficial owner located in the EU. In the CRS, this requirement would be similar to turning a Passive NFE which is resident in a participating jurisdiction into a reporting financial institution. This way, any account held abroad (in a non-participating jurisdiction) by a Passive NFE resident in a participating jurisdiction would not escape reporting (as it currently does) because the Passive NFE itself would have to report on the income/balance account at the entity’s and controlling persons’ level⁹².

90 EUSTD, article 4:

http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/rules_applicable/index_en.htm;

28.9.2014.

91 In case of a discretionary arrangement, such as a discretionary trust or foundation, the agent would be called

“Paying Agent Upon Distribution” because if no beneficial owner could be identified, then the Paying Agent will have to identify -as the beneficial owner- whomever receives a distribution (payment) within 10 years.

92 In contrast, under the CRS, neither the FI (bank) located in a non-participating jurisdiction nor the Passive NFE account holder resident in a participating jurisdiction need to report any information.

49 Figure 6: Look-through measures in the CRS

(1) a Bank (“reporting financial institution”) “resident in a participating jurisdiction” would have to look through an account holder which is a Passive NFE (with mainly passive income) resident in a non-participating jurisdiction, to identify the Natural Persons (“controlling persons”) who are resident in a participating jurisdiction, and report it to authorities.

(2) a Bank (“reporting financial institution”) “resident in a participating jurisdiction” would have to look through an account holder which is an Investment Entity (considered a “Passive NFE” because –though managed by an FI - it is resident in a non-participating jurisdiction) to identify the Natural Persons (“controlling persons”) who are resident in a participating jurisdiction, to report it to authorities.

Figure 7: Look-through measures and Paying Agent Upon Receipt (PAUR) in the EUSTD

(1) a Bank (“paying agent”) “located inside the EU” would have to look-through an Intermediate Structure (such as “untaxed entity,” e.g. a trust) effectively managed outside the EU to identify the Natural Person (“beneficial owner”) who is a resident in the EU, and report it to authorities.

(2) a Bank (“paying agent”) “located inside the EU” would have to look-through another Bank (“Economic Operator”) resident outside the EU (used to route the payment) to identify the Natural Person (“beneficial owner”) who is a resident in the EU, as long it is aware of the identity of the beneficial owner, to report it to authorities.

(3) The “Paying Agent Upon Receipt” (an Untaxed Entity, e.g. a trust) which is effectively managed inside the EU is required to report any payment received in a foreign bank account (held in a Bank

50 –called “Upstream Economic Operator”- located outside the EU), if the “beneficial owner” of such Untaxed Entity is a Natural Person resident in the EU.

Enhanced Beneficial Ownership Identification: FATCA’s 10% threshold for US ownership

62. FATCA IGA Models require to identify the “controlling persons” of a Passive Non-Financial Foreign Entity (NFFE)⁹³, with the same limitation as the CRS: the 25% threshold. However, FATCA regulation (not the IGA Treaties) requires to identify those “substantial US persons” owning 10% of an NFFE, providing a threshold much harder to avoid. Given this precedent, the CRS could have improved the easily-avoidable FATF threshold (of more than 25%) and apply FATCA’s 10%, to consider an individual as the controlling person of a Passive NFE.

Enhanced incentive for participation: FATCA’s 30% withholding tax

63. The CRS has no collective sanction or incentive scheme to promote implementation and participation—it merely relies on political pressure, hoping that “reputation” will be enough to engage secrecy jurisdictions and financial centres. However, nothing prevents these secrecy jurisdictions from keeping their reputation intact by engaging in AIE only with each other or major powers, while excluding developing countries. In contrast, FATCA became a reality (with 42 signed IGAs and other 59 which have reached agreements in substance, as of September 11th, 2014) very likely because of its 30% withholding tax on any US sourced payment to any foreign financial institution not participating in FATCA and to any recalcitrant account holder (who/which did not provide identity information).

64. Since no country other than the US, and especially a developing country, has leverage to successfully impose a unilateral sanction against any secrecy jurisdiction or financial centre, the CRS should promote a FATCA-like collective sanction or incentive scheme to promote global participation. Nevertheless, there should be no sanctions against developing countries (which are not financial centres or secrecy jurisdictions) which should be given time, and if requested capacity building support, before they may implement AIE.