The CRS will require financial institutions to report information to their own jurisdiction and this information will in turn be passed on to other relevant countries automatically each year. It is not designed to replace any existing basis or any other means of information exchange, but instead intends to supplement current measures. The CRS, although closely modeled on FATCA, is not simply a straightforward extension of FATCA. The CRS is based upon tax residence and, unlike FATCA, does not refer to citizenship. Not only do FI’s have to report on far more than only US persons, but on far more accounts than they would under FATCA. Unlike FATCA, which forgives tax liability on smaller accounts (less than $50,000), all individual accounts and new accounts opened by financial entities are considered reportable.
The CRS is wider reaching and, as a multilateral agreement, multiplies the reporting obligations of FI's. The CRS represents another global compliance burden for FI's and increases the risks and costs of servicing globally wealthy customers. The good news for FI's is that this standard follows in the footsteps of FATCA and is explicitly modeled on the approach taken in FATCA's Model 1 IGA. However, there is no withholding option under the CRS so those who think that, because they have the systems in place to deal with FATCA reporting, they have no work to do, will have to think again. The data required is different and the volumes are likely to be significantly greater under the CRS.
Unlike FATCA, which allows fund managers to report on their underlying funds, the CRS requires each individual fund to file on its own, reporting directly to the tax authorities in other nations. The result will be greater compliance burden for global funds.
What are the implications for FI's?
FI’s have two main tasks under the CRS. Their initial task is to identify ‘reportable accounts’. Reportable accounts are financial accounts held by tax residents in relevant CRS reportable countries. This include accounts held by individuals and entities (which includes trusts and foundations), and the requirements to look through passive entities to provide information on reportable persons.
Having identified ‘reportable accounts’ FI’s then have an obligation to report the financial information (balances, interest, dividends and sales proceeds from financial assets) on an annual basis to their local taxation authorities which will, in turn, pass that information on to the tax authorities where the account holder is resident.