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.
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.
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.
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.