donderdag 26 maart 2015

How does the CRS Regulation interact with FATCA?

The Common Reporting Standard (CRS) is a standard developed by the Organisation for Economic Co-operation and Development (OECD) for the automatic exchange of information. It is an effort to make the automatic exchange of information between tax authorities the global standard, effectively replacing the exchange of information on request as the usual way of doing business. Like FATCA, the CRS will require financial institutions (FI’s) around the globe to play a central role in providing tax authorities with greater access and insight into taxpayer financial account data including the income earned in these accounts.
FATCA versus CRS
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.
The CRS sets out in detail the robust Due Diligence procedures FI’s must follow. These procedures are necessary to enable the identification of reportable accounts and obtain the accountholder identifying information that is required to be reported for such accounts.
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.
An issue that already exists under FATCA and will be expanded exponentially under the CRS is that reciprocity means every government bears the cost of incorporating expansive financial surveillance. Each participating country must work to put in place administrative procedures and IT systems to safely exchange information with other participating countries while ensuring that the information received is kept confidential only used for the purposes specified in the Competent Authority Agreement (CAA). This is a particular issue for developing countries, as the Tax Justice Network (TJN) points out, this formal equality in fact introduces substantive inequality and potentially great harm to poorer countries. Hence the plans to assist them to achieve the standards.
When is it happening?
Approximately 51 jurisdictions are 'Early Adopters' of the CRS. FI's based in those participating jurisdictions must have their due diligence processes in place by the end of 2015 as the first reports will be in respect of the 2016 calendar year. The first exchange of information will take place in September 2017, but this will require FI's to report to their local tax authorities some time in advance of this date. A further 34 countries, including Hong Kong, Switzerland, Singapore and United Arab Emirates will start reporting in 2018, one year later than the 'Early Adopters'.
For further information please contact me.

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