Smoothing the move to common reporting
It’s basically a global version of FATCA, but the CRS adds a few new wrinkles to due diligence and reporting requirements
The first question most managers ask us about the common reporting standard (CRS) at Citco’s Central FATCA Team is: “Is this just more FATCA?” The answer in a nutshell is… well, yes. But, as the older moniker GATCA implied, this is FATCA on a global scale, with almost 100 countries pledged to participate and agreeing to share tax information on account holders within their jurisdiction with other participating countries. We refer to these regulations – US FATCA, UK CDOT and CRS – collectively as automatic exchange of information (AEOI) regimes.
In many ways, the objectives for participating tax authorities are similar: they want to receive information about accounts with financial institutions in foreign jurisdictions held by, or controlled by, persons taxable in their own jurisdiction. That much, most will agree, is understandable. It is a global attempt to remove the ability to conceal assets in accounts held outside one’s country of tax residence.
However, that is where the simplicity ends.
No harmonisation on types of entity
All three sets of regulations and agreements require financial institutions (FIs) to perform due diligence and account opening procedures to determine ‘reportable’ account holders under one or more of the regimes.
The definitions of what types of entity classify as FIs are not harmonised across the regulations, making it possible for an entity to have a different classification under FATCA than under CRS.
In addition, account holders that are active non-financial entities are reportable under CRS unless they fall into one of a number of prescribed low risk categories. Many entities will also fall into the passive non-financial entity category due to differences in the regimes, requiring a look-through to controlling persons. All of this classification must be achieved alongside the continuing need to clarify US-specified and UK-specified account holders, as defined by the current regimes.
Classifications and data collected to determine account status must pass reasonability checks, and must be monitored on an ongoing basis for any change in account holders’ circumstances that may require a re-review of documentation and of previous determinations held. With the advent of CRS, this so-called ‘change in circumstance’ monitoring takes on a new level of required attention, with any address change of an account holder within participating countries requiring a case review.
For your pre-existing investor base, a review of the collected documents for US FATCA and UK CDOT would need to be revisited. There could be circumstances where Citco would need to ask the investors for additional information to classify them appropriately for CRS purposes.
Citco covers due diligence and reporting
Citco offers a consolidated approach to all three regimes, which includes investor due diligence and annual regulatory reporting. This benefits our clients by ensuring all data is maintained in a central data repository, allowing for consistency and accuracy when preparing regulatory filings and identifying reportable accounts.
Separating the due diligence and regulatory reporting between Citco and the client, or using other service providers and public accounting firms may result in information being overlooked. This could lead to missed deadlines or inaccurate interpretation of the information.
The 2014 FATCA reporting season was in a transitional period where the respective jurisdictions and the IRS took a soft approach on the reporting deadlines. As everyone has now been given a year to familiarise themselves with the portals and the technology requirements, these deadlines will in future be much more firm, and late filings could result in penalties.
Citco is currently contacting clients to ensure their needs under the various AEOI regimes are met in 2016 and beyond.