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Tax Transparency for Financial Institutions: A Cost or an Opportunity?

25th Oct 2021

What have been the main changes to global tax transparency rules in the last few years?

In the last few years, there have been numerous developments in the tax transparency regulatory space. These include the EU directive DAC6, the respective OECD Mandatory Disclosure rules and Economic Substance requirements across some of our key jurisdictions. The common theme amongst these initiatives is competent authorities increasing their scope of client information they expect financial institutions to identify, monitor, assess and report. There are also proposed changes to the OECD Common Reporting Standard (CRS), which are expected to focus on how the Automatic Exchange of Information (AEOI) can be approached in the face of future technologies, including crypto-assets.

Have the increased tax transparency rules presented any new opportunities for financial institutions?

Financial institutions are now in the unique position to be considered as guardians of data. Within the value chain there is a reliance from both clients and regulators for the financial institution involved to have the deepest understanding of the client’s circumstances, based on the extent of the information financial institutions are now expected to collect and maintain. If a financial institution is able to maintain strong data integrity and really understands the data they collect, there are many opportunities to use this data to better understand clients’ needs for now and in the future, whilst acting as the ultimate protector of their data and sharing it where required.

How have the changes to tax transparency rules impacted the way financial institutions operate? What changes have they had to make to their IT and operations?

Financial institutions are still focusing heavily on:

  • Meeting the ever-changing requirements set out by the varied regimes
  • Gaining internal agreement to invest in technology solutions, both in house and externally
  • Being prepared for the anticipated audit requests from competent authorities

Many financial institutions have experienced significant internal pressures when implementing these complex requirements, including resourcing, prioritisation and investment. There is a need for a strong collaboration between tax, technology and data analytics teams to understand what the regulatory requirements are and to have the ability to translate these into technology and data requirements to build a robust, compliant solution.

The synergies between AML vs. FATCA/CRS are also something that organisations often overlook when prioritising investment and resource, with AML often taking priority due to its high profile. Tax, Risk, Compliance and AML teams should work closely to leverage these synergies and work together to take a proactive approach to FATCA/CRS compliance. Treating the concepts holistically and working together will ultimately simplify client journeys and increase automation opportunities.

How are the large financial institutions keeping up to date with the tax transparency and reporting requirements in different jurisdictions?

Large financial institutions have taken different approaches to keep up to date with the varied requirements across all their operating jurisdictions. Some opt to  have a centralised function who has oversight of all jurisdictions; others place reliance on local contacts to keep the organisation up to date. The one thing everyone agrees on is it’s tricky, and at times costly, to get the right expertise with the right level of capacity to do a good job. Here at JTC, we have seen a significant increase in financial institutions now looking to outsource FATCA and CRS activity to us as we understand the complexity and nuances of their operating jurisdictions.

How are new technologies enhancing tax reporting?

This is a really exciting time to explore new technologies within tax reporting. Many tax authorities are now looking to blockchain, artificial intelligence and robotic process automation to simplify their processes and reduce the reliance placed on human intervention for investigations. Many financial institutions have started their automation journey for FATCA and CRS, but these are typically focused on small wins with rules based engines to simplify some of their most manual processes. With the additional pressures such as warnings from the IRS regarding the provision of default TINs rather than valid TINs coming into fruition this year, never has there been a more pertinent time to focus on improving the integrity and overall quality of the data collected under the FATCA and CRS regimes. Without a focus on maintaining clean, accurate data, any large scale automation solution utilising tools such as artificial intelligence and machine learning will not provide meaningful results.

How do you think global tax transparency will evolve over the coming years?

I believe the tax transparency agenda will continue to be prevalent in the coming years. Public attitudes towards the importance of tax transparency has changed, which comes with an enhanced pressure on governments around the world to demonstrate they are taking steps to combat tax abuse.  An example of this is the current proposals for a global minimum tax rate– the interesting part will be how far they go to meet this objective.

Many developing economies are now in a place where they are able to commit to the Automatic Exchange of Information with now 74% of OECD Global Forum members having signed up, with Rwanda being the most recent.  This is a great opportunity for developing countries to generate additional tax revenue, combat instances of tax evasion and boost their country’s tax compliance.

From a financial institution perspective, I believe we will still be in a place of evolving regulations, but we will become smarter with how we use our data and the new technologies available to us. I believe we will work much more closely with other financial institutions to better understand the most effective methods for compliance to tax transparency regimes, which in turn will strengthen our relationships with competent authorities, with more opportunities for working through practical issues presented by the regulations and local legislation set out.

To find out how JTC can help with your AEOI reporting requirements, please get in touch with Josie or a member of the team.

 

 

IMPORTANT INFORMATION: The content of this article is intended for general information purposes only. It does not constitute, should not be interpreted as constituting and cannot be relied upon as providing (i) legal, investment or tax advice or any other form of professional advice, (ii) an offer to sell, a solicitation of an offer to buy, or a recommendation of any service or any other product or service regardless of whether such security, product or service is referenced in this article. JTC has sought to ensure that the information provided in the article is adequate, accurate and complete as at the time of publication but offers no assertion or warranty as to its adequacy, accuracy or completeness either at the time of publication or thereafter. No responsibility or liability will be accepted for any losses resulting from reliance placed upon the content of this article.

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