Critical issues in tax report ing and new IT systems - Crédit Agricole ...

REPORTING
ADDED VALUE ON TAX ISSUES
Critical issues in tax
report ing and new IT
systems
In the field of international private banking, tax reporting becomes critically important. Given the
recent changes in the regulatory environment and the likelihood of further changes in future,
multi-country tax reporting will soon be less of a “necessary evil” and more of a genuine competitive
advantage for institutions committed to private banking.
Jacques BOURACHOT *
Etienne SAINT-RAYMOND**
It must first be noted that a distinction
should be made between “domestic” tax
reporting for clients whose tax residence
is in the country where the bank
is located, and “foreign” tax reporting
for clients whose tax residence differs from
the bank’s (a frequent occurrence in
Switzerland and Luxembourg, for example).
Handling clients’ tax affairs does not consist
“only” in supplying them with a tax return,
such as the Imprimé Fiscal Unique in France;
it is a service in its own right. It involves a
range of tasks and responsibilities for the
bank, which can sometimes be very extensive
depending on the match between the
bank’s country and the client’s tax residence.
This service includes: supplying
clients with the information they need to
declare their income, capital gains, wealth
etc.; supplying clients with any documentation
required to corroborate their tax
returns, often in a regulated format; fulfilling
the role of tax collection agent for some
types of client income or capital gains, and
subsequently transferring the monies to
local or foreign tax authorities; supplying
tax authorities with supporting documentation;
and, in some cases, providing clients
with tools to simulate the tax impact of different
investment management choices.
The most advanced banks will offer clients
top-quality tax advisory services.
Jacques BOURACHOT, Chief Operating Officer,
Crédit Agricole (Suisse) SA
In order to carry out these tax-related operations,
the bank must have all the information
needed to produce the requisite data. This
consists, firstly, of information about the
clients themselves (nationality, residence,
composition of the taxable household, type
of taxation, choice of tax regime in any given
country, etc.), and the financial products
involved (product category for each type of
taxation, income and capital gains components,
etc.). Obviously, classifications of
clients and financial products depend on
national tax laws, be it that of Switzerland,
France, Germany or another country.
Furthermore, a bank has to have the operational
data needed to determine the tax
base and applicable tax rates, for example
in the case of securities purchases and sales
(dates, market side, context etc.) or for corporate
events such as coupons and dividend
payments. All these data may vary
over time, in accordance with the country’s
tax rules concerning the classification of
financial products, calculation of tax liability,
exemptions, tax rates and other factors.
The bank must be capable of managing such
data across the entire value chain, using a
coherent IT system, so that they can be collated
as automatically as possible in order
to deliver reliable, detailed, and corroborated
information at a cost acceptable to both
the bank and its clients.
The importance of tax reporting
for foreign banks operating in
Switzerland
In the very near future, institutions intending
to expand their private banking operations
will have to respond to demands,
which used to be mere wishes, for domestic
or foreign tax reporting services corresponding
to the tax residence of their clients,
most of whom will have chosen to declare
their assets.
Foreign banks operating in Switzerland have
a straightforward local tax environment
compared to those in many neighbouring
countries. They have long focused on off-
58 B&F
B&F BANKING SOLUTIONS

REGULATION
shore private banking, which simply
requires the submission of a fairly concise
foreign tax return. In consequence, they
have often only limited knowledge of the tax
systems in neighbouring countries such as
Italy, France, Germany, Belgium and Spain,
even though they already know how to deal
with US taxation (for those with QI status)
and the European directive on the taxation
of savings income.
That said, foreign banks operating in
Switzerland have advantages over domestic
banks that stem from their expertise in
international private banking. The largest
usually have experience in managing
booking centres established in several
countries and serviced with centralised IT
and back-office platforms. Accordingly, they
usually have some understanding of the tax
rules in different countries.
While banks in neighbouring countries are
experts in their own domestic tax rules, this
does not necessarily extend to other countries,
and their IT systems are typically
unable to handle other tax systems.
Foreign banks operating in Switzerland therefore
face a stiff challenge in competing
with domestic banks when it comes to
handling tax affairs in the country. But they
also have undeniable strengths relative to
other offshore financial centres in terms of
multi-booking and managing several sets of
tax rules simultaneously.
The implications for IT systems
in Switzerland
The main software packages for banks in
Switzerland are capable of producing Swiss
tax returns. Some software houses offer specific
versions adapted to other countries
that can generate some or all of what their
domestic tax laws require.
The real problems arise when the software
in a given bank is asked to simultaneously
produce domestic and foreign tax returns –
often for several jurisdictions – in response
to clients’ needs and tax residences. The
software must be flexible enough to
manage, for different data structures, a
whole range of features whose execution
will depend on the country where the bank
is operating and the client tax residence
(which can sometimes be specified at regional
level within a country).
Thus the Securities master file has to be
able to manage classifications of financial
products that differ between tax jurisdictions,
with automated updates from financial
data vendors. In the case of coupons,
for example, this means obtaining a breakdown
between their “income” and “capital
gain” components. For mutual funds, some
tax authorities require investment income
to be broken down into various categories
(income from equities, income from bonds,
etc.) that are treated differently. Securities
purchases and sales have to give rise to
running tax estimates related to such transactions,
the client’s securities position or a
combination of the two. Moreover, the software
must be capable of functioning on the
basis of average purchase price, FIFO or
LIFO, according to the client’s tax residence.
Tax or withholding tax rates, and even
whether tax is withheld at source, are also
part of the tax information that clients want.
Etienne SAINT-RAYMOND, Secretary-General,
Crédit Agricole Private Banking Services (CAPBS)
Tax management is therefore not limited to
producing sophisticated schedules and
returns; it has a profound impact on IT
systems, not only databases of securities
and clients but also the complete processing
of different banking transactions.
Ideally, the software – notably in the context
of platforms supporting multiple booking
centres – should be able to handle different
tax environments, thereby enabling domestic
tax rules to coexist with several foreign
tax systems within a given banking entity.
Apart coping with inherently complex IT
systems, banks need back offices that have
the expertise to deal with these diverse tax
rules. The back office is key player that
must be able to handle all the operations
involved in domestic or foreign tax reporting
throughout the client’s investment
cycle (purchases, sales, coupons, corporate
events etc.). Here too, existing multicountry
IT and back offices platforms have
a competitive edge that they intend to
exploit in the near future. n
J.B. & E.S.-R.
*Chief Operating Officer, Crédit Agricole
(Suisse) SA
*Secretary-General, Crédit Agricole Private
Banking Services (CAPBS)
B&F BANKING SOLUTIONS B&F 59