COMMON REPORTING STANDARDS – THE TAXMAN COMETH

Meggy ParengkuanPartner, Marccus Partners Mabel & Associates, Attorneys at Law

By James Kallman
The idea is that you can run but you can’t hide when it comes reporting your wealth.

There can be little doubt that globalization has in many ways been good for the world, responsible for lifting countless millions out of poverty. It has also made some very wealthy and today there are multinational operations that are richer than nations. However, to misquote Shakespeare, therein lies the rub, for wealthy individuals and corporations have become progressively more adept at short-changing governments of tax income through the artful use of loopholes in national laws.

The latest attempt to patch the net in countering evasion and narrowing avenues for avoidance of taxes comes with the introduction of the OECD-sponsored Common Reporting Standard (CRS), due diligence for which will begin on January 1, 2016 for the early adopter nations.

Building on earlier exchange of information legislation such as the EU Savings Directive and the U.S. Foreign Account Tax Compliance Act (FATCA), governments will obtain information from their financial institutions and automatically exchange data with other jurisdictions. To put it simply, the idea is that you can run but you can’t hide when it comes reporting your wealth; the taxman cometh!

This has not gone unnoticed by either the Indonesian government or a number of its richer taxpayers who have funds conveniently parked offshore. Hence, the current parliamentary discussions about a possible tax amnesty that would enable the legal reporting of these funds and payment of tax at a nominal rate.

Automatic transfer under the CRS will involve the systematic transmission of large amounts of data from the tax administration where the account is held to that of the country where the taxpayer is resident. This will cover a variety of income sources, and even changes in residence. The resident tax administration can then verify whether the taxpayer has accurately reported their income on a global basis.

This will have a massive impact on financial institutions facing significant additional reporting responsibilities to disclose financial details of their account holders, while facing penalties for failure or unwillingness to comply. No way can this be done on a manual basis, or even by politely suggesting smaller clients take their business elsewhere as some banks did with FATCA. Instead, a complete review of existing client bases will be required and the introduction of new systems and procedures to identify reportable accounts, all of which will have to be carried out against the backdrop of remaining sensitive to customers’ reactions to these requests for additional information.

As of October 30, an impressive 56 jurisdictions had committed to an exchange of information under the CRS by 2017, with a further 40 (including Indonesia) the following year. The U.S., meanwhile, has indicated it will undertake automatic information exchanges pursuant to FATCA from 2015. Whichever acronym is used that old chestnut about the certainty of death and taxes draws ever closer with the advent of CRS. The taxman cometh, even in Indonesia perhaps!