The Common Reporting Standards (CRS), intended to get a large group of countries to agree on a common set of data about offshore account holders, will have effect from 1 January 2016. Like US Foreign Account Tax Compliance Act (FATCA), the CRS will require financial institutions around the globe to play a central role in providing tax authorities with greater access and insight into taxpayer financial account data including the income earned in these accounts. The regulations under CRS are estimated to raise £560 million net over the next five years. Financial institutions will need to complete a number of preparatory steps in advance before the CRS is implemented. The companies currently working to be US FATCA compliant will need to consider the impact that the CRS will have on their compliance plans. The scope of CRS will likely diverge from FATCA in various ways. As a result, it will be important for companies to maintain flexible plans to accommodate the CRS requirements that are different from the current FATCA requirements.
With so much focus on the FATCA over the past few years, the Organization for Economic Cooperation and Development (OECD) CRS may have crept up on many of you unnoticed.
So far, 93 jurisdictions have committed to implement CRS, which builds on previous regulations for sharing tax data, such as FATCA and the EU saving directive, with other jurisdictions likely to follow. Reporting in 58 jurisdictions starts in March 2017; the remaining jurisdictions start a year later. However, don’t fall into the trap of thinking this means you have plenty of time. For early adopter jurisdictions, due diligence procedures need to be in place by the end of 2015 for reporting in 2016. Recreation of data partway through 2016 is not a robust option, nor one that would be favored by regulators.
While CRS often gets misconstrued as an extension of FATCA, this is simply not the case. Unlike FATCA, CRS is a collection of regulations that interact across jurisdictions but at the same time may differ between regions and jurisdictions. Scratch beneath the surface of the regulations and it quickly becomes clear that the scope and requirements of CRS present some significant hurdles.
Increased scope: Under CRS, a “reportable person” increases the scope of what is covered under FATCA with respect to both individuals and entities to be classified. Under CRS, a financial institution (FI) may need to identify controlling person(s) of passive non-financial entities.
Self-certification: Whereas a W8 form is sufficient for FATCA, under CRS a W8 confirms status for chapter 3 purposes but self-certification is required to confirm tax residency.
These are just two of the myriad differences between CRS and FATCA—indeed, by one multinational’s estimate, CRS will require at least 20 times the effort of FATCA. Since there is no doubting that CRS has increased the scope and complexity of existing projects, some questions you might consider include: How will you handle the broader scope of CRS and the subsequent reporting to tax authorities? How will you resource both the short and longer term requirements, and how will you manage client communications effectively? Finally, if you do have a solution in place, are you confident that it is compliant and robust enough to cope?
Given the stakes of the above questions, perhaps the best place to begin is with data management. Under CRS, requisite financial information for reporting includes account balance, dividends, interest, certain types of income and proceeds from assets, plus tax residency (not citizenship). Due to the global requirement of CRS, care needs to be taken with data formats—for example, not every jurisdiction issues Tax Identification Numbers (TINs). When you understand the scope of CRS, you begin to realize that, in many ways, it’s no joke to say FATCA was indeed just the warm-up act.
CRS arrives at a time when financial institutions confront economic and regulatory challenges that have critically tested their capability and capacity to deliver. Financial institutions must have robust, automated, flexible and cost-effective control regimes in place to meet global requirements. Addressing these requirements, we recommend implementing a rules-based approach using a combination of specialist software and intelligent processes. Data sources need to be organized to form a single customer view, at which point automated rules-based categorization can significantly reduce manual effort. From there, organizations can cross-reference documentation potentially already on file (e.g., from KYC or FATCA activity) before arriving at a final list of clients to contact for additional documentation. The next step is reporting, the ongoing cycle of annual reporting and monitoring for changes in circumstance.
Genpact with extensive experience in the capital markets domain, delivers robust yet cost-effective and agile solutions. We leverage our expertise in technology, consulting, business processes, and analytics. We offer a flexible range of services designed to help maintain compliance with both FATCA and CRS. Whether you require a full Managed Service or simply a health check of your existing arrangements, Genpact can provide you with additional support, on either an ad hoc or an ongoing basis.
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