The OECD has established the Standard for Automatic Exchange of Financial Account Information in Tax Matters known as the Common Reporting Standard (CRS). This was based on the Foreign Account Tax Compliance Act (FATCA), and the Intergovernmental Agreements (IGA) launched by the USA in 2014.
Today, more than 100 jurisdictions worldwide have implemented CRS in their domestic legislation, and agreements are being signed to exchange information on financial accounts between CRS participating jurisdictions automatically. The CRS agreements are effective as of 2016 or 2017 with the first automatic exchange between jurisdictions as per 30th September of the subsequent year. This will have a profound impact on your compliance, reporting, as well as structuring.
FATCA & CRS compliance requirements
Every entity has to be classified as either Financial Institution or Active/ Passive Non-Financial Entity (NFE), with each different compliance and reporting obligations. All entities classified as Financial Institutions (FI) in CRS participating jurisdictions that maintain financial accounts have compliance and reporting obligations under the CRS. The FIs include not only banks, mutual funds, and hedge funds, but also trusts with corporate trustees, and many offshore Private Investment Companies with a discretionary mandate granted to investment managers, which are to be classified as FI-Investment Entities.
To be compliant, each FI needs to perform pre-described due diligence procedures to identify financial account holders who are tax resident in CRS reporting jurisdictions. The information of those reportable accounts will be annually reported by the FI to local tax authorities and subsequently will be automatically exchanged between CRS reporting jurisdictions. CRS sets out the personal and financial account information to be reported (balance/value, interest, dividends, and sales proceeds), which FIs need to report and the different types of accounts and taxpayers covered (individuals and entities).