Global FS tax newsflash: TRACE Implementation Package announced by the OECD

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After years of technical discussions, the Committee on Fiscal Affairs of the OECD approved the TRACE Implementation Package (TRACE) at its meeting of 23 January and presented it at the OECD conference on TRACE/FATCA in Paris on 12 February 2013. TRACE, which stands for “Treaty Relief and Compliance Enhancement,” is a regime to allow for automated tax withholding by Authorised Intermediaries who agree to the automatic exchange of information.

This marks an important development in the exchange of information across governments and in the mechanics of treaty relief systems. It is a further development in what are now global moves to ensure better tracking and ownership checks on transactions flowing through the world’s financial systems. FATCA is the biggest enacted example of new law in this area but it can be expected that other initiatives will follow and TRACE is one of these.

FS Groups should be monitoring these developments because there are significant implementation issues likely to be associated with each change but also economies to be gained by linking the various initiatives in what we now call “global information reporting.”

With world-wide portfolio investments estimated at greater than USD 35 trillion the OECD has, since 2006, been striving to facilitate cross-border investment. TRACE is an international business and government initiative intended to streamline procedures for claiming reduced rates of and exemptions from withholding tax, pursuant to tax treaties, domestic law and the exchange of information.

Approximately 3,000 tax treaties are currently silent on methods of granting treaty benefits, so the typical method for granting relief on portfolio investments is through ex post refund procedures. These refund procedures are cumbersome for all governments involved, for the financial institutions and for the ultimate investors and as a result they typically lead to a “home bias” in investing.

In developing its TRACE implementation package, the OECD has given close consideration to the mechanics of the well-established US Qualified Intermediary Regime (QI). Through the QI regime, foreign banks can automatically grant US-treaty relief to foreign beneficial owners provided they sign up to a model agreement with the US-Internal Revenue Service (IRS) thereby subjecting themselves to certain due diligence, documentation, audit, reporting and withholding requirements.

Governments of OECD countries were assisted in the development of TRACE by comments from experts of the financial industry through the Business and Industry Advisory Committee to the OECD (BIAC).