Now with more than 100 participating countries, the CRS is the global standard for the collection, reporting and exchange of financial account information on foreign tax residents. The standard regulates this exchange of information between tax authorities on an annual basis.
Under the CRS, financial institutions such as banks and other deposit taking institutions, custodial institutions, certain investment entities, and specified insurance companies are required to perform due diligence on its customers and report to the local tax authority information on those who are identified as reportable.
In 2017, the Australian Government implemented the CRS ‘wider approach’, effective from 1 July 2017. Under the legislation, Reporting Financial Institutions (RFIs) are required to complete due diligence and report on ‘accounts’ held by all foreign tax residents.
There are broadly four types of financial institutions under CRS:
- a Custodial Institution
- a Depository Institution
- an Investment Entity (Type A & Type B)
- a Specified Insurance Company
Stemming from a global community desire to facilitate a mechanism to enable transparency of accounts held aboard, both the CRS and FATCA regimes equip tax authorities with an effective tool to tackle off-shore tax evasion by providing a greater level of information on a resident’s wealth when held aboard.
Challenges
A key challenge in any global agreement is the implementation across jurisdictions. With RFIs required to review the financial accounts they maintain for reporting purposes, what constitutes an account can differ from country to country. Under the CRS regime, a financial account includes five categories of accounts: depository accounts, custodial accounts, equity and debt interests, cash value insurance contracts and annuity contracts – which for Australia means CRS can capture more than a traditional bank account.
Other challenges facing financial institutions in the adoption of the CRS include educating issuers and noteholders on the new regime, and understanding the ATO guidelines on what due diligence needed to be complete for pre-existing clients.
Ultimately, it’s crucial that people have a clear understanding of how their business operates, and if there is any ambiguity, they should seek tax advice from an appropriate source.
Misconceptions
The CRS does draw extensively on the FATCA Model 1 IGA approach, however has its own unique standards. For example, the CRS wider approach in Australia requires identifying and reporting of financial account holders who are non-Australian tax residents, including those from a non-participating country; whereas FATCA limits the identification and reporting requirements on certain US persons only.
In Australia, we have seen confusion around whether trustee documented trusts are required to report. It is important issuers are aware that trustee documented trusts have reporting obligations (albeit the obligation falls on the trustee to undertake the reporting), and that they are engaged with their trustees to ensure reporting is performed.
Looking forward
Now that the submissions for the first reporting period have been made, we are seeing a shift from “implementation mode” to integrating these processes into daily tax operations.
At BNY Mellon, we are invested in the infrastructure required to facilitate and track this regulatory change in an efficient way. We have reviewed and implemented new systems and processes to ensure we are well positioned to assist clients and customers with the changes due to the CRS.
We are also placing a strong focus on reviewing our anti-money laundering and Know Your Customer procedures, as these are critical elements of the due diligence process that makes up the Automatic Exchange of Information (AEOI).
Looking forward, it is a matter of ensuring the CRS are added to the list of items when closing a transaction by the reporting entity.
For clients, it comes down to being inherently aware of the requirements and passing this awareness on to their investors. Ultimately, it is investors who are facing a significant change. Keeping all parties informed will ensure a smooth process and transparent landscape for all.
James McNeil, client services team leader, BNY Mellon
