Since the introduction of OECD’s Common Reporting Standard (CRS) and the US Foreign Account Tax Compliance Act (FATCA) agreements, tax transparency has become increasingly important for financial institutions and wealth managers around the globe. The CRS kept financial institutions busy the last years. Why and what kind of information needs to be reported by financial institutions? What are the major challenges? How does it influence the client relationship and experience? What is key for financial institutions?
The CRS is an internationally agreed standard which serves as the basis for the automatic exchange of information on financial accounts. The CRS was developed by the OECD in 2014 with the first reporting taking place in 2017. Since then, an increasing number of countries joined to combat cross-border tax evasion. Therefore, it is almost impossible to hide income from tax authorities, and investors with offshore financial accounts can almost be certain that their home tax authority will receive information about hidden income. The release of the “Panama Papers” in 2016 is most likely the most prominent example as it has increased the pressure for change for governments and tax authorities leading to a higher regulatory and political scrutiny.
Under the automatic exchange of information (AEoI), tax authorities are called to obtain reportable account information from their financial institutions. The obtained account information is then exchanged with other tax authorities worldwide annually. Thus, the implementation of the CRS has kept financial institutions busy during the last years. Financial institutions have to be compliant with the CRS and provide their tax authorities with respective account data. They also have to ensure compliance with the respective due diligence procedures and high quality of data reported to the tax authorities.
Due to the COVID-19 pandemic, governments worldwide are facing economic downturn. With the ongoing pandemic, it becomes even more important for governments to use data from tax transparency initiatives to mobilize tax revenues and combat tax evasion. Thus, it is crucial for financial institutions to understand the objectives and the key requirements of the CRS.
To be compliant with the CRS reporting obligations, financial institutions need to identify reportable persons or legal entities along with their reportable accounts. Since the CRS is a rather new standard, financial institutions often do not have the opportunity to access an extensive database that contains all the account information that needs to be reported. Financial institutions have to check their existing customer base regularly and, at the same time, need to implement specific due diligence procedures when onboarding new clients to identify reportable accounts. They also need to ensure that the reported information is in accordance with the format and data requested by the local tax authorities. The completeness and correctness of data relies highly on self-certifications of any new or pre-existing client and any other client static data on file. Additionally, local existing or not existing know your customer (KYC), or anti-money laundering (AML) requirements can facilitate or complicate data collection due to a possible overlap of required information.
Data collection under the CRS is more comprehensive than data collection under FATCA. Differences between both tax transparency initiatives often make it challenging for the financial institutions to use the same due diligence or reporting systems and processes.
Apart from an increasing internal workload, financial institutions are also facing an increasing number of requests from clients on the rationale behind the CRS. Financial institutions need to be compliant with CRS requirements and due diligence procedures, but the quality and truthfulness of information heavily relies on the feedback of clients. Tax is a sensitive topic for most clients and client-facing staff at financial institutions need to alleviate customer concerns. A proper understanding of the objectives of the CRS will help financial institutions to alleviate these concerns without having to give any tax advice.
No matter how beneficial the CRS is for the fight against tax evasion or for the protection of the integrity of our global tax systems, financial institutions often face challenges in implementing the CRS. The flexibility of the CRS enables a worldwide adoption of the standard. However, this aspect makes it difficult for financial institutions to implement and run a standardized process. The legal basis of the automated exchange of information are Competent Authority Agreements (CAA), which are either signed bilaterally or multilaterally between countries. The CRS then needs to be translated into domestic law of participating countries. Those countries can adapt details in the reporting scheme and the result is that different tax authorities have nuanced reporting requirements. This may be difficult for financial institutions to manage, particularly if they operate in multiple jurisdictions.
Establishing a comprehensive compliance strategy and a centralized data approach may help financial institutions to operate as efficiently as possible, particularly in light of the ever-changing regulatory requirements. Different tax transparency initiatives or different local requirements like KYC or AML might require different information. However, the fundamental data might often be similar and can be re-used.
Regarding the correctness and completeness of CRS reports, it is crucial that industry practitioners working in financial institutions have a comprehensive understanding of the CRS regime, its intentions, and the reporting requirements. Financial institutions need to be able to classify reportable persons and accounts following CRS criteria and need to understand due diligence and reporting requirements. They also need to know how to navigate common issues while onboarding clients, how to monitor changes in circumstances and how to prepare for reporting exercises and any audits in the future.
If you would like to enhance your understanding of CRS, join our four-hour long e-learning course. Starting from the basic knowledge of the CRS regime and its associated requirements, you will further gain a deeper understanding of how to classify accounts following CRS criteria and learn more about due diligence reporting requirements and key considerations of CRS. We will also present, discuss and work on practical case studies to apply your knowledge. Best practices will show you how a comprehensive compliance strategy could look like.
The e-learning is brought to you in partnership with the ICC Academy, an e-learning platform by the International Chamber of Commerce (ICC), the world’s largest business organization representing more than 45 million companies in over 100 countries. The ICC Academy offers dynamic e-courses and specialised programmes on trade finance and cross border transactions designed by leading industry experts to meet the educational needs of banks, corporates and other organisations at the forefront of international trade.