There has been much discussion regarding the Common Reporting Standard’s (CRS) “wider approach” to due diligence and reporting but what does it mean when Hong Kong says it is taking the “optional approach” and Bahamas announces it is taking the “narrow approach”?
Bilateral v Multilateral Implementation
Under CRS, a Reporting Financial Institution (FI) must establish, maintain and apply due diligence procedures to identify Account Holders (and Controlling Persons for certain accounts) who are tax residents in Reportable Jurisdictions.
A Reportable Jurisdiction is one where an agreement is in place requiring sharing of certain account holder data and which is identified on a published list.
A jurisdiction participating in CRS may implement the CRS regime through multilateral or bilateral agreements. Those jurisdictions taking the multilateral path have been following the wider approach to due diligence while jurisdictions opting for the bilateral route have been taking either the narrow approach or optional approach. [See my January 31, 2017 blog re: the wider approach http://bit.ly/2nGZ3O1].
Bahamas’ Narrow Approach
The Bahamas has elected the bilateral approach for CRS implementation and will enter into agreements with jurisdictions on a country-by-country basis.
Under the narrow approach an FI may end up reviewing and collecting less Account Holder information than under the wider approach. For example, if the self-certification collected during onboarding indicates that the Account Holder is resident in a jurisdiction with which the Bahamas does not have a bilateral tax sharing agreement, the FI will not collect the Account Holder’s tax identification number (TIN) or date of birth.
The primary benefit of using a narrow approach to data sharing is that the tax authority can choose on a jurisdiction by jurisdiction basis which jurisdictions to trust with their FI’s Account Holder data. This is similar to the bilateral approach taken by the U.S. in its exchange of information with jurisdictions participating in FATCA.
Hong Kong’s Optional Approach
Hong Kong is also engaging in a bilateral sharing of tax information under CRS. It will only share financial account holder information with those jurisdictions with which it has entered into a comprehensive avoidance of double taxation agreement (CDTA) or tax information exchange agreement (TIEA).
Additionally, Hong Kong and each partner jurisdiction will sign a competent authority agreement (CAA), which sets out tax authority to tax authority information sharing details.
Under the optional approach, Hong Kong only requires that the FI perform due diligence on Account Holders resident in Reportable Jurisdictions. However, Hong Kong FIs are permitted to adopt the wider approach if they would like.
Local Data Protection Laws
Theoretically, an FI in a narrow approach jurisdiction can opt to pursue a wider approach in its due diligence. However, before doing so, the FI must determine whether local privacy laws allow it to collect and maintain private data that is not otherwise required to be obtained and held.
If data privacy laws restrict the FI to only collect information related to the Account Holders in Reporting Jurisdictions, the FI will have to engage in the costly solicitation and review of client data each time a bilateral agreement is signed.
Hong Kong and those jurisdictions using the optional approach address data protection laws in CRS implementing legislation. For example, Hong Kong’s Internal Revenue Department (IRD) has authorized FIs to apply CRS due diligence procedures to cover all Account Holders and Controlling Persons that are tax residents of all territories outside Hong Kong – whether the jurisdiction is a Reportable Jurisdiction or not.
Current Optional and Narrow Approach Jurisdictions:
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 narrow, optional or wider approach. It is important to track these jurisdictions for compliance planning.
For further guidance on your FATCA and CRS obligations, contact me at firstname.lastname@example.org