First it was FATCA, now its CRS and AEOI. Why do account holders have to establish their tax residency status with their financial institutions?
Key points (from 1 July 2017):
For financial institutions
- The CRS does not alter your FATCA practices but CRS practices may require adjustment to activities previously designed for FATCA.
- Review your FATCA practice to ensure these comply with CRS.
- Update your customer terms and conditions to ensure these contemplate the collection, reporting and exchange of financial account information on foreign tax residents.
- Ask any person opening an account to certify their residence for tax purposes irrespective of whether the account holder’s jurisdiction has adopted the CRS.
For tax residents with foreign bank accounts
- Ensure that the foreign financial institution has all your updated details on file.
- Consider whether your current holdings are structured optimally especially from an asset protection angle.
For software developers
- You will need to get familiar with a CRS participating jurisdiction’s information reporting format.
- Larger financial institutions will need to be cognisant of how to develop bulk files which interface with the CRS XML Schema.
- Develop ways to support CRS reporting through the use of SBR enabled business management software (BMS).
Have we all caught up with FATCA?
The Foreign Account Tax Compliance Act (FATCA) was enacted by the US Congress in March 2010 to improve compliance with US tax laws. FATCA imposes certain due diligence and reporting obligations on foreign (non-US) financial institutions (FFIs), to report to the US Internal Revenue Service (IRS) information on US citizens with financial accounts.
These rules not only impact the financial services sector, but also affect many entities outside of the traditional financial services sector. FATCA aims to deter tax evasion by US taxpayers who hold certain types of financial accounts outside the United States.
FATCA applies to all non-US financial institutions offering bank or deposit accounts, investment funds, custodial accounts and certain insurance accounts but it is limited to providing information held by those FFI’s about their US customers.
For non-US customers changes are afoot as well. If you hold accounts in a foreign jurisdiction with financial institutions you may now have to ensure that the financial institution has all your updated and correct details.
What is the CRS global standard and its new obligations?
The Common Reporting Standard (CRS) is the single global standard for the collection, reporting and exchange of financial account information on foreign tax residents.
CRS was developed by the OCED together with the G20 countries, and calls on jurisdictions to obtain information from their financial institutions, and exchange that information automatically with other jurisdictions on an annual basis. It sets out:
- the financial account information to be exchanged;
- the financial institutions that need to report;
- the different types of accounts and taxpayers covered; and
- common due diligence procedures to be followed by financial institutions.
The OECD anticipates that most countries will eventually adopt the CRS, after more than forty (40) countries committed to the early adoption of the Standard.
How to start preparing for CRS?
Banks and other financial institutions in participating countries are required to collect and report to their taxation authorities financial account information on non-residents. In turn those tax authorities exchange the information with participating foreign tax authorities.
This means that taxation authorities like the:
- Australian Tax Office (ATO) in Australia;
- Inland Revenue Department (IRD) in New Zealand; and
- Inland Revenue Authority of Singapore (IRAS),
will receive financial account information on their tax residents from other participating tax authorities under CRS.
The aim is to assist tax authorities participating under the CRS to ensure that their tax residents with financial accounts in other countries are complying with the applicable tax laws in their home countries and act as a deterrent to tax evasion.
If you would like to discuss these issues further please contact Nitij Pal.