The Common Reporting Standard (CRS), developed in response to a G20 request and approved by the Organization for Economic Cooperation and Development (OECD) Council on 15 July 2014 as a global standard for the Automatic Exchange Of Information (AEOI), requires jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.
The Standard is made up of four major components:
- A model Competent Authority Agreement (CAA) establishes the international legal framework for the automatic exchange of CRS information
- The Common Reporting Standard (CRS)
- Commentaries on the CAA and CRS
- The User Guide for the CRS XML Schema
It applies to all countries that have signed on to the CRS and incorporated it into their domestic legislation. Over a hundred countries have signed on so far, and the list is still growing. As of October 2021, over 4500 bilateral exchange relationships had been activated concerning more than 110 CRS-committed jurisdictions, The list of countries participating in the CRS is available at http://www.oecd.org/tax/automatic-exchange/commitment-and-monitoring-process.
The OECD lists forty-plus “developing” countries that have not yet signed on to CRS. With 196 sovereign countries and non-sovereign territories (such as Anguilla or the Cayman Islands), there are a few jurisdictions that aren’t on either list.
CRS requires Financial Institutions (FIs) located in a CRS-compliant country to identify non-resident clients and report them to their local tax administrations in a CRS-compliant country.
It specifies that financial institutions must report the various types of accounts and taxpayers covered, and the common due diligence procedures that financial institutions must follow. Financial institutions will be required to provide HMRC with information on anyone who owns foreign investments and appears to be a UK resident, such as by having a UK postal address. Certain clients will be required to be notified by financial institutions and certain relevant persons, including professional businesses providing tax advice.
The implementation of automatic information exchange is based on the following actions:
- Account-holders who must declare their tax residence to determine whether or not they are considered “non-residents” via self-certification in the following cases:
- for any new account or subscription of CRS-eligible products for an existing client, provided that this client does not already have a valid self-certification
- for any change in circumstances that has a tax impact.
- Financial institutions that must report annually to their local tax authority on “non-resident” clients’ account balances and financial income paid to them during the year
- The tax authorities of the participating countries should share this information with the tax authorities of the account holders who are the subject of this declaration for tax purposes.
Account holders who didn’t provide the CRS-required information will be reported “undocumented” by their regional tax authorities and will face legal consequences as per local law.
The Common Reporting Standard (CRS) and its Implications for the Financial Services Industry
Financial Institutions must report their income and expenditures to their jurisdiction’s governing body under the CRS, but there are some exceptions. Financial Institutions are defined by the CRS as:
- Custodial Institutions
- Asset/Wealth Managers
- Investment Trades
- Investment Entities
- Depository Institutions
What are the challenges faced by the financial institutions in CRS reporting?
Achieving the regulatory compliance mandate is time-dependent and involves operational risk due to manual data scrubbing. Manual validation causes are results in error-prone and require additional investigation from the Regulator prompting questions and enquiries over the operational efficiency of the business and the data which lead to reputational risk.
Further, as the new compliance processes require more granularity around the reportable data, FIs with their legacy operational approach find it hard to produce data that is fully compliant with HMRC FATCA & CRS reporting guidelines.
Identification and Classification of the Reportable Accounts
The existing customer onboarding process involves manual interaction and the data received from the customer during this onboarding process may not be adequate to identify and classify the CRS reportable accounts. Hence the banks and financial institutions must perform exhaustive data cleaning processes to make their customer data fully compliant with HMRC CRS guidelines, which is a time-consuming and tedious process.
Impact on Data Quality due Data Silos
Data quality is one of the main challenges in any regulatory reporting as the legacy technologies or the manual operational approach results in data inaccuracies, data gaps, inconsistent taxonomies & consolidation of entities that affects the accuracy of the CRS reporting and increase the operational risk. Multiple systems are to be integrated to collate and aggregate the data that is required for CRS reporting which is a challenging and complex task considering the IT architecture and the scalability of the financial institutions. Implementing a solid FATCA/CRS solution can save your life.
Compliant to HMRC CRS Reporting Schema
Reportable banks and financial institutions must have improved systems in place to monitor and assess capital-market transactions for potential withholding and reporting. This demands the deployment of a relevant reporting schema to capture additional data, which is a difficult task that requires a comprehensive understanding of CRS & FATCA requirements and the related taxonomy.
Inadequate operational efficiency
Typically, data is distributed across variety of products and geographical data sources. It is critical to synchronise data from various departments to make the necessary decisions concerning account holders. Only a few institutions accomplish error-free reporting by adopting effective FATCA/CRS solutions that address the issue.
Short deadlines and a lack of trained resources
FATCA/CRS regulatory reporting is a comprehensive regulation. Because of the critical tasks and strict deadlines for report submission, employees of reportable institutions may not have complete knowledge of these ever-changing regulations. As a result, banks and financial institutions may seek an external solution to assist in interpreting the regulation and identifying its impact on the business process to file the report on time and without error.
New Amendments in CRS
In 2017, the OECD published a new guidance called “Mandatory Disclosure Rules” for Combating CRS Avoidance Arrangements and Offshore Procedures. It considered,
- Will the additional reporting obligations reduce cross-border tax evasion?
- Preserving the protections offered by legal professional privilege while shifting the reporting obligation to the taxpayer in cases where arrangements are covered by privilege.
Following this, the OECD issued new Model disclosure rules in March 2018, requiring intermediaries such as lawyers, accountants, financial advisors, banks, and other service providers to notify tax authorities of any schemes they put in place for their clients (as promoters or service providers) to avoid reporting under the CRS or to conceal beneficial owners of offshore entities or trusts.
CRS Regulatory Reporting Requirements
From 2017 onwards, Crown Dependencies and Overseas Territories started reporting to their tax authorities.
In the UK, HMRC oversees CRS implementation within each reporting FI located in a country that has recently signed or is planning to sign the CRS soon.
To promote tax transparency, HMRC commits to fulfilling all its CRS obligations following the principles outlined in its Tax Code of Conduct. Below is the key information which should be shared with HRMC:
- Personal identification information, such as name, address, and date of birth;
- Bank account numbers
- End-of-financial-year balances and valuations
- Interest earned
- Earnings from asset sales
The information on remittance basis users will be included in the reports, which is likely to be of particular interest to HMRC.
Individuals with assets in other countries should ensure that their affairs are compliant; if they are, they will have peace of mind. In any case, making a prompted disclosure is preferable to awaiting an HMRC challenge.
Banks are not required to notify their clients that their information may or may not be disclosed to tax authorities in other CRS member countries.
What are major shifts to look out for?
“Tax authorities now have a new and very powerful tool to track and combat tax evasion with the CRS.”
The success of the CRS is determined by how strictly the FIs implement the CRS procedures to procure the correct data which is compliant with OECD guidelines. Its impact will be felt over time once respective governments generate more revenue and tax collection. At the same time, multinational corporations are taking advantage of the CRS to improve their business models and data quality and analytics capabilities.
Internal Procedures and Procedures – Because CRS aims to achieve global tax compliance, it will have an impact on due diligence processes as well as product and entity classification. It will also have an impact on data collection, data quality assessment, and exchange readiness, as well as the implementation of specific reporting procedures. Each jurisdiction will be closely scrutinised to ensure compliance with the law.
Embracing new technologies – Financial institutions are working hard to improve their existing data capture, KYC validation, and due diligence checks while onboarding customers by leveraging innovative technologies such as Artificial Intelligence, Behavioural Biometrics, and Machine Learning.
Digital Customer Onboarding – Banks adopt to Digital customer onboarding process. By aggregating the customers’ data and making the process smoother or even effortless, Digital Customer Onboarding improves the customer experience with intuitive navigation. Digital customer onboarding platforms like Pera provides dependable online identification services that assist banks in quickly verifying customer data and thus expediting customer access to banking products and services.
Privacy – CRS requirements must be included in financial institutions’ data protection terms to explain why CRS collects client data.
When tax evasion was discovered by authorities in the past, many authorities lacked the resources to prosecute offenders. Today, however, technology is easing the resource burden by allowing governments to more easily review CRS data provided by foreign counterparts and match it to taxpayers in their own countries.
Financial Institutions are proactive and think and act holistically about tax, onboarding, data, and using technology to automate manual processes are at an advantage. More accurate data and information technologies will help governments pinpoint and reduce tax evasion more effectively.
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