Tax Asia Pacific Client Alert Automatic Exchange: OECD Common Reporting Standard Implementation In August 2015, the Organization for Economic Cooperation and Development (“OECD”) released guidance on implementing the multilateral automatic exchange of financial account information under the Common Reporting Standard (“CRS”). This guidance included the first edition of the CRS Implementation Handbook (“Handbook”). The Handbook provides practical guidance and outlines the necessary steps to assist governments and Financial Institutions (“FIs”) to implement the CRS. It identifies areas of challenges in CRS implementation. It also contains answers to frequently asked questions (“FAQs”) received by OECD from governments, FIs and Non-Financial Entities (“NFEs”). However, the Handbook leaves many issues unresolved. Steps for CRS Implementation The four core requirements to implement CRS (which a jurisdiction may accomplish in any order) are as follows: • Requirement 1: Translating the reporting and due diligence rules into domestic law, including rules to ensure their effective implementation • Requirement 2: Selecting a legal basis for the automatic exchange of information • Requirement 3: Putting in place the necessary administrative and IT infrastructure • Requirement 4: Protecting confidentiality and safeguarding data Requirement 1: Translating the reporting and due diligence rules into domestic law, including rules to ensure their effective implementation Legislation and guidance incorporating CRS into domestic law can align with existing legislation implementing a FATCA Intergovernmental Agreement (“IGA”) and existing guidance issued thereunder. The Handbook contains a list of 16 optional provisions that countries could adopt to provide flexibility for FIs, align CRS with FATCA, and reduce costs for FIs. Some businesses and advisors who have participated in OECD briefings are advocating for an adoption of all of the optional provisions by all participating jurisdictions. September 2015 Beijing Suite 3401, China World Office 2 China World Trade Centre 1 Jianguomenwai Dajie Beijing 100004, PRC T: +86 10 6535 3800 F: +86 10 6505 2309 Hong Kong 14/F Hutchison House 10 Harcourt Road Central, Hong Kong T: +852 2846 1888 F: +852 2845 0476 Shanghai Unit 1601, Jin Mao Tower 88 Century Avenue, Pudong Shanghai 200121, PRC T: +86 21 6105 8558 F: +86 21 5047 0020 2 Baker & McKenzie | September 2015 The first group of options addresses reporting requirements. One option would allow for FIs, such as Investment Entities (“IEs”), to report the average balance or value of the account in lieu of the end of year balance or value (following FATCA). Gross proceeds reporting could be delayed to a subsequent year. There is also the option for a jurisdiction to require nil reports; CRS is silent on this issue, including the method of reporting the lack of reportable accounts (e.g., .xml or paper return). The second group of optional implementation provisions address due diligence and include options to: • Allow FIs to apply the due diligence procedures for new accounts to be used for preexisting accounts (following FATCA and the EU Directive). • Allow due diligence procedures for high value accounts to be used for lower value accounts (following FATCA and the EU Directive). • Allow FIs to elect to exclude from due diligence procedures preexisting entity accounts of USD 250,000 or less (following FATCA). • Allow FIs to make greater use of and rely on existing standardized industry coding (SIC) systems for the due diligence process for preexisting entity accounts (following FATCA and the EU Directive). • Allow FIs to apply US dollar amounts or equivalent amounts for various CRS thresholds (following FATCA and the EU Directive). • Allow FIs to use the residence address test to determine an individual account holder’s tax residence for a lower value preexisting account (less than USD 1 million), in lieu of an electronic indicia of residence search. • Allow third party service providers to fulfill reporting and due diligence obligations of reporting FIs. The third group of options addresses CRS definitions and options to: • Allow FIs to treat, for due diligence purposes, new accounts held by a preexisting customer opened with the FI or a related entity as preexisting accounts (following FATCA and the EU Directive). The FI can rely on prior documentation so long as (i) the FI satisfied its AML/KYC procedures for the account by relying on AML/KYC performed for the preexisting account and (ii) the opening of the new account does not require new, additional, or amended customer information. • Expand the definition of a related entity to treat as related IEs that are under common management that is responsible for the IE due diligence (following FATCA sponsoring and the EU Directive). • Grandfathering rule for bearer shares issued by an exempt collective investment vehicle. This option would provide a grandfathering rule so long as the entity: (1) has not issued and does not issue physical bearer shares after the date specified by the jurisdiction; (2) retires all such shares upon surrender; (3) performs the due September 2015 | Baker & McKenzie 3 diligence and reporting with respect to such shares when presented for redemption or payment; and (4) has in place policies and procedures to ensure that the shares are redeemed or immobilized as soon as possible or by the date provided by the jurisdiction. By comparison, FATCA does not allow for the issuance of bearer shares after December 31, 2012, and requires such shares to be redeemed or paid by January 1, 2017. The EU Directive has a similar rule. • For a trust that is a passive NFE, FIs may align the scope of the trust beneficiaries to be treated as controlling persons of the trust with the scope of the trust beneficiaries treated as reportable persons where the trust is an FI (as discussed further below). Requirement 2: Selecting a legal basis for the automatic exchange of information A legal instrument is necessary to provide the legal basis for the exchanges of information while also providing safeguards and confidentiality of exchanged information. Legal instruments providing for automatic exchanges under CRS include: (1) double tax agreements containing CRS OECD Model Article 26, (2) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”), Under the Article 6 of the Convention, a Multilateral Competent Authority Agreement (“MCAA”) was agreed. The MCAA does not become operational until the jurisdiction has enacted domestic legislation and the safeguards for data protection/confidentiality are in place. The exchange begins between two signatories once they provide notification of the wish to exchange with each other, and (3) Tax Information Exchange Agreements (“TIEAs”), which provide for the automatic exchange of information. Requirement 3: Putting in place IT and administrative infrastructure and resources To implement CRS properly, tax administrations and FIs will require a technical and administrative IT infrastructure, which will allow (1) FIs to collect the information and report it to the tax administration in its jurisdiction, (2) the local tax administration to receive the information from FIs, (3) the local tax administration to send the information to CRS partner jurisdictions, and (4) the CRS partner jurisdiction to receive the information. Requirement 4: Protect confidentiality and safeguard data The confidentiality and proper use of the data is imperative to CRS. It is advised that these confidentiality restrictions should also include policies that restrict access to sensitive documents, oversee employees, put 4 Baker & McKenzie | September 2015 in place systems to protect the data, restrictions on the transmission of the data, appropriate information disposal policies, regular risk assessments, updates to confidentiality polices as necessary and the policing of unauthorized access and disclosure. Any breach or failure of the confidentiality requirements requires a competent authority to notify the other competent authority immediately. CRS also includes the required domestic framework in relation to breaches of confidentiality, including penalties, sanctions, and investigatory procedures to be triggered in the case of breach. CRS Overview and Due Diligence Rules The CRS contains the detailed rules and procedures that FIs should follow in collecting the relevant information and reporting of such information. These rules should be incorporated into the domestic laws of the implementing jurisdiction. The CRS can be broken down into five steps (which also relate to the chapters in the Handbook): • Step 1 (Chapter 1): reporting FIs • Step 2 (Chapter 2): review their financial accounts • Step 3 (Chapter 3): to identify the reportable accounts • Step 4 (Chapter 4): by applying due diligence rules • Step 5 (Chapter 5): then report the relevant information In the Handbook, there is also Chapter 6, which discusses the CRS treatment of trusts. Chapter 1: Reporting Financial Institutions The CRS contains detailed rules specifying which entities are FIs and which FIs are reporting FIs, based on four steps. • Step 1: Is it an entity? Only entities can be reporting FIs. • Step 2: Is the entity resident in a participating jurisdiction? Entities resident in a participating jurisdiction are within the reporting nexus, and that includes branches located in such jurisdiction, and branches of non-resident entities that are located in such jurisdiction. • Step 3: Is the entity a financial institution? • Step 4: Is the entity a non-reporting FI? Certain governmental entities, international organizations, central banks, retirement funds, credit card issuers, exempt collective investment vehicles, and other low-risk FIs are non-reporting FIs. September 2015 | Baker & McKenzie 5 Chapter 2: Accounts that are financial accounts and therefore need to be reviewed Reporting FIs are required to identify their financial accounts and determine whether any are required to be reported to the tax authority. Accounts that CRS specifies as posing a low risk of facilitating tax evasion (Excluded Accounts) are excluded from further review and reporting. Jurisdictions can specify types of Excluded Accounts in their domestic law. Excluded Accounts should present a low risk for tax evasion and not frustrate the purposes of CRS. It is expected that each jurisdiction will publish a list of Excluded Accounts. Given the varying legal, administrative, and operational frameworks applicable to different accounts in different jurisdictions, there may be cases where the reporting FI may not have all of the information it needs to report. CRS contains examples of such situations and possibilities of how to deal with it. Chapter 3: Financial accounts that are reportable accounts An account is reportable if a reportable jurisdiction person holds the account. This requires a determination regarding whether the account holder is tax resident in a jurisdiction that has an exchange agreement in place. In general, tax residency is determined under the laws of the resident jurisdiction or the place of effective management (in the case of an entity account holder) if there is no tax residency. If the account holder is a reportable jurisdiction person, the FI must determine whether the reportable jurisdiction person is a reportable person. Absent a specific exclusion, the default rule is that a reportable jurisdiction person is a reportable person. If the account holder is a passive NFE, the FI must then identify its controlling persons by looking through the passive NFE. Moreover, an IE that is not a participating jurisdiction FI is a passive NFE regardless of the income it receives or assets it holds. The Handbook refers to the Financial Action Task Force (FATF) recommendations and its use of the term ‘beneficial owner’ to determine who the controlling persons are. It focuses on individuals who exercise control over the entity either directly or indirectly. • With respect to a partnership and similar arrangements, the focus is on individuals “who exercise control through direct or indirect ownership of the capital or profits of the partnership, voting rights in the partnership, or who otherwise exercise control over the management of the partnership or similar arrangement.” • With respect to trusts and entities like trusts, CRS defines the term controlling persons to mean “the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, 6 Baker & McKenzie | September 2015 and any other natural person(s) exercising ultimate effective control over the trust.” • If any of these roles is fulfilled by an entity, the FI must identify the controlling persons of such entity in accordance with FATF recommendations discussed above. If it is determined that the account holder or controlling persons are reportable person, then the account is a reportable account and the FI must gather information related to the account and report it to its tax authority. Chapter 4: Due diligence procedures The CRS due diligence procedures closely track the procedures found in Annex I to US FATCA Model IGAs. Preexisting individual accounts are subject to an electronic indicia search and, high value accounts with balances or values over USD 1,000,000 are reviewed using a paper indicia search. For new individual accounts, participating jurisdiction FIs must request a valid self-certification stating the tax residence(s) of the new account holder. Due diligence is accomplished through one or more reviews of publicly available information and information maintained for KYC and AML purposes, followed by requests for self- certification from the account holder and/or controlling person(s), if necessary. The OECD’s goals for the due diligence procedures are to build off of existing KYC and AML processes (especially for preexisting accounts) and to ensure that the approach taken by FIs is consistent across jurisdictions. Decisions regarding due diligence procedures Participating jurisdictions must make several important decisions when implementing CRS due diligence procedures. • Participating jurisdictions must decide on the applicable deadline for preexisting and new accounts, as the latter requires the application of new documentation requirements. This date will depend on the time required to pass any necessary legislation and by local FIs to institute the procedures related to new accounts. Early adopters have chosen January 1, 2016 as the deadline. • Participating jurisdictions must decide on an appropriate timeframe for FIs to complete certain aspects of the due diligence procedures (e.g., review of high value and low value preexisting individual accounts and review of preexisting entity accounts). The OECD expects that the applicable timeframes will be 12 months for high value preexisting individual accounts and 24 months for low value preexisting individual accounts. • Participating jurisdictions must decide whether to modify the definition of preexisting individual and preexisting entity accounts to include certain accounts (e.g., new accounts opened by account September 2015 | Baker & McKenzie 7 holders already holding preexisting accounts) that otherwise would be treated as new accounts. • Participating jurisdictions must decide whether to modify the procedures related to preexisting individual accounts by either compelling FIs to apply the “residence address test” (discussed below) in place of an electronic indicia search or by granting FIs the ability to elect the application of the residence address test. • Participating jurisdictions must decide whether to allow FIs to elect the application of threshold exemption of USD 250,000 or less for preexisting entity accounts. In addition to these implementation decisions, participating jurisdictions are expected to provide relevant information to assist taxpayers with the determination of their tax residences. The OECD will also endeavor to facilitate the dissemination of such information. Chapter 5: The information that is reported and exchanged The Handbook provides details regarding the information that is required to be exchanged with respect to a reportable account. The jurisdiction of residence for preexisting accounts should be based on the residency test or the indicia search, and for new accounts – on the self-certification. The identifying information required to be reported includes: • name, address, • jurisdiction(s) of residence, TIN(s), • date of birth and place of birth. The account information required to be reported includes: • The account number (or functional equivalent), and • The name and identifying number (if any) of the reporting FI. The financial information required to be reported includes: • The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) or, if the account was closed during the reporting period, only the fact of the closure of the account (but not the balance). • With respect to depository accounts, the total gross amount of interest paid or credited to the account. • With respect to custodial accounts: – The total gross amount of interest or dividends paid or credited to the account. – The total gross amount of other income generated with respect to the assets held in the account paid or credited to the account. This means any amount considered income 8 Baker & McKenzie | September 2015 under the laws of the jurisdiction where the account is maintained, other than any amount considered interest, dividends, or gross proceeds or capital gains from the sale or redemption of Financial Assets. – The total gross proceeds from the sale or redemption of financial assets paid or credited to the account. • With respect to other (i.e., not depository or custodial) accounts: – The total gross amount paid or credited to the account holder with respect to the account with respect to which the reporting FI is the obligor or debtor. This includes the aggregate amount of: (i) any redemption payments made in whole or part to the Account Holder, and (ii) any payments made to the Account Holder under a Cash Value Insurance Contract or an Annuity Contract even if such payments are not considered Cash Value. With respect to jointly held accounts, each holder of the joint account is attributed the entire account balance or value as well as all amounts paid or credited to the joint account. Chapter 6: CRS treatment of trusts CRS classification of trusts For CRS purposes, a trust is resident in any place where a trustee is resident. If a trust has multiple trustees resident in different jurisdictions, the trust is a resident of each such jurisdiction. The general trust residence rule based on trustee residence does not apply if the trust itself is a tax resident in a participating jurisdiction and all information required to be reported in respect of the trust is reported to the tax authority where the trust is resident. For CRS, a trust will be an IE if (among other tests) the trust’s income is primarily attributable to investing in financial assets and the trust is managed by another entity that is an FI. A trust is “managed by” another entity if that other entity performs certain investment management activities for the trust directly or through a service provider. Many private trusts will be IE FIs under this definition. Trust-based collective investment vehicles (e.g., funds structured as unit trusts) will also be IEs. If a trust is an IE under the gross income and managed by tests referred to above and the trust is not resident in a participating jurisdiction FI, reporting FIs who maintain accounts for the trust must treat the trust as a passive NFE and report on its controlling persons. This look-through rule will impact US trustees of US law trusts with non-US controlling persons and non-US accounts, if the US does not implement CRS. Where a trust is an IE, the account holders of the trust are the holders of debt issued by the trust and the holders of “equity interests” in the trust. Trusts do not issue equity as a matter of trust law so the CRS provides September 2015 | Baker & McKenzie 9 special rules to determine who holds the “equity interests” in a trust for CRS purposes. Any person treated as a settlor or beneficiary and any other natural person exercising ultimate effective control over the trust holds an equity interest in the trust. A discretionary beneficiary is only treated as an account holder in a year in which the beneficiary receives a distribution. A contingent beneficiary is treated like a discretionary beneficiary. If a settlor, beneficiary, or other controlling person is an entity, the CRS looks through such entity to the natural persons controlling that entity. A trust that is a reporting FI must report the account information and financial activity for the year in respect of each reportable account. For a trust that is an NFE, if the trust holds an account with a reporting FI, the reporting FI would generally be required to report the trust for CRS purposes. The trust itself will be a reportable person only if the trust is a tax resident of a reportable jurisdiction and is not exempt or excluded. An account held by a trust is also reportable if the trust has one or more controlling persons that are reportable. The controlling persons include the settlor, the trustee, beneficiaries, protectors, and any other natural person exercising ultimate effective control over the trust. • A settlor is reported regardless of whether the trust is revocable or irrevocable. • CRS does not require identifying individual beneficiaries by name where the beneficiaries are possible members of a class. Instead, when a member of the class receives a distribution from the trust or intends to exercise vested rights in the trust property, this is considered a change in circumstances triggering additional due diligence and reporting as necessary in respect of that person. • Named discretionary beneficiaries are considered reportable persons even if they do not receive a distribution during the year. Jurisdictions may permit FIs to align the scope of beneficiaries subject to CRS reporting for both FIs and NFEs. CRS FAQs Annex I of the Handbook outlines responses to FAQs on CRS topics, such as due diligence, self-certification, reporting, non-reporting FIs, financial accounts, and other issues. • Due diligence documentary evidence A reporting FI is not required to retain a paper copy of the documentary evidence, but may do so. A Reporting FI may retain an original, certified copy, or photocopy of the documentary evidence or, instead, a notation of the type of documentation reviewed, the date the documentation was reviewed, and the document’s identification number (if any, for example, a passport number). • Residence address test – manual review of documentary evidence The CRS does not require a paper search to examine the documentary evidence. If the FI has kept a notation of the documentary evidence or 10 Baker & McKenzie | September 2015 has policies and procedures in place to ensure that the current residence address is the same as the address on the documentary evidence provided, then the reporting FI will have satisfied the documentary evidence requirement of the residence address test. • Residence address test – two residence addresses It is possible that after the application of the residence address test the account holder has two residence addresses. For example, with respect to a bank account maintained in Country A, a bank could have two addresses in a case where a resident of Country B is working and living half her time in Country B and Country C. In this case, the bank could seek a selfcertification or could report the account to both reportable jurisdictions where there is a residence address. • CRS status of entities An entity’s status as FI or NFE should be resolved under the laws of the participating jurisdiction in which the entity is resident. If an entity is resident in a jurisdiction that has not implemented the CRS, the rules of the jurisdiction in which the account is maintained determine the entity’s status as FI or NFE as there are no other rules available. When determining an entity’s status as an active or passive NFE, the rules of the jurisdiction in which the account is maintained determine the entity’s status. A jurisdiction in which the account is maintained may permit in its domestic implementation guidance an entity to determine its status as an active or passive NFE under the rules of the jurisdiction in which the entity is resident if the residence jurisdiction has implemented the CRS. • New accounts of pre-existing account holders A jurisdiction may allow reporting FIs to treat a new account opened by an existing account holder (or a related entity within the same jurisdiction as the reporting FI) as a pre-existing account if certain conditions are met. For example, the opening of the financial account does not require the provision of new, additional, or amended customer information by the account holder other than for purposes of CRS. This condition should be interpreted to include any instances in which the account holder is required, in order to open the account, to provide the reporting FI with new, additional or amended customer information (as a result of a legal, regulatory, contractual, operational or any other requirement). The rationale for this condition is that such instances provide an opportunity to obtain a self-certification together with new, additional, or amended customer information as part of the opening of the account. • Reliance on AML/KYC procedures could result in controlling persons not being reported For accounts with a balance or value below USD 1 million (after applying the aggregation rules), it is possible that the FI does not have and is not required to have information for regulatory or customer relationship purposes, including AML/KYC procedures, on file that indicates the controlling person may be a reportable person. Then the FI cannot September 2015 | Baker & McKenzie 11 document the residence of the controlling persons and does not need to report that person as a controlling person. • Reliance on service providers A jurisdiction may allow reporting FIs to use service providers to fulfil their reporting and/or due diligence obligations (Commentary). CRS does not require that the service provider be within the same jurisdiction as the reporting FI or obtain approval from the relevant jurisdiction to act as a service provider. The reporting FI will remain responsible for its reporting and due diligence obligations and the actions of the service provider are imputed to the FI. The jurisdiction must have access to the relevant records and evidence relied upon by the reporting FI and service provider for the performance of the reporting and/or due diligence procedures set out in the CRS. • Reason to know: change of circumstances An account holder is not required under the CRS to include in the selfcertification a requirement to update the reporting FI if there is a change in the information that affects the account holder’s status. However, a reporting FI may prefer or may be required to under a particular jurisdiction’s domestic law to include in self-certifications collected from its account holders a requirement on account holders to inform the reporting FI if there is a change to information contained in the selfcertification that affects their CRS status. • Holding company or treasury center of a financial group An entity serving as a holding company or treasury center of a financial group may be an FI if it meets the definition of FI. This is the case even if the company’s activities or operations are performed solely on behalf of related entities. An entity that, for example, enters into foreign exchange hedges on behalf of the entity’s related entity financial group to eliminate the foreign exchange risk of such group, will be an FI if the other IE definitional requirements are met. • Managed entity FI An entity whose income is predominantly passive will generally be an IE, and thus an FI, if the entity is “managed by” an FI. An entity is managed by an FI if the FI performs (directly or through a service provider) any of the listed investment management activities, including the broad catchall category of “otherwise investing, administering, or managing Financial Assets or money on behalf of other persons.” The managing entity must have discretionary authority to manage the entity’s assets in whole or in part. An FI performing administrative services for an entity unrelated to the entity’s financial assets or money is not considered to be managing the entity. • Indirect investment in real estate An entity’s gross income primarily attributable to investing, reinvesting or trading of directly held interests in real property will not cause the entity to be an IE because real property is not a financial asset. If, instead, an entity 12 Baker & McKenzie | September 2015 is holding an interest in another entity that directly holds real property, the interest held by the upper-tier entity is a financial asset; the gross income derived from the indirect interest is taken into account to determine whether the upper-tier entity will meet the IE definition. • Equity interest reporting balance or value In the case of valuing an equity interest for reporting purposes, FIs use the value calculated by the FI for the purpose that requires the most frequent determination of value. What this value is will depend on the particular facts. Depending on the circumstances it could, for example, be the value of the interest upon acquisition if the FI has not otherwise recalculated the balance or value for other reasons. • Validation of TINs Participating jurisdictions will provide reporting FIs with information with respect to the issuance, collection and, to the extent possible, the practical structure, and other specifications of TINs. The OECD is facilitating this process through a centralized dissemination of the information on the OECD Automatic Exchange Portal (the “Portal”). A reporting FI will have reason to know that a self-certification is unreliable or incorrect if the self-certification does not contain a TIN and the information included on the Portal indicates that the reportable jurisdiction issues TINs to all tax residents. A reporting FI is not required to confirm the format and other specifications of a TIN with the information provided on the Portal. However, reporting FIs may nevertheless wish to do so to enhance the quality of the information collected and minimize the administrative burden associated with any follow up concerning reporting of an incorrect TIN. In this case, they may also use regional and national websites providing a TIN check module for verifying further the accuracy of the TIN provided in the selfcertification. September 2015 | Baker & McKenzie 13 CRS and FATCA Model 1 IGA Comparison In general, the differences between CRS and the US Model IGAs are intended to eliminate US-specificities and reflect CRS’s multilateral approach. The Handbook provides a detailed comparison. The following table summarizes key differences. Issue Comment Nexus for reporting FIs The nexus for reporting FIs under the CRS is the residence of the FI. FATCA Model 1 IGA uses residence and jurisdiction of organization. Categorization of FIs CRS does not contain many of the exempt beneficial-owner and deemed-compliant categories used in FATCA Model 1 IGA. Debt or equity interests in an IE CRS does not exclude debt or equity interests in an IE from the definition of “Financial Account” regardless of whether the interests are regularly traded on an established securities market. Reportable jurisdiction persons Only tax residents of a CRS reportable jurisdiction are considered reportable persons. Double or multiple residency Information is exchanged with all CRS jurisdictions in which the account holder is found to be resident for tax purposes. Residence address test CRS provides an alternate procedure for lower value accounts so that participating jurisdiction FIs can rely on addresses listed on government-issued documentation and certain other documentary evidence when establishing tax residence. Participating jurisdictions have the ability to decide whether to make this alternate procedure mandatory, elective, or not available. Citizenship indicia The citizenship of the account holder is not a CRS indicia. Passive NFEs and controlling persons Controlling persons of passive NFEs are reportable regardless of whether they are resident in the same jurisdiction as the passive NFE. Under FATCA, a US controlling person of a US entity is not reportable by an FI maintaining an account for the US entity. Passive NFE definition Under CRS, an IE not resident in a participating jurisdiction is generally considered a passive NFE. Preexisting accounts CRS provides that participating jurisdictions can decide to include as preexisting accounts new accounts opened by account holders who already hold preexisting accounts with the same FI. Thresholds for pre- existing individual accounts CRS does not include the USD 50,000 threshold for pre-existing individual accounts or the USD 250,000 threshold for cash value insurance and annuity contracts. Cash value insurance contract CRS does not exempt contracts with a cash value of USD 250,000 or lower. Hold mail or in- care-of address Under CRS FIs are required to request documentary evidence or self-certifications from the account holders if an account has a hold- mail or in-care-of address and no other indicia. If such requests do not establish the tax residence, then the FI must report the account as an undocumented account. Paper search Under CRS FIs are required to perform a paper search only with respect to the indicia not captured by the FI’s electronically searchable databases. Entity account procedures If a reporting FI cannot determine whether the account holder of a new entity account is an active NFE or FI (other than an IE resident in a non-participating jurisdiction), it is required to presume that the entity account holder is a passive NFE. Under the US Model IGAs, FIs would treat such accounts as held by nonparticipating FIs. Where an FI cannot obtain a self-certification related to a passive NFE’s controlling persons, the FI must conduct an indicia search. 14 Baker & McKenzie | September 2015 Issue Comment Change in circumstances Where there is a change in circumstances and a self-certification is found to be unreliable or incorrect, the FI must obtain a valid self- certification, must report based on where the account holder claims to be resident, or may be a resident after the change in circumstances. Documentary evidence validity Subject to exceptions, documentary evidence remains valid for five years under CRS. Verbal self- certification CRS generally allows FIs to obtain a verbal self-certification from the account holder. TIN CRS requires FIs to use reasonable efforts to obtain a TIN from the account holder. FATCA Model 1 IGA includes a commitment to require the collection and reporting of TINs. Date and place of birth CRS emphasizes the date of birth of reportable persons. FATCA Model 1 IGA requires date of birth only where TIN is not available for certain pre-existing accounts. Reporting of average monthly balances CRS allows for reporting of the highest and/or monthly average balance or value instead of the balance or value at the end of the calendar year. Dormant accounts Dormant accounts can be excluded from review, identification, and reporting under CRS. Account closure CRS requires reporting the fact that an account has been closed. What is next? The Handbook provides a welcome clarification that should increase the efficiency and consistency of CRS implementation. However, it also shows that many uncertainties remain. The OECD’s stated goal is to assist the countries that have agreed to a FATCA Model 1 IGA and invested in its implementation to leverage that investment to establish automatic exchange relationships with other jurisdictions. Nevertheless, key concerns remain to be resolved such as the differences between CRS and FATCA as well as expected differences in guidance from CRS participating jurisdictions, resulting in burdensome due diligence and reporting regimes that frustrate FIs and confuse their customers and local tax administrations. CRS may also require some FIs that currently are not required to report, to report tax information. The CRS categories of non-reporting FIs include some but not all of the types of institutions contained in FATCA Model 1 IGA Annex 2. For example, FIs required to report under CRS include sponsored IEs, sponsored controlled foreign corporations, and sponsored closely held investment vehicles (these types of FIs are generally exempt from FATCA reporting obligations). The CRS contains a residual category to allow jurisdictions to identify jurisdiction-specific non-reporting FIs. It remains to be seen how participating jurisdictions will implement that residual category, particularly in light of the extensive use of sponsoring for FATCA purposes. A key area for jurisdictions to consider during the legislative process is identifying FIs and accounts that present a low risk for tax evasion, but which the CRS does not identify as such expressly. Jurisdictions must also consider whether such institutions and accounts meet the terms of CRS. In evaluating these low risk tax evasion accounts, jurisdictions can look September 2015 | Baker & McKenzie 15 at the institutions and accounts found in Annex II of the FATCA IGAs. It is expected that each jurisdiction will have a single published list. The Global Forum on Transparency and Exchange of Information for Tax Purposes will review the lists to ensure consistency with CRS. Over 100 jurisdictions have now committed to implement CRS, and during the years 2016 and 2017 many of these jurisdictions will put in place exchange agreements and participate in CRS (the US has not yet committed). CRS will create additional compliance burdens such as new IT systems and an increase in personnel. A “soft landing” would allow jurisdictions to address these and other implementation issues, including the instances in which penalties may apply. FIs will need time to report the information for a given year in the following calendar year but before September of that following year. While CRS does not prescribe a specific approach, jurisdictions may wish to collect the data in the same format in which CRS requires the information to be exchanged, the CRS schema. Consistency is important as it will ensure maximum efficiency. The CRS schema is virtually identical to the FATCA schema and should not require significant additional investment. CRS only provides the minimum standards and not a security process. As part of FATCA, FIs and OECD learned that the due diligence on previous accounts is time consuming and expensive. A wider approach allows FIs to review all of its previous accounts at one time, rather than on a rolling or on-going basis. Jurisdictions may want to consider going beyond the requirements of CRS to enhance its efficiency and its effectiveness, i.e. the fewer times FI needs to complete the due diligence procedures, the less costly for the FI. The Handbook contains an option that would allow an FI to collect and retain residency information for all jurisdictions at once for all account holders and controlling persons. This would allow an FI to minimize costs and more reliably categorize the tax residency of each account holder by performing the due diligence for all jurisdictions at one time, rather than in a piecemeal approach as different countries execute CRS agreements and implement legislation. This approach recognizes that it is challenging for FIs to contact clients repeatedly for residency information. Going forward, every FI would apply CRS onboarding processes for all accounts. For example, in the case of new accounts, persons opening the accounts will need to certify their residence for tax purposes, and if the person is a resident in a jurisdiction that automatically exchanges information, then the details of the account need to be reported. However, if the person is not a resident in such a country, CRS is silent on what to do with the tax residency information. It would not be efficient to have to re-establish whether an account is reportable each time when a new automatic exchange relationship is agreed. Jurisdictions could, for example, require or allow FIs to retain the information for all non- residents, or report all information to the tax authority (including that of the person not a resident in a jurisdiction that automatically exchanges information – which would allow the Tax Administration to 16 Baker & McKenzie | September 2015 www.bakermckenzie.com To find out more about how we can add value to your business, please contact: Richard Weisman +852 2846 1969 firstname.lastname@example.org cross-check the information). Other benefits of adopting a wider approach include, improving the quality of the information collected, and increase in overall effectiveness. There are two ways that the information could be reported to a tax authority: the FI could report only information relating to those jurisdictions that have CRS agreements, or the FI could report all of the information on all preexisting accounts to the local tax authority, which would then transmit it to the tax authorities of CRS participating jurisdictions. The CRS Commentary likely needs to be included in domestic legislation or guidance to be effective. Such provisions include for example, the definition of controlling persons, and the procedure for reporting information for jointly held accounts. Each jurisdiction will also likely need to include guidance for FIs. The optional provisions in the Handbook discussed above reflect the incomplete, evolving nature of CRS. If all jurisdictions that are committed to the CRS would adopt all of the optional provisions, CRS could be implemented consistently, targeting reporting to those areas that pose the greatest potential for tax non-compliance. The Handbook does not take into account a soft landing for penalties. While the CRS does not provide for a standard for penalties, it is likely that many countries will include penalties for non-compliance and incomplete compliance as part of local legislation. It would be helpful if such jurisdictions take a measured approach and waive penalties for substantial good-faith compliance in the first year or two of CRS. Other unresolved issues relate to how countries will audit compliance with the CRS. Should the tax authority or the financial regulator handle the audit? Ideally, an audit will focus on the adequacy and application of policies and procedures, as opposed to an account-by-account review. The OECD intends to update the Handbook on a regular basis treating it as a “living” document. Therefore, as most jurisdictions are only now starting to finalize, propose, or draft the legislation and guidance for implementing the CRS, it is not be too late to resolve further questions for clarification and requests for consistency. The above comments were prepared by: Elliott Murray (Geneva), Rodney Read (Houston), Cecilia Hassan (Miami), Paul DePasquale (New York), Joshua Odintz (Washington, DC), and Lyubomir Georgiev (Zurich). For further contacts and information, please refer to the worldwide contacts in the left margin of the client alert. This publication has been prepared for clients and professional associates of Baker & McKenzie. Whilst every effort has been made to ensure accuracy, this publication is not an exhaustive analysis of the area of law discussed. 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