The Common Reporting Standard (CRS) is an OECD-devised standard for the automatic exchange of financial account information between the tax authorities of participating jurisdictions. Over 100 jurisdictions have so far signed up to the standard, with the exchange of information relating to the 54 'first wave' jurisdictions taking place by September 2017. Switzerland, as one of the 47 second wave jurisdictions, will begin to exchange information from September 2018.
Broadly, the standard operates by the collection of relevant information by financial institutions, which is then reported by those institutions to the tax authority in the jurisdiction where they are situated. The tax authority then exchanges that information with the relevant tax authorities in other participating jurisdictions.
For 'reportable persons' (individuals tax resident in a participating jurisdiction) holding an overseas bank account for example, the impact of CRS is fairly straightforward. The bank is likely to be a 'reporting financial institution' and accordingly will use its own due diligence procedures to gather relevant information about the account holder. It will then report this information to its domestic tax authority, which will then exchange the information with the tax authority where the account holder is resident. The information exchanged will include the name, date and place of birth, tax identification number (TIN) of the account holder, as well as financial information relating to the account.
The CRS is also relevant to trusts, however the duties and obligations imposed depend on whether a trust is classed as a 'reportable financial institution' (RFI) or a 'passive non-financial entity' (Passive NFE).
If a trust is an RFI (broadly, if it has a professional corporate trustee whose primary business is investing and managing clients’ assets and most of whose income derives from investing and trading financial assets), the onus is on the trust itself to collect and report relevant information on accounts held by reportable persons. An account holder of a trust is someone with an 'equity interest', which the CRS defines as a settlor, beneficiary, or any natural person exercising ultimate effective control over the trust. The latter definition has been designed as a residual category, to ensure that the rules cannot easily be circumvented. Note though that a beneficiary will only be an account holder if they receive a distribution from the trust during the relevant reporting period. The information reported includes the account holder’s name, address, date of birth, TIN and the total gross amount paid or credited to the account. Once this information is reported to the local tax authority, it will be freely exchanged with any jurisdictions in which the account holders are resident, assuming those states have signed up to the standard.
A trust that is not an RFI will be an Active or Passive NFE. The CRS has a closed definition of Active NFEs and most trusts that are NFEs and are set up for wealth protection will be Passive NFEs. Passive NFEs do not have reporting obligations under the CRS, however they are very likely to have an account with a financial institution that is itself a reporting entity. That entity, as an RFI, will therefore be obliged to collect information about the trust and report it to its local authority.
Specifically, the RFI must identify the 'controlling persons' of that Passive NFE, which in the case of a trust is defined as the settlor, trustees, protector, (class of) beneficiaries and any natural person exercising ultimate effective control over the trust. Again, only a beneficiary receiving a distribution during the reporting period will be treated as a controlling person. Note though that here, protectors and trustees are expressly included in the definition of controlling persons, whereas they are not 'account holders' for trusts that are RFIs (although either might be persons exercising effective control over the trust). The relevant information (the name, address, and place and date of birth of each controlling person, plus the value and movements on the accounts) is reported and then exchanged to all relevant participating jurisdictions’ tax authorities.
Account holders and controlling persons will therefore have their information disclosed and exchanged, and their tax affairs and structures scrutinised, like never before. Affected persons should ensure that their house is in order before the information starts to flow across jurisdictions.