Full Presentation

The Common Reporting Standard and its implications on international tax and compliance transparency

I. Introduction

The standard automatic exchange of financial account information in tax matters, known as the Common Reporting Standards (“CRS”), will implement an automatic disclosure of the identity and details of the ultimate beneficial owners to domestic local tax authorities. The Domestic tax authorities will automatically and systematically receive information about their residents who are holding, directly or indirectly through legal arrangements or entities, assets offshore without having to identify these residents, their assets, the holding financial institutions nor the countries where the financial assets are being held. It is then crucial to be in compliance with CRS.

II. CRS Participating Countries in 2017

*It will be noted that many of the well-established off-shore jurisdictions have signed up to the CRS and are therefore participating jurisdictions.

III. CRS Participating Countries in 2018

*The listings in paragraphs II and III above can vary. Please note that Kenya has recently adhered to CRS.

IV. Future CRS Participating Countries:

Non participating Countries may risk to be “blacklisted”, denied the use of Nostro Accounts or access to international cross boarding financing. The majority of African jurisdictions should sign up to CRS in 2019 and soon thereafter. The Risk will be to face Ready to report Financial Accounts information, upon entering into CRS agreements, of reportable persons who are account holders in Financial Institutions of future CRS participating jurisdictions which are already signatories to existing Double Tax Conventions, TIEA

V. The Reporting Financial Institutions:

Definition: Custodian institutions, Depository institutions, Banks, Specified Life Insurance companies, Some Trusts and Some private equity funds resident in reportable jurisdictions.

Role: The Reporting Financial Institutions will collect the financial accounts information (bank account balances, closure of accounts, benefits from some life insurance investments wrappers policies…) of their reportable account holders in a calendar year and transmit them to the tax authorities of the countries of fiscal residence of these persons, who could have more than one fiscal residence which will imply several reporting for the same person.

VI. The Reportable Persons

Resident persons (legal entities or arrangements and natural persons) in CRS Participating Countries, and,
Resident controlling natural persons, in the CRS Reportable Countries, of passive entities. This “Entities Look through Mechanism” will apply even if these entities are not resident in the CRS participating countries as long as they have financial assets held in them.

A. Identification of the Fiscal Residence
  • The identification could be done manually or electronically through a list of indicia amongst which: utility bills, residency permit, retained mail procedure, standing orders to participating jurisdiction, phone numbers given to the reporting financial institutions, the knowledge accumulated through the last 5 years by the reporting financial institutions about the account holder’s tax residence status, an account holder’s self-certification by which the account holder will be confirming his tax residence (s) (a person could have more than one fiscal residence, an exhaustive list of all the tax residencies of the person must be provided under penalty of perjury).
  • It will also be achieved through the Bank Relationship Manager who will have a duty to report any indicium in this respect.
B. Definition of Passive Entity & Passive Income

An entity is classified as a passive entity, unlike an active entity, when more than 50% of its income is a passive income or more than 50% of its assets produce or are in nature to produce passive income (e.g. cash not being invested to not produce any income).

Passive income is any investment income such as dividends, interests, royalties, cash value or Annuities insurance contracts, securities (bonds, stocks…), investments’ income, proceeds from sale of financial assets, derivatives, options, swaps...

E. Examples of Reportable Persons
  • In the case of a Trust/ Foundation/Stiftungs/ Partnership or any similar arrangements: the trustee, the settlor (even if “hidden” behind an entity), the beneficiaries (including discretionary beneficiaries plus those “hidden” behind an entity), the protectors and any person exercising any ultimate effective control will be considered as equity or account holders.
  • In case of Private Equity Funds classified as financial institution: any person holding any debt or equity interests in it.
  • In case of legal entities: any controlling person or beneficial owner. Any person who exercise ultimate effective control through direct or indirect chains of control and ownership, any other means (debt financing, convertible bonds, convertible debts, different class of shares) or holding in last recourse senior position within the legal entity.

VII. Other Agreements Facilitating the Exchange of Information

  • The US FACTA IGA 1A on reciprocal basis.
  • For exchanges between EU Member States, the EU has transposed the CRS by virtue of the amended EU Directive on Administrative Cooperation (DAC2) (examples of type of exchangeable information: income from real estate, ownership of real estate) which incorporates CRS.
  • The Basis Erosion Profit Shifting OECD Convention (“BEPS”).
  • Domestic regulations demanding disclosure of Beneficial Ownership in case of payment of dividends, royalties, interest to non-resident companies.
  • Future implementation of Offshore Beneficial Ownership Registries (BVI, Cayman…).
  • The Centralised European Registry of Real Estate Ownership, information will be available to developing countries through the EU commission