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As more tax administrations move towards CRS compliance, there are three key points to consider: the cost of investment, the duration, and the complexity around introducing OECD standards.
The OECD’s Common Reporting Standard (CRS) is an information requirement within the automatic exchange of information (AEOI) initiative. Countries committed to the standard must gather information from financial institutions and automatically exchange the information with participating jurisdictions.
CRS regulations provide a unique opportunity for tax authorities to encourage disclosure, strengthen tax compliance, and consequently increase tax revenue – all of which are becoming even more significant in a post-COVID context.
However, there are three key things administrations need to know before introducing and implementing CRS.
Tax authorities must be aware that the necessary changes to comply with the CRS requires substantial resources in terms of monetary spend as well as technology and people. The level of investment is one of the core aspects that many organisations underestimate.
Whether administrations decide to build a CRS system in-house or buy a ready-made solution tailored to their requirements, they need to ensure that enough budget is allocated to this technically and technologically challenging project.
Many administrations may initially think that building an in-house solution is a more cost-effective option. However, considering that, on average, one out of six in-house IT projects exceed costs by 200% and overrun schedules by almost 70% - according to Harvard Business Review - it is difficult to accurately assess both financial and time resources needed for a complex solution. This is why a bespoke off-the-shelf solution is often a more astute and viable long-term option.
Regardless of the decision to build or buy, committing to and meeting the CRS regulations comes at a significant cost. However, as investment in tax infrastructure continues to show, such an investment pays for itself.
The figures speak for themselves. In 2019, nearly 100 countries complied with the AEOI standard, enabling their tax authorities to obtain data on 84 million financial accounts held offshore by their residents, covering total assets of €10 trillion ($12.2 trillion), an OECD report shows.
The CRS enables tax authorities to increase tax transparency and reduce illicit financial flows. Over time governments should recoup their initial investment by more efficiently detecting and auditing taxpayers with hidden amounts offshore. Ultimately, governments can reclaim some of this as additional tax revenue.
Tax authorities must also think about the timeframe from start to finish, ensuring that there are sufficient buffer zones for bridging knowledge gaps and fully understanding all standards, specifications, and guidelines, including any recent changes.
As various aspects must be aligned to ensure project success, organisations must consider a wide range of time-intensive processes such as the legal framework, the procurement, contractual, and eventual implementation of the technical platform.
As with any end-to-end project, the initial time resource spent on developing an internal solution must be accurately assessed. Custom development requires time to plan, design, and test.
While buying a software solution can be implemented in a total of 10 to 15 weeks from project kick-off to solution go-live, authorities must ensure they have forecasted far enough in advance to comply with CRS.
While the concept of collecting and sharing information on financial institutions seems relatively simple, complying with the CRS requires a deep understanding of obligations from a regulatory and technical perspective. There is significant complexity in building a solution because of the changing and expanding number of rules for the standard.
Tax administrations should consider whether they currently have the right skills and expertise already available, or whether they realistically have the time to train and upskill their teams. They must dedicate analysis and research to all editions of the CRS user guide, the CRS status message user guide, guidance notes from the OECD and feedback from the tax authorities.
Organisations must also ensure they provide high-quality data in the correct format to partner jurisdictions through automation and to avoid errors.
Additionally, the OECD is signalling that a review of CRS is necessary to include the rise of new financial products. A public consultation will be launched in 2021 and the OECD is asking national tax authorities to find input from industry experts on improvements and changes that might improve CRS regulations, particularly with regard to the quality and usability of its data.
Opting to use a ready-made solution means extensive experience is part of the service. Software providers dedicate extensive resources to the analysis and research of all guidelines and updates. Through experience in providing solutions to other tax authorities, software providers have built unique and transferable subject matter expertise.
At Regnology we assist tax authorities to navigate CRS from start to end, providing support on the legal, and technical aspects of compliance.
Book a demo with us today.