Given the most recent data pointing at tax evasion on a grand scale (the Pandora Papers released on 3/10/2021), the topic of tax transparency is yet again at the top of every governmental agenda. While exchange of information mechanisms (such as the Common Reporting Standard (CRS) of the OECD) have been around since 2017, Thailand is currently embarking on this journey, with their first round of CRS exchanges to commence in 2023.

Given our experience in this area, this whitepaper sets out some reflections on the trajectory of CRS to date, the impact on reporting Financial Institutions (such as banks, trust companies etc.) and some best practices for FIs in complying with this new regime.

Extract – To read the full whitepaper, please download your PDF-version below.

CRS to date

Background

CRS is a globally agreed standard set out by the Organization for Economic Cooperation and Development (OECD) for the annual automatic exchange of financial account data. It relates to bank accounts held by non-residents in a jurisdiction (such as Thailand) which may be relevant to tax authorities of other jurisdictions (such as Singapore, for example). The first round of CRS exchanges commenced in 2017 with new members signing on each year totaling 120 jurisdictions as of October 2021.  The Global Forum on transparency and exchange of information on Tax Matters (Global Forum) within the OECD in Paris, France, is mandated to ensure that the standard is being complied with as well as to lead any changes to the standards from both a policy and technical perspective.

Why introduced

The global policy motivation for the CRS arose post the 2008 global financial crisis when governments in great budget deficit and in desperate need to claw back revenues being lost offshore decided the era of tax evasion was over. As most tax evasion at that time involved many offshore financial centers (or tax havens as they were then known), the most obvious tool to combat these mass amounts of tax leakage was to make the world more transparent and to utilize exchange of information to make this a reality. This has indeed already rendered some impressive results. For example, in 2019, 100 jurisdictions exchanged information regarding 84 million financial accounts with an aggregate value of approximately EUR 10 trillion demonstrating the enormous scope of the CRS in a relatively short period of time. In addition, countries have recorded impressive results regarding increased revenues, either through voluntary disclosure regimes or increased audits utilizing the information received on residents’ offshore assets. Access to exchanged data has proven to be a powerful tool not only in verifying the correct amounts as submitted by taxpayers regarding their overseas assets but also in instilling public confidence that the increasing globalization of the financial system is not undermining domestic tax systems but is in fact aiding its enforcement.

How it works

CRS comprises a business standard with rules for classifying accounts etc., simply referred to as the ‘AEOI standard’ (for more information please consult the most recent AEOI CRS Handbook). It also comprises the technical standard which sets out the technical structure as to how the data will be automatically exchanged (known as the ‘CRS schema’).  Each year, every entity classified as a ‘financial institution‘ for CRS purposes is obliged to gather the required data on accounts held by non-residents and compile this data in the necessary format to submit to their tax authority. The tax authority will then verify that the data is in line with the CRS standard (via an automated process) and send it to the respective treaty partner via the Common Transmission System (CTS) of the OECD. Should any of the data submitted by the financial institution be incorrect, it will be refused by the treaty partner and a request for corrected filing will be sent. The deadline for submission of data filings to the tax authority is usually between May to June each year depending on the jurisdiction, and the deadline for the tax authority to send all transmissions to its treaty partners is the end of September.

Core pillars of CRS

CRS requirements

It is important to understand the main requirements of the OECD CRS guidance, as most participating jurisdictions broadly follow this common standard. CRS stipulates that Reporting Financial Institutions review financial accounts to identify reportable accounts by applying the due diligence procedures. They should then report the relevant information associated with these reportable accounts to the tax authority. Financial institutions in Thailand should familiarize themselves with the definitions of these terms, as it will influence their approach to compliance.

Due diligence procedures

Once a company has identified itself as a Reporting Financial Institution and determined the relevant financial accounts, it will need to apply the due diligence procedures to classify these financial accounts. New information such as Tax Residency and Tax Identification Numbers (TIN) will need to be collected from customers at onboarding along with other KYC/AML related information. The declarations of Tax Residencies by new customers will also need to be validated for their reasonableness when compared to other information, documentation or knowledge obtained by way of the KYC/AML procedures. In some cases, the financial institution might need to seek clarifications from its customers before confirming the Tax Residency and TIN.

In addition to collecting new information when onboarding new accounts, CRS also stipulates that financial institutions are to perform a remediation of pre-existing financial accounts. The objective of this exercise is to classify and identify the reportable accounts. However, these accounts may have been opened at a time when the required information to perform the necessary classification was not obtained. Hence, there will likely be a need to do a mass outreach to pre-existing customers to gather the required information. This information will also need to be validated for its reasonableness.

Another crucial requirement is for financial institutions to monitor for changes in circumstances. In today’s heavily digitized world, there are multiple ways for a customer to inform the financial institution of any changes in personal details. A change in the country of the residential address, for example, could indicate a change of tax residency. The firm should have processes and controls in place to detect such changes and perform the necessary due diligence procedures to re-classify the account if needed.

 

To read the full whitepaper including the sections "challenges in practice" and "best practices to prepare for CRS" please download your PDF-version below. 

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