UK: FATCA & The OECD's Common Reporting Standard – Q&A

The Common Reporting Standard (CRS), a global initiative to introduce the automatic exchange of information on financial accounts beneficially owned by residents of foreign countries, took effect on 1st January 2016. Governments of signatory countries have drafted or are in the process of drafting local legislation in accordance with guidance provided by the OECD in August 2015. Financial institutions, including Sovereign, will need to report details of accounts owned by individuals, companies, trusts, foundations and other structures to their local tax authorities which will then exchange that information with the tax authority of the beneficial owner's country of tax residence on an annual basis.

:: Also read how additional reporting requirements brings headaches to banks and their clients? here.

CRS reporting begins in 2017 or 2018 depending on the country in question (see details below), but every economically significant jurisdiction has now signed up. That means that revenue authorities worldwide will soon be collating tax data supplied by foreign financial institutions. CRS signals the end of banking secrecy and confidentiality and, as Sovereign has been saying for many years, any tax planning that seeks to defeat tax transparency will be doomed to failure.

Q1. What is the CRS?

A1. The Common Reporting Standard or CRS is the method and rules by which automatic exchange of information will be introduced after 1st January 2016 in most countries and territories of the world.

Q2. Who does the CRS apply to?

A2. The CRS potentially applies to any individual who is tax resident in any of the many CRS signatory jurisdictions.

Q3. Are the reporting agreements the same for each jurisdiction?

A3. The CRS provides for various models of operation to allow for ease of adoption, such as multilateral agreements, non-reciprocal agreement models (so that jurisdictions which have no native income tax can provide reportable information) and those which work bilaterally in conjunction with double taxation agreements.

Whilst the agreements are largely standard, there are some defined areas which have been left flexible to allow for local variations in application. These include the application of thresholds under which entity accounts need not be reported and how beneficiary reporting is to be handled. Clients are urged to seek advice from their tax adviser in relation to country specific issues.

Q4. Which jurisdictions have signed the CRS?

A4. At the time of drafting this Q&A the following countries had already signed up to CRS in one of two tranches.Tranche A jurisdictions are: Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Chile, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, the United Kingdom and Uruguay. Tranche B jurisdictions are: Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, China, Costa Rica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Marshall Islands, Macao (China), Malaysia, Monaco, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Saint Maarten, Switzerland, Turkey, and the United Arab Emirates.

Q5. When will reporting take place?

A5. It is expected that reporting will be undertaken in June of each year. For the Tranche A group of jurisdictions the first reports will be filed in 2017 and for the Tranche B group jurisdictions the first reports will be filed in 2018.

Q6. What will be reported?

A6. The information to be reported by Financial Institutions is equivalent to that required to be reported by individuals in their tax returns. Information will be provided in respect of reportable financial accounts.

Q7. What is a reportable financial account?

A7. Foreign bank accounts, custodian and investment accounts will be reportable, even if held indirectly through a corporate vehicle. However, an "equity interest" in a trust is also a "financial account" for reporting purposes. Even if not an "investment entity", if 50% or more of a trust's assets produce "passive" income (dividends, interest, rent, royalties, etc.), the trust will be a "Passive Non-Financial Entity" (NFE) and equity interests in that NFE may be reportable.

Q8. Can you advise me how to circumvent automatic tax reporting?

A8. No. Concerned clients should consult the tax or treasury website in their local jurisdiction or seek advice from their tax adviser.

Q9. Could I face any liability?

A9. Not if you have satisfied your own obligations to file full and complete tax returns in the countries in which you are tax resident. If you are delinquent in your filings then you may face penalties and possibly even criminal liability.

Q10. Why are you doing this?

A10. Financial Institutions have no choice. All Financial Institutions in signatory jurisdictions must comply with the CRS. Financial Institutions are not investigating clients but simply collating and reporting information. This trend towards transparency and automatic exchange of information is likely to continue and in future will become the norm.

Q11. What happens if you do not comply with the CRS?

A11. If Financial Institutions do not comply they will be subject to penalties under local legislation. In practice, Financial Institutions will not deal with each other unless they are demonstrably compliant and able to produce their global intermediary identification number (GIIN) issued by the Inland Revenue Service in the USA. Therefore, Financial Institutions will need to comply if they are to continue in business.

Q12. What if I refuse to provide information?

A12. In some jurisdictions Financial Institutions are required to close accounts or cease acting for clients who do not provide information that the Institution is obliged to collect.

Q13. What can I do now?

A13. Ensure that you have satisfied your own obligations to file full and complete tax returns in the countries in which you are tax resident.

Q14. What if I know that I am in default of my obligations?

A14. Concerned clients should consult the tax or treasury website in their country of tax residence or seek advice from their tax adviser to establish whether there are local arrangements in place for persons who have hitherto undeclared tax liabilities resulting from overseas assets or investments to make any required disclosures to settle and rectify their tax affairs quickly and cost effectively in advance of the commencement of the automatic exchange of tax information.

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.