United States: The OECD Issues An Updated CRS Implementation Handbook

The Organization for Economic Co-operation and Development (the "OECD") has published version 2.0 of its Common Reporting Standard (the "CRS") Implementation Handbook (the "Handbook"). Several of the changes will be of particular interest to high net worth individuals using trusts and other fiduciary structures globally for wealth planning purposes:

  • Protectors – The OECD has confirmed that it expects Protectors to always meet the definition of "exercising ultimate effective control", and thus be Reportable Accountholders of Financial Institution ("FI") trusts, regardless of whether the Protector holds any powers or actual control. While appearing to contradict the plain language of the Model Commentary, it now seems clear that local authorities who adopt the OECD guidance will expect to receive information exchanged as to Protectors.
  • Revocations & Distributions – The OECD made several changes to the Handbook chart that lists reportable financial activities. In doing so, the OECD created further confusion in regard to whether revocations are considered as a "gross amount paid or credited to the settlor". Distributions had previously been clearly addressed, but now all direct references to distributions have been struck from the chart and replaced by the "gross amount paid or credited" language.
  • Account Closures – The OECD further muddied the waters in explaining the distinctions between FI and  Non-Financial Entity ("NFE") trusts, stating in separate sections that when an account closes in the structure, "the fact of closure is reported (in addition to any distributions made prior to closure)" for FI trusts and "where the financial account held by the trust is closed during the year, the fact of closure is reported and the gross payments made or credited until the date of account closure" for NFE trusts. The result is to skew the data reported and potentially encourage closures to avoid certain reporting.

These are just a few key aspects of the changes made in the 2nd edition. The document, meant to give practical guidance to those tasked with implementing CRS locally, has swelled from the previous 118 pages to 171 pages.

Conspicuous in their absence or notable in the lack of any substantive updates are the following troubling conclusions still in place from the 1st edition:

  • Trustees as Accountholders – The Handbook has not changed the status of trustees as accountholders in FI trusts and as Controlling Persons of NFE trusts. The result is the extraneous treatment of trustee data which does not "correspond to the obligation to identify the beneficial owner of a trust under domestic AML/KYC procedures". Coupled with the "no entity accountholders in trusts" conclusion below, the troubling outcome is that it needlessly exposes the data of corporate trustee senior management to cross-border exchange.
  • Debt Interest Confusion – The Handbook has not updated the definition of a debt interest, instead continuing to defer to a determination "under the local law of each implementing jurisdiction".  This continues a disturbing trend of the guidance becoming the UNCommon Reporting Standard.
  • No Entity Equity Interest Holders in Trusts – The OECD has provided that FI trusts must always look through any entities holding an Equity Interest and instead treat the entity's Controlling Persons as the account holder. The result will relieve FI trustees from some due diligence obligations. However, this may also cause some duplicate reporting and the reporting of individual data which does not "correspond to the obligation to identify the beneficial owner of a trust under domestic AML/KYC procedures".

We are in the early years of global information exchange regimes' rollout. FATCA laid out a standard model approach and the OECD Model Commentary spread it globally. This update and other elements of published practical guidance demonstrate that it will be many years – if not decades – before we see certainty in the regulations governing these regimes. High net worth individuals and families, their advisors and fiduciaries of multi-jurisdictional wealth planning structures should seek proper guidance to ensure that they meet all requirements ahead of key reporting deadlines this year and in years to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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