The Common Reporting Standard: Impact on Financial Services Institutions

By Denise Hintzke, J.D., and Andrea Garcia Castelao, J.D., New York City

Editor: Alex J. Brosseau, CPA, MST

The Common Reporting Standard (CRS) is the standard for automatic exchange of financial account information (AEOI) developed by the Organisation for Economic Co-operation and Development (OECD). CRS is a broad reporting regime that draws extensively on the intergovernmental approach to the implementation of the Foreign Account Tax Compliance Act (FATCA), P.L. 111-147, and, similar to FATCA, CRS requires financial institutions resident in participating jurisdictions to implement due-diligence procedures, to document and identify reportable accounts, and to establish a wide-ranging reporting process.

On July 21, 2014, the OECD released the first version of the Standard for Automatic Exchange of Financial Account Information in Tax Matters, which contained the different model competent authority agreements (MCAAs) to be signed by the participating jurisdictions (including a multilateral MCAA, a bilateral MCAA, and a nonreciprocal MCAA); the CRS itself, which provided the documentation and due-diligence rules applicable to the financial institutions; as well as commentaries on the provisions of the MCAA and the CRS user guide. By December 2015, over 95 jurisdictions signed or were committed to sign the CRS. More than 50 jurisdictions are considered "early adopters," which means that they will exchange information on financial accounts automatically starting in 2017. The rest of the jurisdictions have committed to automatically exchange information starting in 2018.

Timing

The information to be exchanged corresponds to the prior year. Therefore, financial institutions that fall within the definition of a reporting financial institution in any of the early-adopter jurisdictions will need to implement CRS onboarding and due-diligence requirements starting Jan. 1, 2016, to ensure that they are capturing the information needed to perform the reporting in 2017, thereby allowing their jurisdiction to send information before September 2017 to the jurisdictions with which it has agreed to automatically exchange information.

With respect to preexisting accounts, reporting financial institutions in early-adopter jurisdictions need to complete the review of their high-value individual accounts by Dec. 31, 2016. Therefore, reporting financial institutions in these jurisdictions will be required to report, at a minimum, new individual and entity financial accounts identified as reportable as well as high-value preexisting accounts identified as reportable. For the remaining preexisting accounts (i.e., preexisting lower-value individual accounts and preexisting entity accounts), the review will need to be completed by Dec. 31, 2017, and the accounts will be reported in 2018 for the first time.

Reporting financial institutions in non-early-adopter jurisdictions generally will need to implement CRS requirements starting Jan. 1, 2017, to collect the information that will be exchanged by their jurisdiction in 2018. Likewise, they will need to complete the review process for preexisting accounts one year later. (See the exhibit below for a timeline of key CRS implementation dates.)

Exhibit: Key dates for CRS implementation

 

Differences Between CRS and FATCA

Despite the fact that CRS draws extensively on the Model 1 Intergovernmental Agreement (Model 1 IGA) approach of FATCA, there are key differences that require specific onboarding, remediation, and reporting enhancements and processes. For example, the scope of CRS is broader than FATCA as it aims to identify tax residents in any of the 95-plus jurisdictions participating in CRS. Furthermore, the account scope may be significantly greater than FATCA's because most thresholds applicable under FATCA are not applicable within CRS, and the categories of entities that have to provide information on controlling persons are broader. IRS forms (e.g., Forms W-8 and W-9) are generally not acceptable, and reporting financial institutions will need to collect specific self-certifications covering the CRS requirements (e.g., CRS self-certifications need to allow the account holders to certify multiple tax residencies or provide CRS classifications that differ from FATCA).

Another key difference between FATCA and CRS is that CRS legal entity classifications can vary significantly from FATCA legal entity classifications. This difference may require a significant effort in the financial and nonfinancial services industries as they will need to confirm the classification of entities within their affiliated group, substantially increasing the cost of legal management of classifications and documentation.

Finally, unlike FATCA, CRS does not impose a withholding requirement. Instead, CRS enforcement will be handled by each of the jurisdictions adopting CRS that will be required to establish an audit and penalty regime for lack of compliance with the rules.

One important challenge associated with CRS is that even though the standard intends to impose uniform requirements across the jurisdictions adopting this new global information reporting regime, the reality is that each jurisdiction is entitled to exercise different options and expand the minimum requirements established in the standard. In addition, the residency definitions and data privacy and protection rules can vary from country to country. As a result, stakeholders will need to monitor the rules, guidance, approach, reporting forms, etc., that each jurisdiction releases.

The U.S. Position

The United States has neither signed nor committed to sign the CRS. According to the most recent Status of Commitments for AEOI (a list that summarizes the intended implementation timelines of the new standard by all the jurisdictions that have signed or are committed to sign CRS) released by the OECD's Global Forum on Transparency, the United States has indicated that it will be undertaking automatic information exchanges under FATCA beginning in 2015, which means it will achieve equivalent levels of reciprocal automatic information exchange with certain partner jurisdictions. It also highlights that these IGAs include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve the equivalent levels of reciprocal automatic exchange.

CRS Lookthrough Rule

CRS requires competent authorities of the participating jurisdictions to publish a list that identifies participating jurisdictions for the purposes of the CRS's lookthrough provisions with respect to controlling persons of investment entities that are nonparticipating jurisdiction financial institutions. Only a few of the 96 countries implementing CRS have currently released a list of participating jurisdictions. None of the lists released (e.g., the United Kingdom and India) recognize the United States as a participating jurisdiction. This means that the United States is likely to be a nonparticipating jurisdiction for most countries and therefore subject to the lookthrough provision.

The CRS lookthrough rule requires reporting financial institutions to treat an account holder that is an investment entity managed by another financial institution (including by an investment adviser or an investment manager) that is not a participating jurisdiction financial institution as a passive nonfinancial entity (NFE) and to document and report the controlling persons of the entity that are reportable persons.

Investment vehicles, including investment funds and trusts in the United States, generally will be treated as investment entities managed by another financial institution. Therefore, U.S. investment vehicles and funds may fall within the scope of the passive NFE definition and may need to identify their controlling persons.

It is specifically recognized in the CRS Commentaries that collective investment vehicles may qualify as passive NFEs with controlling persons that are reportable persons. It should also be noted that according to the CRS Commentaries, each of these controlling persons needs to sign (or positively affirm) its own information. This directive may be interpreted to mean that those U.S. investment vehicles and investment funds will likely need to provide self-certifications from their controlling persons. Under this requirement, when U.S. investment entities have any financial accounts (including equity or debt interests) in a participating jurisdiction (e.g., the Cayman Islands), they will need to provide self-certifications for both the entity and the controlling persons to the counterparty where they maintain the accounts.

The standard also seeks to attract investment entities incorporated in nonparticipating jurisdictions into participating jurisdictions, by indicating that a nonparticipating entity that is managed or controlled by an entity in a participating jurisdiction will be treated as a participating entity. For example, a trust is considered to be subject to the jurisdiction of a participating jurisdiction if one or more of its trustees are resident in a participating jurisdiction, irrespective of whether they are resident for tax purposes in that participating jurisdiction. In other words, a trust established in the United States will be considered a reporting financial institution in a participating jurisdiction if any of its trustees are tax resident in a participating jurisdiction, regardless of the court and control test that applies in the United States to establish the tax residency of the trust.

In addition, financial institutions (other than trusts) that do not have a residence for tax purposes or are located in a jurisdiction that does not have an income tax are considered to be subject to the jurisdiction of a participating jurisdiction (and, therefore, are considered reporting financial institutions in that jurisdiction) if either (1) they are incorporated under the laws of a participating jurisdiction, or (2) they have their place of management in (including effective management), or are subject to supervision in, a participating jurisdiction.

Implications

Due to the complexity of these rules, financial institutions incorporated inside and outside the United States should assess the CRS rules and determine how they are affected. Knowledge of how other countries have adopted the standard may allow financial management professionals to provide beneficial guidance to their clients and their operations team on how to follow reporting and compliance rules in participating jurisdictions.

EditorNotes

Alex Brosseau is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.

For additional information about these items, contact Mr. Brosseau at 202-661-4532 or abrosseau@deloitte.com.

Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.

Newsletter Articles

SPONSORED REPORT

Year-End Tax Planning and What’s New for 2016

A look at year-end tax planning strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

PRACTICE MANAGEMENT

CPAs Contend With Tax ID Theft

Tax-related identity theft fraud remains a widespread problem that is often difficult for victims and their tax preparers to correct.