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Tax Transparency For Financial Institutions: A Cost Or An Opportunity?
25 October 2021
As European and wider global regulatory requirements continue to evolve, and with proposed changes to the OECD’s Common Reporting Standard on the table, Josie Cuff, senior manager at JTC in Edinburgh, looks at whether tax transparency represents a cost or an opportunity for internationally dynamic financial institutions. (We know that the CRS is controversial, given concerns about data security and threats to legitimate privacy, as this story highlights.) -- Meeting the ever-changing requirements set out by the varied regimes; How are new technologies enhancing tax reporting?
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 key jurisdictions.
The common theme running through these initiatives is competent authorities increasing their scope of client information that 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 of being 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 for using this data to understand clients’ needs more fully, 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?
Financial institutions are still focusing heavily on:
-- Gaining internal agreement to invest in technology solutions, both in-house and externally; and
-- 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, prioritization and investment. Strong collaboration between tax, technology and data analytics teams is needed to understand what the regulatory requirements are in order to translate these into technology and data requirements for building a robust, compliant solution.
The synergies between AML vs. FATCA/CRS are also something that organisations often overlook when prioritizing 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 which 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 that it’s tricky, and at times costly, finding the right expertise with the right level of capacity to do a good job. We have seen a significant increase in financial institutions now looking to outsource FATCA and CRS activity to us, for instance, as we understand the complexity and nuances of their operating jurisdictions.
This is a really exciting time for exploring new technologies within tax reporting. Many tax authorities are now considering using 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, there has never 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 using 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?
The tax transparency agenda will continue to be prevalent in the coming years. Public attitudes towards the importance of tax transparency have changed, which comes with enhanced pressure on governments around the world to demonstrate that 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 able to commit to the Automatic Exchange of Information with 74 per cent 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 the perspective of a financial institution, I believe that we will still be in a place of evolving regulations, but we will become smarter about 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 have a better understanding of the most effective methods for compliance with tax transparency regimes, which in turn will strengthen our relationships with competent authorities, providing more opportunities for working through practical issues presented by the regulations and local legislation set out.
As European and wider global regulatory requirements continue to evolve, and with proposed changes to the OECD’s Common Reporting Standard on the table, Josie Cuff, senior manager at JTC in Edinburgh, looks at whether tax transparency represents a cost or an opportunity for internationally dynamic financial institutions. (We know that the CRS is controversial, given concerns about data security and threats to legitimate privacy, as this story highlights.)
-- Meeting the ever-changing requirements set out by the varied regimes;
How are new technologies enhancing tax reporting?