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Here to help with Regulation and Compliance

Compound Growth

7th January 2016


In September 2013 the G20 Leaders met to endorse a proposal for the automatic exchange of information on a global level, as put forward by the Organisation for Economic Co-operation Development (OECD). Later in October 2014, the agreement on the automatic exchange of financial account information was signed to implement the OECD’s Common Reporting Standard system (CRS).

The key purpose of proposing a new common standard for an automatic exchange of information (AEOI) was to help ensure tax compliance and better fight tax evasion by providing a means of systematically and periodically transmitting taxpayer information between participating jurisdictions.

Participating Jurisdictions

Created by the OECD with G20 countries and in close co-operation with the EU, the Common Reporting Standard (CRS) has now been adopted by the UK at the beginning of this year on 1st January 2016.

At the same time, 57 other countries also agreed to formally commit to an early adoption of the CRS legislation in January 2016 with another 39 also signalling their intent to so do within the next year. Thus, 97 Jurisdictions in total have committed to the AEOI so far.

In should be noted that the CRS within Europe is incorporated into European Law via the revised European Directive on Administrative Co-operation (DAC) and is implemented within the UK by HMRC as the competent authority.

The Common Reporting Standard (CRS)

The Standard for AEOI covers detailed due diligence and reporting rules that financial institutions must apply to ensure consistency in the scope and quality of information exchanged. Together the reporting rules and due diligence requirements create the Common Reporting Standard (CRS).

The CRS will work by jurisdictions obtaining certain financial information from local financial institutions and exchanging that information automatically with other countries each year, similar to the requirements of the US Foreign Account Tax Compliance Act (FATCA).

Firms will be required to carry out specific due diligence procedures to correctly identify account holders who are resident overseas and will also have to determine each client's tax residency so that their bank account information can be forwarded to relevant participating jurisdictions.

What will DAC and CRS mean for UK Financial Services Firms?

The new regulations mean that UK financial institutions will have to disclose information about clients’ accounts to HMRC which will be forwarded to other jurisdictions on an annual basis, just as HMRC will receive information from other jurisdictions about UK resident taxpayers.

As such, with immediate effect, UK financial firms will be required to compile information about all financial accounts in existence as of 31st December 2015 as well as all new accounts opened on or after 1st January 2016 ready for reporting to HMRC from 2017.

IMPORTANT ACTION REQUIRED: UK Firms will now need to review their client account opening and due diligence procedures as well as thoroughly review their existing client accounts to correctly determine reportable data in time for next year.

The CRS Implementation Handbook

A CRS Implementation Handbook has been developed to provide assistance and practical guidance for financial institutions and government officials in implementing the new standard.

Kept and updated regularly by the OECD, the CRS Implementation Handbook details the financial account information that institutions are required to report.

In summary, these requirements specify:

Overview of the Common Reporting Standard & Due Diligence Rules (CRS)

The Handbook is split into various sections to assist with implementation. Part II of the handbook provides particular guidance and overview of the Common Reporting Standard and Due Diligence Rules (CRS).

In summary, the guidance details how to determine if you are a Reporting Financial Institution and if so, that you must review your client accounts to identify any financial accounts that are reportable, which are determined by applying certain due diligence measures.

Required Action by UK Financial Firms:

Determining Reporting Financial Institutions under CRS:

Financial Services Firms within the UK will first have to determine if they are a financial institution (FI) that is required to report and collect information, also known as a Reporting Financial Institution.

It should be noted that only entities are able to be Reporting Financial Institutions, thus individuals and sole proprietorships are not included whilst legal entities such as corporations, trusts, partnerships and foundations are.

If you are an entity of a participating jurisdiction you will need to determine if you fall within the category required to report or not.

Reporting Financial Institutions include:

Financial Institutions that are not required to report (Non-reporting financial institutions) include:

Reviewing Financial Accounts under CRS

As Reporting Financial Institutions, firms will need to review the Financial Accounts that they maintain for their clients. In general, a Financial Account is an account maintained by a Financial Institution of which there are various types such as depositary accounts like checking and savings accounts, custodial accounts, annuity contracts, equity & debt interest in Investment Entities and Cash Value Insurance Contracts.

However, there are also some financial accounts that are considered to be at low risk of being used to evade tax and thus these are excluded from requiring review and are considered non-reportable. Excluded accounts include amongst others, estate accounts, escrow accounts, retirement and pension accounts and depositary accounts that are due to overpayments that have not been returned.

Financial Accounts which are Reportable

Once a firm has determined which of its Financial Accounts need to be reviewed, they will need to further determine if these are Reportable due to the account holder being a person or entity of a reportable jurisdiction or because of the account holder’s controlling persons are.

If an Account Holder is an individual or entity resident in a reportable jurisdiction for tax purposes, then they are considered a Reportable Person, unless specifically excluded from being so.

In addition, whether the Account Holder is considered a Reportable Person or not, if the Account Holder is a Passive Non-Financial Entity (i.e. a non-financial entity that is not active, such as holding companies that produce passive income) and their Controlling Person or Persons (i.e. their beneficial owners) are resident in a reportable jurisdiction then they are also considered Reportable Persons unless specifically excluded. Thus Financial Accounts may be reportable due to the residency status of the Account Holder and/or the Account Holder’s Controlling Persons.

Specific exclusions to Reportable Persons include Government Entities, International Organisations, Central Banks and Financial Institutions that will themselves be subject to the rules and obligations under CRS.

The term ‘Controlling Persons’ is consistent with that of ‘Beneficial Owner’ as described by the Financial Action Task Force (FATF) and relates to persons that hold directly or indirectly 25 percent or more of the shares or voting rights of an entity or other such person that exercises control over the management of the Account Entity.

To determine the nature and status of Account Holders and Controlling Persons/Beneficial Owners requires particular due diligence to be carried out by firms to both pre-existing client accounts and for new client accounts going forwards.

It is therefore imperative that firms review their client on-boarding procedures and examine their existing client account records in light of the new CRS regulation.

Client Due Diligence Procedures under CRS

For UK financial services firms, if a client’s account was in existence on the 31st December 2015 then they can be considered a Pre-existing Account, however for client accounts opened from 1st January 2016 and beyond, these are considered New Accounts.

Pre-Existing and New Accounts may be treated differently under CRS with regards to due diligence requirements and timing deadlines, thus it will be of great importance for firms to first classify their client accounts accordingly. Invariably for pre-existing accounts, firms may rely upon information already held on file, whilst for new accounts, information must be requested relevant to tax compliance.

In addition, differing due diligence requirements apply to Individual accounts and Entity Accounts.

Taxpayer Information

Under CRS, taxpayer information to be reported by the source country to the tax residence country includes data on various forms of income, (such as dividends and interest), along with income from certain insurance products, the proceeds from sales of investments and an account’s balance - in addition to general identifying data such as names, addresses, dates of birth, National Insurance or Tax Identifier Numbers.

This specific financial information is then set to help provide timely information on any non-compliance where tax has been evaded either on the underlying capital sum or on the return on an investment.

Preparing for CRS Compliance:

DAC and CRS are of much wider scope than that of FATCA – which concerns itself with US residents and citizens - thus many within the industry are referring to CRS as ‘G20’s FATCA’ or a ‘Global FATCA’.

UK Financial Services Firms should familiarise themselves with CRS and local jurisdiction requirements under DAC.

Whilst FATCA provided certain thresholds for pre-existing individual accounts before being reportable, the same cannot be said for CRS, therefore a greater number of accounts are expected to fall within the scope of CRS and be reportable.

Thus new client on-boarding procedures will need to be put into effect so that new clients are correctly classified with tax residency statuses obtained and reportable information gathered.

DAC & CRS Compliance Support Services

If you are unsure of the required action you must take to ensure compliance with the new DAC and CRS regulation, or if you would like assistance considering the impact the CRS regulations will have upon your compliance programs, please contact our experience regulatory support team who would be happy to assist.

Tax Matters: DAC, CRS Compliance and Due Diligence for Financial Firms

News & Views News & Views

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.

UK Firms must take action:

UK Firms will now need to review their client account opening and due diligence procedures as well as thoroughly review their existing client accounts to correctly determine reportable data in time for next year.

DAC & CRS Compliance Support Services

If you are unsure of the required action you must take to ensure compliance with the new DAC and CRS regulation, or if you would like assistance considering the impact the CRS regulations will have upon your compliance programs, please contact our experience regulatory support team who would be happy to assist.

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