Common Reporting Standards

Capital V #8 | by Benoit Dewar, Head of Regulatory Services, Deputy Head of Depositary Services, Alter Domus

CRS is in essence very similar to FATCA, the main difference being that CRS covers over 95 jurisdictions while FATCA only covers the US.

What is CRS?
International co-operation in tax matters and global tax transparency have been a concern since the end of the 90’s, but this has taken a step up following the global financial crisis and the implementation of FATCA (Foreign Account Tax Compliance Act) between 2010 and 2014.

The need for a more global exchange system became apparent and it is in this context that the OECD released the Common Reporting Standard (CRS) on 15 July 2014, to ensure an effective automatic exchange of information between participating countries.

In October 2014, 51 countries willing to participate, including Luxembourg, signed a CRS Multilateral Competent Authority Agreement (CRS MCAA), which put into effect this automatic exchange of information.

As of 30 June 2016, over 95 jurisdictions have signed the CRS MCAA (the “Partner Jurisdictions”).

Financial Institutions in these Partner Jurisdictions have to automatically exchange through their respective tax authorities, “bulk” taxpayer information from the source country to the residence country concerning various categories of assets and income (account balances, dividends, interest etc.).

Furthermore, bilateral agreements have to be signed between the Partner Jurisdictions for the exchange of information to become effective.

Why do we have to comply in Luxembourg?
In December 2014, the EU adopted the text of the CRS via the Directive 2014/107/ EU amending Directive 2011/16/EU with regards to the mandatory automatic exchange of information in the field of taxation (Directive on Administrative Cooperation –DAC). Directive 2014/107/EU is also called DAC 2 and entered into force on 1 January 2016. DAC 2 was transposed into Luxembourg law on 18 December 2015.

What do we have to do?
CRS is in essence very similar to FATCA, the main difference being that CRS covers over 95 jurisdictions while FATCA only covers the US.

The first step to take for each entity will be to determine its CRS status. It is almost impossible nowadays to open a new bank account in Luxembourg without providing this status.

Entities which are categorised as Financial Institutions will have to:

• Identify their account holders (i.e. shareholders and debt holders) by obtaining a self-certification, disclosing their CRS status (for entities) or their tax residency (for individuals).
• Report to the Administration des Contributions Directes (ACD) any entity which is classified as PNFE (Passive Non-Financial Entity) with controlling persons located in a country within the CRS scope and any individual located in a country in the CRS scope.
• The ACD will then dispatch this information to the relevant local tax authorities. Since 1 January 2016, Financial Institutions are under an obligation to identify their new account holders.

As of 31 December 2016, existing accounts (i.e. accounts opened before 1 January 2016) of individuals with value above EUR 1,000,000 will also have to be identified. The first reporting date will be in June 2017.

As of 31 December 2017, all other existing accounts (i.e. lower value individual accounts + entity accounts) will also have to be identified.

What are the challenges?
The main challenges are caused by the scope of CRS, as it covers almost 100 countries.

Consequently, reports will no longer only target US reportable accounts, but reportable accounts from several different countries.  Blank reports will become less frequent and report content will often be more consequential.

This will also have an impact on the disclosure of controlling persons. It was quite common, under FATCA, that a Passive NFFE (Non-Financial Foreign Entity) did not disclose any of its controlling persons as there were not usually any US ones.

However, under CRS, it is expected that controlling persons are disclosed on the self-certification of the PNFE (Passive Non-Financial Entity) even though it ends up to be the senior management of this entity.

Finally, given the sensitivity of the topic, adopting an integrated approach with other KYC requirements and being instructive with investors regarding this new regulation will be key.