Common Reporting Standard: anti-avoidance measures
Article 3 minute read

Common Reporting Standard: anti-avoidance measures

02 August 2018

Compliance with the CRS is not a choice; it’s an obligation. And the penalties for non-compliance are severe.

More than 100 countries have adopted the Common Reporting Standard, adding a new level of transparency in the financial world.

Financial institutions across the second wave of countries operating under the CRS are completing, or have recently completed, their filing obligations. And local authorities in those countries are preparing to exchange this information in September. At the same time, the originator of the Common Reporting Standard (CRS) – the OECD – focusses on arming participating countries with directives on how to counteract CRS avoidance tactics.

Compliance with the CRS is not a choice; it’s an obligation. And the penalties for non-compliance are severe. Anyone considering avoidance of information disclosure will pay dearly – not just through financial penalties but also, potentially, through criminal proceedings and reputational damage.

Financial transparency

‘Financial transparency’ traditionally meant timely, meaningful, and reliable disclosures about a company's financial performance. But CRS law specifically calls on financial institutions (FIs) to disclose financial information about non-residents to their tax authorities, who in turn exchange this information with the tax authorities in the account holder’s country of residence.

If the tax payer doesn’t want to disclose information about certain assets, there’s a dilemma for the FI. Any FI not properly reporting is likely to get caught. Financial Institutions could face audits and investigation if they are not or not properly performing the due diligence, data collection and data recording procedures specifically prescribed under CRS rules.

Anti-avoidance measures

By the pace at which financial transparency rules increase, there is an obvious momentum of anti-avoidance measures. The OECD recommends that all countries implement Mandatory Disclosure Rules for tax advisers and intermediaries. These rules require certain intermediaries to report CRS avoidance schemes. The focus here is on deliberate practices aimed at avoiding disclosure, rather than non-compliance with reporting obligations.

The EU has initiated a mandatory disclosure regime, aiming to tackle the perceived misuse of structuring to evade tax. New EU legislation, taking effect from July 2020, will require accountants, bankers, lawyers, and other tax professionals to report certain aggressive tax planning arrangements to revenue authorities. Other jurisdictions are expected to follow suit.

The OECD is also concerned about the misuse of Citizenship/Residence By Investment (CBI and RBI) schemes to circumvent reporting under the Common Reporting Standard. As part of its CRS loophole strategy, the OECD released a consultation document to assess misuse; to identify the types of schemes that present a high risk of abuse; to remind stakeholders of the importance of correctly applying relevant CRS due diligence procedures in order to help prevent such abuse; and to explain next steps that the OECD will undertake to further address the issue, assisted by public input.

Countries adopting CRS have committed to implementing the Standard effectively, translating reporting obligations into domestic law and imposing penalties for non-compliance. Financial penalties for non-compliance generally increase along with the severity of the compliance failure. Whilst the compliance framework will differ per country, the OECD provides direction, aiming for a level playing field. The latest CRS guidelines include methods for identifying financial institutions or entities that might be FIs; methods to identify potential compliance risks and failures, and for monitoring investigations and sanctions imposed.

Jurisdictions will share information about a company and can easily identify compliance failures. For multi-national groups this means that a compliance failure in one country could have an implication for many other countries, highlighting an FI’s risk exposure.

Periodic reviews could follow, requiring FIs to submit their policies and procedures to the regulator. Staff training, stricter records keeping, and mandatory internal controls or audits could be imposed and are generally recommended as part of any obligated entity’s CRS compliance program.

After implementing a CRS compliance programme, it is key for any impacted entity to put measures in place to identify any gaps in its procedures. If you are not confident that your CRS compliance program is robust enough, even if you cannot pinpoint the exact shortcomings, now is the time to get expert help.

Talk to us

If in doubt, seek help from an experienced international partner such as TMF Group. Our professionals can perform a proper review and necessary remediation. In certain instances, regulators give obligated entities an opportunity to correct and adjust their filings. But apart from this, there may be a need to reassess and validate procedures, or even an entity’s status under CRS. 
Need more information? Get in touch with us today.

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Written by

Izabella Koeijers

Portfolio Director, Compliance and Regulatory Services

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