Written by Mark Le Ray
As demands for more standardised levels of compliance grow internationally, Mark Le Ray of Saffery Champness Registered Fiduciaries looks at the ways in which firms and their clients are preparing.
A decade ago it would have been difficult to envisage the amount of compliance and reporting now required of the offshore financial services industry, not least the obligation to report clients’ financial information to multiple jurisdictions around the world.
Yet the Foreign Account Tax Compliance Act (FATCA) is now embedded in the private client landscape and the even more onerous Common Reporting Standard (CRS) has swallowed up Guernsey, Jersey, the UK, and 51 other jurisdictions as early adopters. These countries will report calendar year 2016 information by 30 June 2017 while a further 47 jurisdictions have committed to the CRS first reporting in 2018.
Each participating jurisdiction has been allowed some latitude as to how the CRS is implemented and each will issue guidance notes specific to that jurisdiction. For example, Switzerland’s commitment is only on the basis of bilateral agreements, of which they have relatively few - one being with Europe, while Guernsey and Jersey, although only 21 miles apart, have so far taken very different approaches. This article relates to CRS reporting in Guernsey and the associated guidance notes in place at the time of writing.
Are firms ready?
The procedures followed for US FATCA and its UK equivalent, the information exchange for Crown Dependencies and Overseas Territories (CDOT), have given firms a good foundation on which to implement the CRS. However, while procedures and definitions are similar to FATCA, the CRS contains some key differences and covers many more jurisdictions around the world.
All firms will be familiar with “self-certification” forms as part of FATCA which should have been issued to pre-existing clients, to collate FATCA-relevant data where there are US or UK connections.
The wider approach to CRS adopted by Guernsey dictates that firms should collate relevant data on clients in all jurisdictions, rather than just those having touchpoints with early adopter jurisdictions. Firms who were aware of CRS as well as FATCA may have already sent self-certification forms to all clients requesting sufficient data to cover both requirements and so no further work is required, however, failure of firms to submit accurate reports on time could lead to penalties. Furthermore, firms need to consider the risks to themselves and their clients should the client information provided be inaccurate for any reason.
Also, by now new client onboarding procedures should be in place to ensure information relevant to CRS is collated from the beginning of every new client relationship.
It is vital that firms assess reporting requirements now to ensure that entities are classified correctly for CRS. A key difference between the CRS and FATCA is the lack of choice available under CRS relating to investment entities. The Guernsey and USA Intergovernmental Agreement (“IGA”) permitted some flexibility in how a financial institution chooses to classify entities but under the CRS in Guernsey there is no such choice.
As an example, the so-called “50 percent gross income test” will dictate whether an entity is an investment entity, reported by the financial institution, or a passive non-financial entity (NFE) which would be reported by a third party to whom the financial institution provides details of the controlling persons.
At the time of writing this is not the case for Jersey, whose guidance notes very helpfully specifically state that FATCA definitions can be used for certain classifications as long as they don’t frustrate the purposes of the CRS.
It is important that firms document CRS procedures and ensure that staff are aware of CRS requirements while not forgetting that FATCA reporting will continue for US clients alongside this new global standard. The USA has not committed to the CRS and most commentators believe they will continue on a FATCA-only basis for the foreseeable future. All client entities will therefore have a FATCA classification as well as a CRS classification and it is quite possible they won’t be the same.
All firms should document how entities and individuals have been classified for the CRS and maintain an electronically searchable database of relevant information. It should also be noted that the OECD encourages all CRS jurisdictions to perform an audit of procedures; firms should be prepared for their procedures and CRS records to be checked by the local tax authority.
The reporting will be a similar process to that completed for FATCA with the creation of XML files in a specified format which will then be uploaded to Guernsey’s online portal, the Information Gateway Online Reporter, more commonly referred to as “IGOR”, by 30 June 2017. This is a specialist process which firms are unlikely to be able to undertake themselves therefore incurring the cost and resourcing of systems advice. This information will be collated by the Guernsey Income Tax Authority and forwarded to each relevant participating jurisdiction by 30 September 2017.
The preparation for and implementation of the CRS is a massive task that should not be underestimated. It will have been necessary to critically review policies and processes in place, robustly test them and further review on a regular basis to keep pace with future changes. The systems requirement is just one of the areas that is putting a strain on firms’ resources in terms of time, effort and cost.
Protectors & Excluded Settlors
One peculiarity of the CRS for trusts is that protectors, regardless of how wide or limited their powers may be, are reportable as controlling persons. This leads to the quite ludicrous scenario that an individual with no beneficial interest in the trust will have the entire trust balance reported under their name to their jurisdiction of tax residence. A similar issue appears to arise for excluded settlors who, according to a STEP guidance note dated 1 October 2015, will have the full value of trust assets reportable on them for CRS purposes, despite being specifically defined to report a nil balance under FATCA.
Are clients ready?
Each client will likely have a different opinion on the information being reported under the CRS. An observation is that most accept the global push for more transparency with regard to their financial affairs and, having conducted business in such a well-regulated jurisdiction as Guernsey, are already familiar with compliance requirements which ensure their financial information is accurately maintained and reported.
There is a requirement under CRS to inform clients that information relating to them is being provided to the local tax authority for onward transmission to their jurisdiction of tax residence; this must be completed more than 30 days before the report is submitted.
For clients and firms, complying with the CRS will likely be a huge task and there will be concerns over the amount of information being transmitted across multiple jurisdictions. The Guernsey Income Tax Authority has given reassurance that information will be transmitted only to jurisdictions where they have “adequate data safeguards in place to protect the confidentiality of the information provided”. A list of those jurisdictions will be published by the authority each year.
In conclusion, the approaching CRS is the most significant outcome of the drive towards increased transparency in a globalised financial services environment. Private client firms will be well advanced in their readiness for the CRS – a scenario for which it could be said it is not possible to over-prepare.
An original version of this article was first published in eprivateclient's 2017 Guernsey report, January 2017.