THE COMMON REPORTING STANDARD

On the 29 October 2014, a total of 51 jurisdictions signed a multilateral agreement to participate in the  automatic exchange of information under the Common Reporting Standard ("CRS"). A further 47 countries have indicated their intention to sign up to the CRS,  42 of these intend to commence automatic exchange  of account information in 2017 or 2018.

Unprecedented numbers of countries have committed  to the CRS in a short period of time, since it was first  published in July 2014, demonstrating the deep  commitment of governments around the world to  tackling tax evasion. 

Local legislation will need to be implemented in each  participating jurisdiction in order to avoid breaches  such as data protection, data privacy and customer  confidentiality. In the UK, the consultation window  on its draft legislation closed on 22 October 2014  and the regulations are expected to be finalised soon  creating the legal obligation on UK financial  institutions ("FIs") to comply.

FIs may wish to consider the following aspects of  compliance listed below.

Classification of Entities

Whilst the CRS heavily builds upon the Foreign  Account Tax Compliance Act ("FATCA"), there are  a number of subtle differences which may affect  whether an entity has any obligation to report the  beneficial owners of any "financial accounts", as  prescribed in the CRS, and how it will certify its status  to other FIs with whom it is dealing.

There are likely to be differences in the classification  of "low-risk" institutions and products for the CRS,  compared with FATCA, given the close economic ties  between a number of participating jurisdictions. In the  UK, given the significantly lower hurdles in doing  business within the EU when compared to the US, the  CRS is likely to increase the number of reportable  accounts relating to cash-value insurance contracts  than those under FATCA.

Due diligence

There could be an increased number of reportable  accounts under CRS than is the case under FATCA.  There are a number of differences in the due diligence  requirements for pre-existing accounts to identify  which are reportable, including but not limited to:

  • the absence of a de-minimis threshold below which  a search for indicia of residence in another  jurisdiction is not required. This means that the number of customers who will need to be contacted to  confirm their status will increase significantly  compared to the remediation required under FATCA.  Substantial numbers of financial accounts not  previously reviewed may need to be considered and  potential false positives cleared.
  • where an existing customer opens a new account, a  self-certification of residence may need to be  obtained where the previous account was not opened  in accordance with current Anti Money-Laundering  ("AML") standards. 

Carefully crafted communication and management  procedures will be critical to customer care.

Any deficiencies that may have existed in the past in  relation to AML/KYC controls are also more likely to be  highlighted given the significant increase in the number  of accounts being reviewed. Any compliance issues that  are identified will need to be carefully managed should a  disclosure to the appropriate regulator be required. 

Reporting

Unlike FATCA, there is no withholding tax to be applied  under the CRS if FIs do not meet their obligations.  However any reporting errors, including failure to report,  will be visible to the domestic tax authorities and may  have an adverse impact on the FI's risk profile.

In the UK, a single information return will be submitted  to HMRC to report for FATCA and all of the CRS  jurisdictions. This information will then be exchanged  automatically by HMRC with the requisite tax  authorities. Therefore any errors in the content of the  return will result in incorrect details being passed on to  overseas tax authorities. As these information returns  will form the basis of any enquiries they may open on  taxpayers, there are potentially severe reputational  consequences of providing incorrect information returns.  The impact of this may far exceed the financial penalties  that HMRC can impose.

Trusts

The classification of trusts under FATCA, together with  the responsibility for registration and reporting, has been  a particular concern. Depending on the nature of its  income and whether the trust is professionally managed,  a trust can be classified as either a Passive or Active  Non-Financial Foreign Entity or indeed an FI. In certain  instances, any reporting obligations can be handled by a  professional Trustee or a "sponsor", although this will  depend on the nature of the trust.

The precise obligations of Trustees under the CRS will  be highlighted in guidance, including the circumstances in which the responsibilities differ from FATCA. This is  expected to be published by HMRC in the next few  months. Given the number of countries that have  announced their commitment to this initiative it is  anticipated that there will be significantly more overseas  of UK trusts beneficiaries reportable under the CRS than  under FATCA.

Future of the UK-Crown Dependency and British  Overseas Territory Agreements

As the UK Crown Dependencies ("CD") and British  Overseas Territories ("OT") have all signed the CRS, the  current UK-CD and OT agreements will have a very  limited life. These are expected to be replaced by CRS  agreements after returns are submitted in May 2016 in  respect of the 2014 and 2015 calendar years.

This may impact on the types of accounts that will be  reportable and which entities are classed as FIs. This  change is an important consideration when developing  procedures to facilitate compliance with the CRS.

The Future of EU Savings Tax Directive ("EUSD")  and the Development Assistance Committee

All of the EU member states have announced their  commitment to the CRS. In addition, bank account  interest details are already exchanged automatically on a  bilateral basis between the UK and Australia, Canada,  Japan, New Zealand, Norway, South Korea and the USA.

The OECD Development Assistance Committee is  currently investigating how to bring EUSD into line with  the CRS. Further announcements on this are expected in  due course.

What should you be doing now

There are many opportunities where the requirements  under CRS will be able to leverage from work that you  are already undertaking for FATCA, notwithstanding that  certain differences exist. Planning for CRS compliance  will therefore be heavily dependent on the impact of these  differences.

Given that FATCA reviews of "low value" accounts need  to be completed by 30 June 2016 (30 June 2015 for "high  value" accounts), there may be scope to co-ordinate or  trial your intended CRS approach when conducting your  FATCA due diligence.

Now may be an opportune time for you to re-evaluate  your plans, given that the first CRS returns will be due  with HMRC by 31 May 2017.