The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
Common Reporting Standards will give governments worldwide a clearer picture of the assets held outside their own jurisdiction by their tax residents. CRS is a result of coordinated efforts between groups such as the G20 and the OECD, to collect tax on undeclared assets globally and create a new level of global transparency.
The introduction of this reporting standard follows the evolution of a very similar reporting obligation introduced by the US government in the last few years called FATCA (Foreign Account Tax Compliance Act) but is actually a revised version of the 1988 Convention on mutual administrative assistance in tax matters. FATCA reports, detailing accounts held by US citizens, are filed by financial institutions for all US citizens living abroad, as the US taxation system focusses on citizenship rather than tax residency. CRS fulfils the same purpose by ensuring that the details of financial accounts in all jurisdictions make their way back to the relevant tax authorities where the account owner is tax resident.
Automatic Tax Information Exchange
The concept of information exchange between countries is not new. For many years there have been bilateral and multilateral exchange agreements and TIEAs (Tax Information Exchange Agreements). However, CRS requires the exchange of the information to be automatic, and a formal request from one authority to another will no longer be required.
These new reporting obligations mandate financial institutions (including professional services companies like TMF Group) globally to automatically report detailed information on their non-tax resident clients to their own tax authority, which in turns reports the information to the tax authority where the client is indeed tax resident.
The resident tax authority can then assess whether the tax payer has accurately reported the information they have received on his or her tax return. Financial institutions which are obligated to report will generally include banks and other investment managers, insurance providers, trusts and potentially holding companies.
It is an understatement to say that the rules, regulations and commentary on CRS are complex and detailed. CRS will provide common parameters but these will be implemented in local laws by local governments. However, it is clear that the type of information to be passed from a financial institution to a tax authority will include (but is not limited to) the name, address, date and place of birth and tax residence of the account holder, identity and residence of the ultimate beneficial owner (if the account is in the name of an entity rather than an individual), account numbers, total assets held, types of assets held, payments or distributions made and any sales or redemption proceeds details.
Timeline for change
CRS has received significant political attention worldwide and many jurisdictions have signed their intention to exchange information under these new rules.
There are two groups of countries that have signed onto CRS. The first group generally referred to as the “early adopters”, will start reporting information in the “CRS First Wave” to their tax authorities for exchange to foreign tax authorities in September of 2017. It is important to note that the details exchanged will be account details from the calendar year 2016. The second group, the “late adopters”, will start exchanging information from the 2017 calendar year, in September of 2018.