Automatic exchange of information
(Clauses 4, 6, 8, 9 and 12 to 26)
- The AEOI standard
- International context
- Key elements of the AEOI standard
- Summary of proposed amendments
- Application dates
- Key features
- Detailed analysis
- The legal instruments for exchange
- Incorporating the Common Reporting Standard and OECD Commentary into New Zealand law
- Other definitions
- Framework for Common Reporting Standard obligations
- Obligations of financial institutions
- Obligations of persons other than financial institutions
- Record-keeping obligations
- Excluded choices
- The “wider approach”
- Determinations and regulatory powers
- Non-reporting financial institutions
- Excluded accounts
The bill proposes the legislative amendments needed to implement the G20/OECD standard for Automatic Exchange of Financial Account Information in Tax Matters (the Automatic Exchange of Information or “AEOI”) in New Zealand.
The AEOI standard was developed as part of a global initiative to address offshore tax evasion. That is, evading tax by hiding wealth in offshore accounts.
Broadly, jurisdictions implementing the AEOI standard must impose obligations on their financial institutions:
- to conduct specified due diligence procedures in relation to their financial accounts to identify those held or (in certain circumstances) controlled by non-residents; and
- to report specified identity (including tax residence) and financial information (such as account balances and interest earned) on those accounts to their local tax administration.
The tax administrations must then transmit the reported information to applicable jurisdictions under tax treaty exchange of information provisions.
The exchanged information will be used by the receiving jurisdiction to verify that its residents have correctly reported their offshore activities and income for tax purposes.
The exchanged information will be used to detect offshore tax evasion. Worldwide implementation of the AEOI standard is also expected to have a strong deterrent effect on offshore evasion.
However, the success of the global AEOI initiative depends on jurisdictions implementing consistent rules, on a similar implementation timeline. Otherwise there is a high risk of the offshore tax evasion problem relocating to jurisdictions that lag behind or implement to a lesser standard.
To ensure consistency, the OECD’s global tax body, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), will lead peer reviews and other forms of monitoring to ensure that jurisdictions correctly implement the AEOI standard. The Global Forum reports directly to the G20, which is positioned to apply sanctions against non-complying jurisdictions, if necessary.
All G20 and OECD member countries are required to implement the AEOI standard with a view to completing first exchanges by 30 September 2018 at the latest. Any other jurisdiction that has or that operates as an international finance centre is required to implement the AEOI standard to the same timeline. In total, 101 jurisdictions are currently subject to the 30 September 2018 deadline.
Jurisdictions other than those identified above can implement the AEOI standard, but will not be subject to implementation deadlines (unless identified by the Global Forum as an emerging tax risk).
Of the 101 jurisdictions, 55 have committed to complete their first exchanges by 30 September 2017 (a year ahead of the general deadline). These are generally referred to as “early adopters”. The 46 other jurisdictions are generally referred to as “second wave adopters”.
As an OECD member country, the New Zealand Government has committed to meeting the 30 September 2018 deadline. New Zealand is a second wave adopter.
The start date to which the New Zealand Government has committed, and from which obligations under the AEOI standard will apply in New Zealand, is 1 July 2017.
The rules for due diligence and reporting that are to be imposed on financial institutions are set out in an element of the AEOI standard known as the Common Standard on Reporting and Due Diligence for Financial Account Information (Common Reporting Standard).
The Common Reporting Standard is supplemented with an official commentary, developed by the OECD (the OECD Commentary) to ensure consistent interpretation and application of the rules.
The other elements of the AEOI standard relate to the exchange of AEOI information between jurisdictions, and include model competent authority agreements and the data schema to be used for exchanges.
A common IT solution for encrypting and transmitting data between jurisdictions, referred to as the “Common Transmission Standard”, is also being developed by the OECD.
All exchanges of information with other jurisdictions will be made under New Zealand’s tax treaties.
The prinicpal tax treaty to be used for this purpose will be the joint OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Multilateral Convention), which New Zealand signed in 2012.
As the legislation primarily concerns the implementation of the Common Reporting Standard, references in this document will be to the Common Reporting Standard (and OECD Commentary) rather than the AEOI standard.
The Multilateral Convention authorises automatic exchanges of information, subject to detailed terms to be agreed between competent authorities. (Broadly, “competent authorities” are persons nominated to administer treaty provisions. The competent authority under New Zealand’s tax treaties is the Commissioner of Inland Revenue or an authorised representative.)
To facilitate automatic exchanges of financial account information under the Multilateral Convention, the OECD developed a Multilateral Competent Authority Agreement (MCAA). New Zealand signed the MCAA in 2015.
The legislation proposed will enable New Zealand to give effect to the New Zealand Government’s international commitment to implement the Common Reporting Standard, and has been framed to reflect the following policy decisions:
- The New Zealand reporting period for Common Reporting Standard purposes will align with the New Zealand tax year (that is, the period ending 31 March).
- The annual reporting deadline for financial institutions for each reporting period will be the following 30 June. The information that must be reported in relation to each account in relation to each reporting period is:
- identity information (including tax residence) of the account holders and (where applicable) controlling persons; and
- financial information, including the account balance or value as at the end of the reporting period, and defined income earned and distributions made during the reporting period.
- If a financial institution is unable to determine the status of a pre-existing account it will be required to report the account as an “undocumented account” in certain circumstances.
- From 1 July 2017, financial institutions will be required to apply the specified due diligence procedures for all new accounts.
- This will generally involve determining the identity and tax residence of account holders and (where applicable) controlling persons, on the basis of self-certifications obtained on account opening.
- From 1 July 2017, financial institutions will be expected to begin due diligence reviews of all pre-existing accounts.
- The due diligence procedures specified in the Common Reporting Standard for pre-existing accounts differ, depending on the status of the account. In general, however, financial institutions will often be able to rely on documentation/information that they have already obtained for regulatory or customer relationship purposes.
- The due diligence for pre-existing individual accounts that are high value accounts (generally, accounts with an account balance exceeding US$1 million) is to be completed by 30 June 2018, taking into account the following:
- The period between 1 April 2018 and 30 June 2018 is effectively a three-month grace period.
- Given the 1 July 2017 start date, the grace period will effectively allow financial institutions 12 months to complete their due diligence reviews of high value accounts.
- Importantly, any high value accounts identified as reportable during the grace period must be reported with respect to the reporting period of 1 July 2017 to 31 March 2018.
- The due diligence and reporting must also both be completed by the 30 June 2018 deadline.
- The due diligence for all other pre-existing accounts (that is, pre-existing individual accounts that are lower value accounts, and pre-existing entity accounts) is to be completed by 30 June 2019, taking into account the following:
- The period between 1 April 2019 and 30 June 2019 is effectively a three-month grace period.
- Given the 1 July 2017 start date, the grace period will effectively allow financial institutions 24 months to complete their due diligence reviews of accounts other than high value accounts.
- Importantly any entity or lower value accounts identified as reportable during the grace period must be reported with respect to the reporting period of 1 April 2018 to 31 March 2019.
- The due diligence and reporting must also both be completed by the 30 June 2019 deadline.
- Some optionality is contemplated under the Common Reporting Standard and OECD Commentary. Financial institutions will generally be allowed at their discretion to adopt the option that best suits their circumstances.
- However, the option of a reporting period ending 31 March will be mandated for all financial institutions. In addition, the use of the “wider approach” to due diligence will be mandated for all financial institutions. These matters, including an explanation of the wider approach, are addressed further below.
- There are also some options that will be withheld. These excluded options are also addressed further below.
- The Common Reporting Standard requires implementing jurisdictions to introduce rules for ensuring compliance. These include a requirement for anti-avoidance rules and effective sanctions. Therefore, the proposed legislation includes a compliance framework with penalties and an anti-avoidance rule.
- This compliance framework will cover financial institutions and also extend to cover other persons and entities that hold or control accounts with such institutions or that otherwise act as intermediaries in relation to accounts. This reflects the fact that effective implementation of the Common Reporting Standard in New Zealand requires a chain of information effectively flowing from account holders, controlling persons, and intermediaries to financial institutions and then to Inland Revenue. These information flows, if effective, will ensure that Inland Revenue obtains the information about foreign tax residents that New Zealand is required to exchange for AEOI purposes.
The legislation proposed in this bill to section BH 1, clarifying that the section applies in the case of multilateral treaties, will have retrospective application beginning on 21 October 2013. As explained below, this is to put beyond doubt that section BH 1 can apply to multilateral treaties (despite wording that, on the face of it, suggests it only applies to bilateral treaties).
Otherwise, the legislative amendments proposed in this bill will come into force on 1 July 2017.
The due diligence and reporting rules in the Common Reporting Standard are broadly similar to those imposed on financial institutions under the United States’ (US) Foreign Account Tax Compliance Act (FATCA) rules. However, they have been adapted for a non-US, multilateral context, and they have also been supplemented with a comprehensive OECD Commentary.
To ensure that errors do not arise in translating these rules into New Zealand law, the legislation proposed in this bill will largely incorporate the Common Reporting Standard and OECD Commentary into New Zealand domestic law by reference.
The Common Reporting Standard and OECD Commentary will also have ambulatory effect. That is, the reference in the legislation is to the Common Reporting Standard and OECD Commentary “as amended from time to time”, which effectively means that any future changes to the Common Reporting Standard and OECD Commentary will automatically flow through into New Zealand law.
The Common Reporting Standard rules include criteria for identifying the financial institutions that will be subject to due diligence and reporting obligations in a particular jurisdiction.
The term “financial institution” is defined broadly, and covers depository institutions, custodial institutions, specified insurance companies, and investment entities. This definition extends beyond typical financial institutions such as banks to cover a number of types of entities that would not normally be considered to be financial institutions (such as many professionally managed trusts).
Importantly, the financial institutions that will be subject to Common Reporting Standard obligations in New Zealand will be those that are resident in New Zealand (excluding branches located overseas) or that have branches in New Zealand. Residence will generally be determined by where the institution is resident for tax purposes. However, the Common Reporting Standard has special residence rules for trusts and transparent entities.
Some financial institutions that pose a low risk of facilitating tax evasion and satisfy other criteria, are excluded from the Common Reporting Standard requirements (non-reporting financial institutions).
An entity that meets the Common Reporting Standard financial institution criteria, that has the required residence or branch nexus to New Zealand, and that is not a non-reporting financial institution, will be a New Zealand reporting financial institution. References in this document to “financial institution” should be read as meaning reporting financial institution unless the context otherwise requires.
The Common Reporting Standard also has criteria for identifying the accounts that will be subject to due diligence (financial accounts).
For this purpose, the term “financial account” is defined to apply in the context of entities that would not normally be considered to be financial institutions. It extends beyond typical accounts such as depository accounts to include custodial accounts, cash value insurance contracts, annuity contracts, equity and debt interests.
For example, for an investment entity (such as a trust) that is a financial institution under the Common Reporting Standard, its financial accounts will be its debt and equity interests. The term “equity interest” is further defined as including any settlor or beneficiary of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust.
The Common Reporting Standard also provides scope for implementing jurisdictions to define accounts as “excluded accounts” if these entities and accounts pose a low risk of facilitating tax evasion and otherwise satisfy other defined criteria.
The due diligence procedures set out in the Common Reporting Standard differ depending on when the account is opened.
More stringent obligations will apply to new accounts (accounts opened on or after 1 July 2017), with self-certifications generally being required to be obtained by the financial institution on account opening.
For pre-existing accounts (accounts in existence on 30 June 2017), the due diligence procedures typically involve the review of documentation/information already held for regulatory or customer relationship purposes. This includes information obtained under Anti-Money Laundering/Countering the Financing of Terrorism “know your customer” requirements. However, more stringent record search procedures will apply to, for example, high value pre-existing individual accounts (with a balance exceeding US $1 million) than for lower value pre-existing individual accounts.
Importantly, financial institutions that maintain accounts held by passive non-financial entities (passive NFEs) will, as part of these procedures, need to “look through” those entities to determine the natural persons that are the ultimate controlling persons. In some cases, particularly for trusts, certain persons are considered to be controlling persons irrespective of whether or not they actually have or exercise control over the entity.
The aim of the due diligence procedures is for financial institutions to identify accounts that are held or (for passive NFEs) controlled by foreign tax residents.
Financial institutions will be required to report an account that is held or controlled by one or more reportable persons (reportable accounts).
A reportable person as defined is generally a tax resident of a jurisdiction that New Zealand has agreed to provide AEOI information to (reportable jurisdictions). Certain exclusions apply, such as for certain listed companies and their related entities, governmental entities, international organisations and persons that are themselves financial institutions.
For each reportable person, the financial institution must report specified identity (including tax residence) and financial information. This includes tax residence, account balances, and defined income and distributions.
AEOI is a stand-alone initiative, but is related to other international developments aimed at improving transparency frameworks and tax compliance. In particular, the Common Reporting Standard reflects (and is largely based on) the US FATCA initiative, which New Zealand implemented in 2014.
The Common Reporting Standard builds off FATCA in a number of ways. For example, both regimes have broadly similar types of financial institutions and other entities, financial accounts, due diligence procedures (including sometimes allowing financial institutions to rely on Anti-Money Laundering/Countering the Financing of Terrorism “know your customer” procedures and other account information that they already hold), and reporting requirements. However, there are some differences between the regimes. Some of the most significant differences are:
- FATCA contains a number of de minimis exclusions from due diligence. The Common Reporting Standard generally does not have any such exclusions. The one exception to this is for pre-existing entity accounts, where the threshold exemption is US$250,000, unless the financial institution chooses to elect out of the threshold.
- FATCA due diligence is focused on identifying “US persons”. The Common Reporting Standard due diligence is much broader and focuses on identifying foreign tax residents.
- FATCA compliance is buttressed by a 30% withholding tax to apply to US-sourced income for non-compliance. This does not apply to the Common Reporting Standard. However, the Common Reporting Standard does require implementing jurisdictions to have a legal and operational compliance framework in place to verify compliance and to penalise non-compliance.
FATCA implementation involved the due diligence and reporting rules (which are set out in a treaty-level instrument) being incorporated into New Zealand law using regulations. Some primary legislation was also necessary to establish a framework for FATCA obligations, and this is located at Part 11B of the Tax Administration Act 1994.
Because of the similarities between the Common Reporting Standard and FATCA, the proposed amendments incorporating the Common Reporting Standard into New Zealand law will also primarily be located in Part 11B. However, as explained below, the proposal is that some provisions will apply solely to FATCA, some will apply solely for AEOI purposes, and some will apply for both FATCA and AEOI purposes.
The proposed update to Part 11B will result in provisions that will apply solely to FATCA, in existing sections 185F to 185M. Proposed provisions that apply solely to AEOI will be located in new sections 185N and 185O. Provisions that apply to both FATCA and AEOI will be located in new sections 185P to 185R. Section 185E, which sets out the purpose of Part 11B, will be updated to include references to AEOI and to set out the new structure. Proposed penalty provisions that relate to these obligations will also be set out in sections 142H and 142I.
Although any form of tax treaty can potentially be used to make AEOI exchanges, the G20 and OECD have promoted the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the MCMAA convention) as the principal treaty to be used for this purpose.
New Zealand signed the MCMAA convention in 2012. It was given legal effect in New Zealand on 21 October 2013 by an Order in Council made under section BH 1 of the Income Tax Act 2007.
Section BH 1 authorises the making of an Order in Council to give legal effect to a “double tax agreement”. As that term is defined, and under statutory legal principles, the reference to “double tax agreement” in section BH 1 is considered sufficiently broad to apply to other types of tax treaty, including multilateral treaties. However, this is not immediately obvious on the face of wording. This, in turn, has led to some claims that the MCMAA convention has not been correctly given legal effect in New Zealand.
Although a legal challenge to the validity of the Order in Council giving effect to the MCMAA convention is unlikely to be successful, any uncertainty is undesirable. Moreover, additional multilateral treaties may need to be given effect under section BH 1 in the future.
Accordingly, the bill contains proposals to put the matter beyond doubt. This includes a retrospective amendment to section BH 1, to clarify that it applies in the case of multilateral treaties. A definition relating to the MCMAA convention (under the term “MCMAA convention”) will also be inserted into section 3 of the Tax Administration Act 1994, which includes a specific reference to the 21 October 2013 Order in Council giving it legal effect in New Zealand.
The definition of “foreign account information sharing agreement”, in section YA 1 of the Income Tax Act 2007, will also be amended to specifically include the “MCMAA convention”. The purpose of this amendment is to ensure that AEOI exchanges made under the MCMAA convention will be subject to the AEOI legislation to be inserted in Part 11B of the Tax Administration Act 1994.
Article 6 of the MCMAA convention authorises exchange of information on an automatic basis (as opposed to other forms of exchange, such as on request), and provides that any automatic exchanges must be subject to detailed terms as agreed between “competent authorities”.
Competent authorities are specific persons or authorities nominated by each treaty partner to administer the treaty. The competent authority under New Zealand’s tax treaties is the Commissioner of Inland Revenue or an authorised representative.
To give effect to the Article 6 requirement for competent authorities to agree the detailed terms of automatic exchanges, for AEOI the OECD developed an administrative instrument referred to as the Multilateral Competent Authority Agreement (MCA agreement).
New Zealand signed the MCA agreement in 2015.
In addition to other important details, such as the manner of exchanges and rules and procedures around maintaining confidentiality of exchanged data, the MCA agreement specifies the actual information to be exchanged between the parties. As this is relevant to the operation of proposed Part 11B, a definition relating to the MCA agreement will be inserted into section 3 of the Tax Administration Act 1994.
The MCA agreement also has a notification mechanism, which enables each party to confirm the actual jurisdictions that it will exchange with (see explanation of “reportable jurisdictions” below), and the timing of exchanges with each of those jurisdictions.
Although New Zealand has signed the MCA agreement, it will not provide its notifications on reportable jurisdictions until the legislation is enacted and New Zealand’s list of reportable jurisdictions is confirmed.
The due diligence procedures and reporting requirements set out in the Common Reporting Standard must be interpreted and applied consistently with the OECD Commentary.
Rewriting the details of all of the rules into domestic law would risk inadvertent differences and gaps between the Common Reporting Standard and the implementing legislation. Moreover, the Common Reporting Standard and OECD Commentary will almost certainly be subject to future change, as deficiencies and improvements are identified, and in response to changes in taxpayer behaviour.
To address such issues, a number of implementing jurisdictions have adopted the approach of incorporating the Standard into law by direct reference to the Common Reporting Standard and its Commentary. The legislation proposed in this bill follows this approach. It will help ensure that the Common Reporting Standard is correctly incorporated into law, and will reduce the risk of deficiencies being identified during peer review.
The legislation generally only introduces special rules when the Common Reporting Standard or Commentary either provides flexibility or requires implementing jurisdictions to make decisions (including decisions on dates that are to apply for due diligence and reporting purposes).
To facilitate the incorporation of the Common Reporting Standard by reference, three key definitions are proposed to be inserted into section 3 of the Tax Administration Act 1994:
- The term “CRS publication”, referring to the official OECD publication that includes the full AEOI standard (the standard for Automatic Exchange of Financial Account Information in Tax Matters).
- The term “CRS standard”, referring to the Common Reporting Standard, which comprises Part IIB of the CRS publication.
- The term “CRS applied standard”, referring to the CRS standard as modified by section 185O of the Tax Administration Act 1994.
Importantly, the definition of “CRS standard” includes the words “as amended from time to time”. These words give the definition ambulatory effect, meaning that future changes to the Common Reporting Standard will generally flow through into New Zealand legislation automatically.
As noted, the Common Reporting Standard must be interpreted and applied consistently with the official OECD Commentary, which comprises Part IIIB of the CRS publication. New section 185O(3) of the Tax Administration Act 1994 will incorporate that requirement into New Zealand law. Section 185O(3) also includes the ambulatory language “as amended from time to time”.
The approach of incorporating the AEOI legislation into existing Part 11B of the Tax Administration Act 1994 necessarily involves merging the AEOI instrument into the concept of a foreign account information-sharing agreement, on which Part 11B is based. To achieve this, the definition of “foreign account information-sharing agreement” (in section YA 1 of the Income Tax Act 2007) will be amended to include the MCMAA convention (which, as noted above, will be the tax treaty predominantly used for AEOI exchanges).
The Common Reporting Standard itself contains a large number of specific definitions. Generally, incorporating the Common Reporting Standard into New Zealand law will ensure that these definitions will apply in the application of the Common Reporting Standard in New Zealand.
However, in the case of a conflict between a Common Reporting Standard definition and a defined term in the Inland Revenue Acts, a rule will be inserted as new section 185O(4) of the Tax Administration Act 1994 to ensure that when applying the Common Reporting Standard the Common Reporting Standard definition will take precedence.
The Common Reporting Standard Commentary specifies that two terms (“passive income” and “maintain”) are to take the domestic law meaning, but they must also include certain things. To ensure that the full meaning of these terms, as set out in the OECD Commentary, will apply in New Zealand, specific definitions of these terms are proposed to be included in section 3 of the Tax Administration Act 1994.
A new term “FATCA agreement” is also proposed in section 3, as a means of differentiating between FATCA and AEOI in Part 11B.
Because the legislation proposed in this bill incorporates the Common Reporting Standard due diligence and reporting obligations by reference, it generally does not need to detail the specific obligations. Rather, the proposed legislative amendments are primarily concerned with establishing the framework under which the obligations will apply in New Zealand.
The application of obligations to financial institutions is facilitated by section 185N of the Tax Administration Act 1994. As noted above, section 185O sets out the specific proposed modifications to be made to the CRS standard, for application in New Zealand.
It is proposed that these obligations will be supplemented by specific record-keeping requirements in respect of Common Reporting Standard compliance to be inserted into section 22 of the Tax Administration Act 1994. This will include a specific requirement for financial institutions to keep a record of any failure to obtain a self-certification.
The application of obligations to persons other than financial institutions (such as account holders, controlling persons or intermediaries) is facilitated by the proposed insertion of section 185P of the Tax Administration Act 1994.
Some complexity arises from the fact that the Common Reporting Standard treats certain legal arrangements (particularly trusts) as entities. As this concept does not fit well with the categorisation of such arrangements under New Zealand law, a supplementary rule is proposed in section 185Q to ensure that any obligations expressed in the Common Reporting Standard as applying to an entity are to apply to the relevant person in the New Zealand context. (For example, for trusts, the obligations will apply to the trustees.)
Modifications made to the Common Reporting Standard by section 185O include rules that require the Common Reporting Standard to be applied consistently with the OECD Commentary.
Section 185O(2) provides that a number of other specific modifications will be detailed in new schedule 2 to the Tax Administration Act 1994.
Section 185O also provides that a Common Reporting Standard definition is to prevail in the case of any conflict with a domestic law definition, and generally permits financial institutions to make elections contemplated in the Common Reporting Standard and OECD Commentary.
Much of proposed schedule 2 is concerned with inserting the commencement dates and due diligence timeframes that are to apply in New Zealand. These include the date on which Common Reporting Standard obligations are to commence, dates for determining whether a financial account is to be considered a new account or a pre-existing account, and the deadlines for financial institutions to complete due diligence and reporting.
In the Common Reporting Standard and OECD Commentary, these dates have generally been left open for each implementing jurisdiction to insert (subject to these meeting international expectations).
In addition, because New Zealand has adopted a reporting period other than the default calendar year reporting period contemplated by the Common Reporting Standard, a rule is included such that all references to reporting period and calendar year are to be read in the context of the New Zealand reporting period (unless the context requires otherwise).
Schedule 2 makes the following specific modifications to the Common Reporting Standard:
- Item 1 clarifies that references in the Common Reporting Standard to reporting period and calendar year should be read as applying to a reporting period ending 31 March.
- Items 2 and 3 mandate the use of the “wider approach” for due diligence. This is an important compliance minimisation option offered to implementing jurisdictions in the Common Reporting Standard. It is explained in detail further below, under the section “Wider approach”.
- Item 4 withdraws a choice available in the Common Reporting Standard (to allow a transitional period for the introduction of a requirement to report gross proceeds from the sale or redemption of financial assets). The reasons for this are articulated below under “Excluded choices”.
- Items 5 to 10 set out various due diligence timeframes that apply for different types of pre-existing accounts.
- Item 11 allows for the adoption of an option relating to certain employer-sponsored group insurance contracts or annuity contracts.
- Item 12 provides that dollar amounts referred to in the Common Reporting Standard (which, by default are in United States currency), can be treated as being in New Zealand dollars.
- Items 13 and 22 to 24 are mechanical provisions that ensure New Zealand’s published lists of its Participating Jurisdictions, Reportable Jurisdictions, Non-Reporting Financial Institutions and Excluded Accounts are included within the meaning of the relevant definitions of those terms.
- Item 14 sets out the date at which a credit card issuer is required to implement various defined policies and procedures in order to come within the definition of “Qualified Credit Card Issuer” in the Common Reporting Standard.
- Items 15 and 16 set out various dates from which collective investment vehicles are required to no longer issue physical shares in bearer form and by which they must have policies in place to ensure that such shares are redeemed or immobilised in order to come within the term “Exempt Collective Investment Vehicle” defined in the Common Reporting Standard.
- Items 17 and 18 define “pre-existing accounts” and “new accounts”. The definition of “pre-existing accounts” incorporates the option in the Common Reporting Standard to apply the due diligence procedures for pre-existing accounts to new accounts opened by pre-existing customers in circumstances permitted in the Standard.
- Items 19 and 20 set out dates that are relevant to determine whether a pre-existing account is a “Lower Value Account” or a “High Value Account”.
- Item 21 sets out a deadline date by which a financial institution is required to implement defined policies and procedures in order for a type of depository account to be an excluded account.
- Item 25 clarifies which of two possible definitions of the term “Related Entity” the Common Reporting Standard will apply.
The Common Reporting Standard provides that a financial institution that is resident (as that concept applies for Common Reporting Standard purposes) in a jurisdiction will be subject to Common Reporting Standard obligations in that jurisdiction.
However, a branch of a New Zealand-resident financial institution located outside of New Zealand is excluded from the rules. Conversely, a branch of a non-resident financial institution located in New Zealand is subject to the New Zealand rules.
These fundamental rules are set out in section 185N(1) and (2).
The Common Reporting Standard also includes a complex series of definitions that set out the actual criteria for identifying financial institutions.
For Common Reporting Standard purposes, the term “financial institution” is broadly defined. It extends beyond traditional financial institutions (such as banks) to a wide range of entities that would not normally be considered as financial institutions (for example, it will include some professionally managed trusts).
However, the Common Reporting Standard CRS also specifies a number of categories of financial institution that pose a low risk of being used to facilitate offshore tax evasion, and which therefore are excluded from the due diligence and reporting obligations. These are defined as “non-reporting financial institutions”.
Proposed section 185N(3) provides that a financial institution must comply with the due diligence and reporting obligations set out in the Common Reporting Standard applied standard.
Proposed section 185N(4) imposes an annual reporting deadline for financial institutions of 30 June.
Consistent with the timeframes contemplated in the Common Reporting Standard and OECD Commentary for completing due diligence of pre-existing accounts, proposed section 185N(5) sets a deadline of 30 June 2018 for due diligence and reporting on pre-existing individual accounts that are high value accounts, and 30 June 2019 for due diligence and reporting for all other pre-existing accounts. Otherwise, proposed section 185N(5) includes a general rule for the timing of reports in respect of an account identified as reportable during a particular reporting period.
Proposed section 185N also includes other supplementary rules.
Proposed section 185P also extends Common Reporting Standard obligations to persons other than financial institutions.
This reflects the fact that financial institutions will often be required to collect documentation and information directly or indirectly from account holders (and sometimes the controlling persons of the account) in order to comply with their Common Reporting Standard obligations. This includes circumstances when the institution has a customer relationship with an intermediary that holds an account for the benefit of an account holder and, potentially, other controlling persons.
This requires an efficient transfer of information from those account holders and other persons directly or indirectly to the institution.
Financial institutions should generally face few problems in obtaining documentation and information from customers on account opening. However, they may face challenges in obtaining documentation and information from customers in other circumstances. For example, a customer may not respond to a written request for information. There may also sometimes be difficulties obtaining documentation and information from persons connected with particular types of accounts, such as trust accounts.
To assist compliance, an amendment proposes to impose an obligation on such customers and other entities or persons, to obtain and provide any documentation and information that the institution requests from them directly or indirectly in the course of undertaking their Common Reporting Standard due diligence obligations.
Such customers/persons will also have an obligation to provide updates on any material change in circumstances that they are aware of that may affect their status as a reportable person.
These obligations are set out in proposed section 185P.
The Common Reporting Standard specifically requires implementing jurisdictions to have rules in place requiring that financial institutions keep records of the steps undertaken, and any evidence relied upon, for the performance of their Common Reporting Standard obligations.
This requirement will be met by the proposed introduction of specific rules in section 22 of the Tax Administration Act 1994. This will include a requirement for a financial institution to keep a record of any failure to obtain a required self-certification. These record keeping requirements will assist Inland Revenue in verifying compliance with the Common Reporting Standard and addressing any non-compliance (including considering the application of any relevant penalties).
Although the success of the AEOI global initiative depends on jurisdictions implementing similar rules, the Common Reporting Standard provides implementing jurisdictions with a number of options. These options have been developed with a view to minimising compliance costs for financial institutions, in areas that are not considered likely to compromise the effectiveness of the Standard.
The circumstances of each financial institution can differ markedly, meaning that financial institutions may have different preferences as to whether these options should be adopted. Accordingly, the legislation proposed has been framed to generally permit each financial institution to make its own decision on whether to adopt any particular option offered in the Common Reporting Standard.
Some of the specific choices available to financial institutions are set out in section 185N. Otherwise, section 185O(5) generally provides that a financial institution may make an election that is expressed as being available to them.
In a small number of cases, a particular choice will be mandated for all financial institutions.
Two “excluded” choices are set out in section 185N(11), which provides that the optionality provided in the Common Reporting Standard to adopt alternative reporting periods, and in the OECD Commentary in respect of the alternative use of average balances rather than period end balances, will not be available to financial institutions.
- The reporting period to be used in New Zealand will be the 12-month period ending 31 March. This is consistent with the New Zealand tax year and the reporting period adopted by New Zealand for FATCA purposes. The period ending 31 March must be adopted by all financial institutions.
- The OECD Commentary provides that jurisdictions that already require financial institutions to report average account balances can permit their financial institutions to maintain this approach for AEOI, rather than reporting period end-balances. This does not apply in New Zealand. However, for clarity, the legislation expressly provides that this option is not available to New Zealand financial institutions.
As noted, an additional excluded choice is set out at item 4 of schedule 2. This relates to an option available in the Common Reporting Standard to allow a transitional period for the introduction of a requirement to report gross proceeds from the sale or redemption of financial assets. On this point there is a mismatch between the Common Reporting Standard and the exchange commitments set out in the MCA agreement, where this is not allowed as an option. Therefore this is specifically set out as an excluded choice.
An important option offered in the Common Reporting Standard is the “wider approach” to due diligence. This option addresses the practical issue that the Common Reporting Standard only requires the identification by financial institutions of persons that are tax-resident in reportable jurisdictions (that is, jurisdictions that New Zealand will exchange AEOI information with). Over time, additional jurisdictions will join the initiative and become reportable jurisdictions. Without specific rules, each new jurisdiction joining would trigger a new round of due diligence reviews of accounts by financial institutions.
To avoid this problem, and to minimise compliance costs, the Common Reporting Standard includes an option for implementing jurisdictions to adopt a “wider approach” to due diligence. Under this approach, a jurisdiction’s financial institutions would be permitted to collect and retain Common Reporting Standard information for all non-residents identified rather than just that pertaining to residents of reportable jurisdictions.
The legislation proposed adopts the wider approach to due diligence. To ensure consistency, and prevent any financial institution from being put at a competitive disadvantage, this approach will be mandatory for all financial institutions.
This modification to the CRS standard is made at item 2 of the new schedule 2.
Adopting the wider approach to due diligence will require financial institutions to sort and filter the collected data to determine the accounts that need to be reported to Inland Revenue (so that they can identify the reportable accounts that are held and/or controlled by reportable persons, which they are required to report).
The Common Reporting Standard therefore provides a further option, to allow financial institutions to report all of the information to the tax authority (Inland Revenue in this context). Under this option, financial institutions may choose that the reporting requirements under the Common Reporting Standard in relation to financial accounts held or controlled by a resident of a reportable jurisdiction apply to all financial accounts maintained by that institution and held or controlled by a resident of a foreign tax jurisdiction. The proposed approach is, therefore, for financial institutions to effectively be permitted to pass the responsibility for sorting and filtering the data on to the tax authority (Inland Revenue), thereby potentially saving costs. Inland Revenue would then be responsible for determining the information to be exchanged with reportable jurisdictions.
The legislation proposed in this bill allows this as an option for financial institutions. This option will be set out in sections 185N(7) and (8).
The Common Reporting Standard defined terms “participating jurisdiction” and “reportable jurisdiction” are key concepts in the application of the Common Reporting Standard. The Common Reporting Standard requires New Zealand to publish lists of its participating jurisdictions and reportable jurisdictions.
The Common Reporting Standard also includes important carve-outs from AEOI obligations, for “non-reporting financial institutions” and “excluded accounts” that pose a low risk of being used for tax evasion purposes. Some generic categories of these are set out in the Common Reporting Standard, but New Zealand will also be required to publish lists of specific institutions and accounts that it approves as meeting other general low-risk criteria.
These lists will be published by a mix of Commissioner’s Determinations and by regulation.
New Zealand must publish a list of its participating jurisdictions. A participating jurisdiction is generally one that has implemented AEOI and indicated that it will provide AEOI information to other jurisdictions. More specifically, New Zealand’s participating jurisdictions will be those with which an agreement is in place for that jurisdiction to provide AEOI information to New Zealand.
New Zealand’s list of participating jurisdictions will be important for New Zealand’s financial institutions, because the Common Reporting Standard due diligence procedures require financial institutions to “look through” passive NFEs to determine the natural persons that are its ultimate controlling persons.
This look-through rule extends to cover certain investment entities that are not from participating jurisdictions. This means that New Zealand’s list of participating jurisdictions will impact on the circumstances when New Zealand financial institutions will need to “look through” their account holders to identify the ultimate controlling persons.
The proposed amendments in this bill provide for the Commissioner of Inland Revenue to make a Determination about whether a particular jurisdiction is a participating jurisdiction. This Determination-making power will be inserted into the Tax Administration Act 1994 as proposed new section 91AAU. The provision will allow the Commissioner to impose limitations on, amend, suspend or withdraw a Determination.
It will take time to confirm whether all jurisdictions that have committed to implementing AEOI have correctly carried through with their commitments. As a transitional measure, the OECD has permitted jurisdictions to tentatively treat all committed jurisdictions as participating jurisdictions. New Zealand intends adopting this approach.
However, the transitional measure is only to apply for a limited time, and jurisdictions are required to publish final lists by 30 June 2017. Given that New Zealand’s start date is 1 July 2017, the intended approach is to publish a transitional list that would apply for the first period (1 July 2017 to 31 March 2018) and then a final list by 30 June 2017 that would apply from the beginning of the second period (that is, from 1 April 2018).
In addition to publishing its list of participating jurisdictions, New Zealand must also publish a list of its reportable jurisdictions.
A participating jurisdiction is one that provides AEOI information. However, not all participating jurisdictions will be reportable jurisdictions. For example, some participating jurisdictions may be smaller economies that do not have a tax system, and which therefore would have no need to receive information.
In general, international expectations are that AEOI information will be provided to all participating jurisdictions that have indicated in the MCA agreement that they wish to receive such information. However, the OECD acknowledges that this raises potential concerns about confidentiality and data security.
AEOI exchanges will comprise sensitive personal and financial information. Under the express terms of the legal instruments under which the information will be exchanged, this information may only be disclosed to specified persons and may only be used for specified (tax) purposes.
Many jurisdictions have been exchanging such sensitive information for many years, have robust laws, processes and systems in place for ensuring exchanged data is kept secure and is only used for legitimate purposes, and have a track record of maintaining confidentiality. However, some jurisdictions that are implementing the AEOI Standard have had little, or no, prior experience in exchange of information for tax purposes.
Implementing jurisdictions may make decisions not to provide information to particular jurisdictions if they hold genuine concerns about confidentiality and/or data security. However, such decisions cannot be used to frustrate the purposes of the Common Reporting Standard.
This is a difficult balancing act. To assist, the Global Forum is conducting specific reviews of implementing jurisdictions’ confidentiality and data safeguards, and will be making its conclusions available to competent authorities of participating jurisdictions.
The amendments proposed in this bill include specific procedures for ensuring that the New Zealand Government retains oversight and control of New Zealand’s determination of its reportable jurisdictions.
A regulation-making power will be inserted into the Tax Administration Act as proposed new section 226D. The decision to provide AEOI information to any jurisdiction will require confirmation by Order in Council.
To ensure that, in the case of any serious breach, exchange of information with a particular jurisdiction can be swiftly suspended, the Commissioner of Inland Revenue will be authorised to make a Determination to temporarily suspend that jurisdiction as a reportable jurisdiction. This Determination-making power will be inserted into the Tax Administration Act 1994 as proposed new section 91AAV. Any such Determination would need to be subsequently confirmed by Order in Council.
This power will only exist as a contingency to ensure that the time taken to make an Order in Council to suspend a jurisdiction does not result in a legal obligation to provide information being switched off too late due to an exchange deadline.
As noted above, the Common Reporting Standard provides that some categories of financial institution that pose a low risk of being used for offshore tax evasion can be treated as a “non-reporting financial institution”.
A number of generic categories of non-reporting financial institution are set out in the Common Reporting Standard. There is also an additional category of low risk financial institutions that an implementing jurisdiction can itself determine. However, these must meet certain specified criteria, must be confirmed by the implementing jurisdiction in a published list, and must meet a final test of not frustrating the purposes of the Common Reporting Standard.
The amendments proposed provide for the Commissioner of Inland Revenue to make a Determination as to whether a particular financial institution, or type of financial institution, is a non-reporting financial institution. This Determination-making power will be inserted into the Tax Administration Act 1994 as proposed new section 91AAW. The provision will include the ability for the Commissioner to impose limitations on, amend, suspend or withdraw a Determination. All Determinations made under this provision must be published.
Similarly, the Common Reporting Standard provides that some categories of financial account that pose a low risk of being used for offshore tax evasion can be treated as “excluded accounts”. Excluded accounts will not be subject to due diligence or reporting.
A number of generic categories of excluded account are set out in the Common Reporting Standard. There is also an additional category of “low risk” accounts an implementing jurisdiction can itself determine. However, these must meet certain specified criteria, must be confirmed by the implementing jurisdiction in a published list, and must meet a final test of not frustrating the purposes of the Common Reporting Standard.
The legislation proposed in this bill provides for the Commissioner of Inland Revenue to make a Determination on whether a particular financial account, or type of financial account, is an excluded account. This Determination-making power will be inserted into the Tax Administration Act 1994 as proposed new section 91AAW. The provision will include the ability for the Commissioner to impose limitations on, amend, suspend or withdraw a Determination. All Determinations made under this provision must be published.
The Common Reporting Standard requires implementing jurisdictions to have rules and procedures in place to ensure compliance and address non-compliance. This includes having appropriate anti-avoidance rules, record-keeping requirements, compliance programmes, and effective sanctions to address identified non-compliance.
Accordingly, this bill proposes a comprehensive suite of enforcement rules and penalties.
Strong sanctions will apply to financial institutions for intentional failure to comply or for failure to comply through lack of reasonable care.
The penalties to be imposed on financial institutions will be backed with specific obligations and penalties to be imposed directly on account holders, controlling persons or intermediaries that (i) provide false information or a false self-certification, (ii) fail to comply with a request for information or a self-certification, or (iii) fail to inform of any material change in circumstances that they are aware of relating to information or a self-certification that they have provided. However, as explained below, these penalties will be subject to the application of “no fault” and “reasonable efforts” defences.
Specific record-keeping obligations are also proposed, together with an anti-avoidance provision that will apply to arrangements and practices entered into or by financial institutions, persons, or intermediaries with “a main purpose” of avoiding an obligation under Part 11B.
The bill proposes that the following penalties will apply to financial institutions:
- a general (civil) penalty of $300, to be imposed on a financial institution for any failure to comply with its Common Reporting Standard due diligence and reporting requirements;
- a specific (civil) penalty of $300, to be imposed on a financial institution for each new account when there is a failure to obtain a self-certification when opening such accounts when obtaining such a self-certification is required by the Common Reporting Standard;
- the above provisions will be subject to a transitional period (until 31 March 2019) in which penalties will not be imposed if the financial institution is able to demonstrate it has made reasonable efforts to comply with its Common Reporting Standard due diligence and reporting obligations; and
- a specific (civil) penalty of $20,000 for a first offence and $40,000 for any subsequent offence, to be imposed in circumstances when a financial institution fails to take reasonable care in complying with its Common Reporting Standard due diligence and reporting requirements.
Knowledge-based offences by financial institutions will be subject to the application of existing legislative provisions.
The bill also proposes that the penalties to be imposed on financial institutions will be backed with specific obligations and penalties to be imposed directly on account holders, controlling persons or persons that otherwise hold accounts for the benefit of others (including trusts and intermediaries):
- a specific (civil) penalty of $1,000, if a person or entity provides a false self-certification or related information, fails to provide a self-certification or related information within a reasonable time after receiving a request, or fails to provide information about a material change of circumstances that they are aware of relating to a self-certification or related information within a reasonable period of time;
- however, this penalty is subject to a “no fault” defence (for a failure to provide information or a self-certification within the control of the information provider) and a “reasonable efforts” defence (for a failure to provide information or a self-certification relating to another person or entity and not within the control of the information provider).
Knowledge-based offences by such persons or entities will be subject to the application of existing legislative provisions.
The mix of transitional measures and available defences is included in the proposed legislation in recognition of the fact that the rules are complex, that financial institutions face short implementation timelines, and that there is a risk of inadvertent error. The intended approach is that for the first two years, reasonable efforts by financial institutions to comply will be recognised. Sanctions will generally only be imposed in cases of intentional non-compliance or lack of reasonable care.
However, the proposed legislation is also structured to recognise the fact that New Zealand’s rules will be subject to international peer review, and that any perceived leniency could be criticised. Accordingly, as an effective deterrence, strong sanctions are proposed for identified cases of serious failure or non-compliance.
For consistency, the bill proposes amendments to the FATCA implementation legislation to first, align the FATCA anti-avoidance rule with the AEOI anti-avoidance rule (with application to any person with an obligation under Part 11B), and secondly, to provide for the imposition of the same obligations and penalties on persons other than financial institutions under FATCA as for AEOI.
 As explained below, this is subject to the application of the “wider approach” to reporting, whereby the financial institution may choose to report all foreign tax residents rather than only reportable persons.
 For this purpose, an entity such as a partnership or similar legal arrangement that has no residence for tax purposes is treated as resident in the jurisdiction in which its place of effective management is situated.
 Details relating to the MCMAA Convention are available on Inland Revenue’s tax policy website at http://taxpolicy.ird.govt.nz/tax-treaties/convention-mutual-administrative-assistance-tax-matters.
 This publication is available on the OECD website, at http://www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-account-information-for-tax-matters-9789264216525-en.htm.