Suits The C-Suite

(Second of two parts)
Embracing the Automatic Exchange of Information (AEoI), whether in the form of FATCA and/or CRS, affects stakeholders ranging from the government and businesses down to the ordinary consumers of financial products and services. As such, the uncertainties arising from the supposed implementation are definitely not in line with the goal of maintaining a stable financial and investing environment – something that the Philippines needs in order to sustain growth in the years to come.
Like any other big-ticket decision, implementation comes with various challenges at all levels. It is therefore crucial for all stakeholders to acknowledge them and plan ahead to ensure survival amid the disruption.
The primary player if the Philippines is to achieve the ASEAN Economic Community (AEC)’s vision of economic integration is the government. As previously stated, taxation cooperation, which requires participation in and implementation of the AEoI initiative, is crucial towards realizing an interdependent and highly connected ASEAN economy. Before any treaty can be fully implemented in the Philippines, concurrence of two-thirds of the Senate is required under Article II, Section 21 of the 1987 Constitution. Thus, implementing FATCA and/or CRS must be dealt with by the legislative branch before significant progress can be made.
At the regulatory level, agencies would need to draft implementing regulations and other pronouncements that will serve as the most reliable references for stakeholder decisions to ensure compliance. At a minimum, these must include: (1) definition, basic concepts and guiding principles; (2) registration and due diligence requirements; and (3) a mechanism for the reporting and exchange of reportable financial information.
These pronouncements should be clear as to the form of report to be submitted by reporting financial institutions, i.e., adherent to the international standards prevalent at the time of implementation. The regulators may issue further guidance to supplement these pronouncements in the form of frequently asked questions (FAQs) and/or an implementation handbook that tackles operational challenges and strategies on a more granular level. It is paramount that the requirements are tailor-fit to the Philippines’ economic and business environment and needs.
Regulators must also demonstrate their readiness to implement on all levels. They must ensure that their personnel possesses the necessary knowledge and technical competence to facilitate resolution of questions and uncertainties that may come up for the stakeholders. Post-implementation, regulatory personnel must also keep themselves abreast of the developments in the international field and be responsive to these changes.
As the AEoI involves the transfer of confidential information, the importance of having a reliable and incorruptible data infrastructure can never be undermined. Regulators must ensure that a system is in place that protects the integrity of financial information being reported.
Other necessary actions may branch out as the regulators face the implementation challenges on a daily basis. Clearly, much still needs to be done. However, it all needs to start from a certainty about Philippines participation in the AEoI initiative, which is still greatly dependent on the legislative chambers.
Financial institutions must initially assess the level of compliance that may be required of them. Other than depository and custodial institutions, financial institutions may also include specified insurance companies, investment entities as well as trusts and other similar arrangements.
Depending on the result of the foregoing, financial institutions must chart their own compliance programs while considering overall business strategies and needs. As with any business decision, implementing key changes requires an investment, the magnitude of which depends on the entity’s available resources and current state of compliance.
After determining the necessary level of compliance based on the regulations and guidance published by the regulators, financial institutions will need to assess compliance gaps. A good starting point would be the current anti-money laundering (AML)/know-your-customer (KYC) policy. Financial institutions may build on their AML/KYC policy and make adjustments to comply with the regulatory requirements under FATCA and/or CRS. Naturally, in conducting a compliance gap exercise, deep understanding and knowledge about the requirements is necessary. Thus, financial institutions must ensure that their decision-makers are well-equipped and ready before starting the discourse.
Financial institutions must also inform account holders, current and prospective, that certain information may be reported, as mandated by regulators pursuant to an AEoI agreement. This poses challenges to maintaining relationships with account holders as it attracts questions and, not to mention, raises the prospect of reporting confidential information to regulators.
Consumers should also be educated on how their financial information will be handled both by the financial institutions and the government. Moreover, as account holders, they will be required to certify their citizenship and/or tax residence to financial institutions. For entities, additional steps are needed as they need to certify their proper FATCA and/or CRS classification.
Clearly, non-participation may not be an option for the Philippines. Central to AEC’s taxation cooperation mandate is the participation of all of the member states in the AEoI initiatives.
If the Philippines does not participate, it will gain a bad reputation as non-participation creates a notion of lack of support towards global and regional tax transparency, and countering tax evasion and other harmful tax practices. Financial institutions from other participating countries will be reluctant to deal or transact with Philippine financial institutions and tax residents since they are likely to face unnecessary costs and difficulties arising from their association with counterparties from non-compliant jurisdictions.
Financial institutions in participating countries (i.e., reporting financial institutions or RFI) may have already encountered account holders that are tax residents of uncooperative jurisdictions. As residents of non-participating jurisdictions, these account holders can insist on their right not to provide additional information as requested by RFIs. This trend creates problems for RFIs on KYC policy documentation and monitoring aspects. As RFIs, they may decide to close financial accounts held by these uncooperative account holders should their policy dictate such treatment. Ultimately, this will lead to reduced options for Philippine tax residents to invest and conduct business activities and may therefore cast an irreversible shadow on the Philippine economy as a whole.
The first step towards continued progress is removing the uncertainty. Knowing the negative repercussions of non-participation, the Philippines should strongly consider cooperation and participation. The earlier the mandate of the government is established, the better it would be for all stakeholders. This would give all stakeholders time to prepare and make the necessary adjustments to facilitate compliance, and ultimately, minimize costs.
Prior to implementation, there needs to be an open discourse, especially during the drafting of the implementing regulations and guidance. Regulators must strike a balance between the stringency of compliance requirements, practicality of the same and business necessities, among all others. This will result in a set of compliance requirements that are tailor fit to the economy and business environment of the country.
Regulators may also tap into the ASEAN network through the AFT. Regulators may seek guidance and learn from countries that have undergone information exchanges initiatives pursuant to an AEoI agreement (e.g., Singapore and Malaysia). Regulators also have a vital role to play in streamlining implementation and addressing any questions that may arise.
It is worth emphasizing that in all stages/phases, it may be prudent for stakeholders to consider technology to aid in their drive for compliance.
There are still a number of years left before 2025 – where AEC’s vision of economic integration is expected to be realized. But the clock is ticking. Responding on an as-it-transpires basis, rather than being proactive, brings forth more problems than solutions. Needless to say, it is best for all concerned parties to act as soon as possible.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Jay A. Ballesteros is an FSO Tax Partner and Gabriel Eroy is an FSO Tax Senior Associate of SGV & Co.