The Cayman Islands, India, Mauritius and the majority of other jurisdictions participating in the Standard for Automatic Exchange of Financial Account Information in Tax Matters (The Common Reporting Standard (CRS)) are taking the “wider approach” to CRS compliance. What is the wider approach and how does it impact your CRS due diligence and reporting?
Global Expansion
Under FATCA, due diligence and reporting focused on one set of reportable persons: Specified U.S. Persons. When the United Kingdom jumped in with CDOT, the UK Crown Dependencies and Overseas Territories had to also worry about Specified UK Persons and to a limited extent, Specified Jersey, Guernsey, Isle of Man and Gibraltar Persons.
Once the OECD pulled in 100 jurisdictions to participate in global tax transparency, the spider web of due diligence and reporting expanded exponentially. This is not just because there are 100 jurisdictions involved but because most participating CRS jurisdictions have decided to take the wider approach.
There are currently 54 jurisdictions committed to engaging in the first CRS exchange of information in 2017. 49 of the 54 jurisdictions have announced they are taking the wider approach to due diligence requirements. [Note: the U.S. has not agreed to participate in CRS.]
What Is the Wider Approach?
Under CRS, jurisdictions obtain financial information from their financial institutions (FIs) and automatically exchange that information with other jurisdictions on an annual basis. An individual jurisdiction will share information with the jurisdictions in which the account holders are resident. The sharing by jurisdictions is limited to jurisdictions that have also agreed to participate in CRS and have signed an Automatic Exchange of Information (AEOI) agreement with a particular jurisdiction.
Each jurisdiction must publish a list of the jurisdictions with which it has an AEOI. An FI will check whether a financial account they maintain is held by a person who is resident in a jurisdiction on the published list – unless the jurisdiction is taking the wider approach.
The tax authority to tax authority sharing will be limited to the published list under the wider approach, but the due diligence and reporting might not be limited. A jurisdiction which adopts the wider approach will require FIs to establish a compliance program that engages in due diligence, including jurisdiction indicia searches, and possibly reporting across all jurisdictions – not just the jurisdictions with which it has entered into an AEOI agreement.
The tax authority may also require that the reporting FI submit reportable account information across not just account holders resident in its AEOI partners but account holders resident in any CRS or non-CRS jurisdictions.
Why Must An FI Conduct Due Diligence and Report on Non-CRS Account Holders?
There are almost 200 countries in the world. It may be impractical for an FI to perform due diligence on accounts as jurisdictions agree to participate in CRS. It is likely more efficient and less costly to follow a comprehensive approach across account holders from all jurisdictions rather than perform due diligence each time a new jurisdiction joins CRS and enters into an AEOI.
Likewise, it may be more efficient for a tax authority to require reportable account information across all jurisdictions rather than reaching out to its FIs multiple times as the tax authority enters into AEOIs with additional jurisdictions.
The OECD noted that the wider approach may result in improving the quality of account holder information collected by FIs which in turn would help the end goal of reducing tax evasion. The FI will obtain the same amount of information for each account holder regardless of residence. The FI will then be able to crosscheck the residency information provided by the customer.
Similarly, if the tax authority requires the FI to report on account holders regardless of residence, the tax authority will be able to crosscheck the submitted data against information the tax administration already holds. Thus, there would be an additional compliance benefit to the tax authority.
More Information to Come
There are still a number of jurisdictions committed to 2017 and 2018 CRS reporting that have not yet decided whether to follow the wider approach. It is important to track these jurisdictions for compliance planning.
For those jurisdictions which have already announced that they are following the wider approach, it is necessary for FIs to understand the extent of the individual jurisdiction’s wider approach (e.g., does it include across the board reporting).
For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.