What are the reporting requirements under the CRS?
While efforts to rein in tax avoidance have been in play in the U.S. for some time by virtue of the Foreign Account Tax Compliance Act (FATCA), financial information reporting will become a global concern in 2017 under the Organisation for Economic Cooperation and Development’s (OECD) Common Reporting Standard (CRS).
Officially known as the Standard for Automatic Exchange of Financial Account Information in Tax Matters, the CRS provides a mechanism for the annual automatic exchange of financial account information between governments. The OECD contends the globalization of finance has made it easier for individuals and businesses to conceal money abroad in an effort to evade taxes. By creating a global reporting standard, OECD members are seeking to maintain the integrity of their tax systems by exchanging an array of financial information.
CRS at a Glance
The standard was formalized in 2014, when a number of nations signed the Multilateral Competent Authority Agreement (MCAA) to automatically exchange information; there are currently more than 60 signatories. Under the CRS, international tax planning is critical as a variety of accounts held by individuals and entities, including trusts and foundations, must be reported.
Generally, the standard applies to a wide range of financial organizations including custodial institutions, depositary institutions, investment firms and certain insurance companies. Investment vehicles such as mutual funds, exchange traded funds, hedge funds, venture capital funds, leveraged buy-out funds, and others are also included. The CRS also requires these firms to “look through” passive entities to report on the relevant controlling persons.
Finally, the types of financial information that must be disclosed include account balances or value, interest, dividends, income from insurance products, sales proceeds from financial assets, and other income garnered from these assets. In sum, the standard provides a mechanism for bulk taxpayer information to be automatically exchanged, by the source country of income to the country of residence, through the reporting of payments by financial institutions and other payers.
Although the standard is substantially based on the principles of FATCA, the volume of data required to be reported is far greater and the CRS does not contain U.S. specific rules. In particular, the standard is based on residence, not U.S. citizenship. Further, the CRS does not provide for thresholds for pre-existing individual accounts, but rather a residence address test that builds on the EU tax savings directive. Lastly, the CRS has special rules regarding certain investment entities located in jurisdictions that are not parties to the standard.
While proponents contend the CRS will help to mitigate tax avoidance and lower administrative costs for all affected financial institutions, the new regime will result in significant operations costs for financial institutions that need to build a reporting system. Moreover, the differences between the requirements of FATCA and the CRS and adhering to the new rules will create additional compliance hurdles. By engaging the services of an experienced international tax attorney, however, you can start preparing now for the Common Reporting Standard.
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