Obligations and penalties under the Common Reporting Standard

As I explained in a post on OECD country-by-country reporting guidelines, more and more countries are implementing the Organization for Economic Cooperation and Development’s BEPS measures, which are intended to combat perceived tax base erosion and profit shifting by multinational corporations. More than 100 nations are part of the Inclusive Framework on BEPS, which calls for implementing four BEPS minimum standards.

One of the four minimum standards relates to committing to transparency and information exchange. In part to facilitate this, the OECD has developed the Common Reporting Standard (CRS). The CRS’s implementation is partially modeled on the Foreign Account Tax Compliance Act (FATCA), a US regulation requiring non-US financial institutions and certain other entities to report on foreign assets held by their US account holders. Some regulatory experts informally refer to the CRS as “GATCA” to indicate that the OECD standard is a global version of the US regulation. (There are significant differences between the CRS and FATCA, though I won’t go into those here.)

Under the CRS, tax authorities from countries adopting the standard must obtain financial-account information from their financial institutions and automatically share that information with other countries each year. As the name implies, the Common Reporting Standard dictates the specific financial information that must be collected and exchanged, what types of financial institutions are involved, and the kinds of accounts and account holders that are covered.

An OECD report summarizing the CRS indicates that the “financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies.” Those institutions are required to perform due diligence to identify reportable accounts. Reportable accounts include those accounts held by individuals and by entities (including foundations and trusts). The CRS requires reporting institutions “to look through passive entities to report on the relevant controlling person.”

Specific financial information subject to collection and reporting under the CRS includes:

• Interest
• Dividends
• Account balance or value
• Income from certain insurance products
• Sales proceeds from financial assets
• Other income generated with respect to assets held in the account or payments made with respect to the account

According to an April 2018 OECD update, over 2,700 bilateral exchange relationships have already been activated. Another page on the OECD site indicates that as of June 12, 2018, a total of 102 jurisdictions have committed to the CRS, with 49 of those having committed to their first exchange in 2017 and 53 committing to their first exchange this year.

Financial institutions covered by the CRS clearly bear a significant burden under the standard. It’s critical to understand as well that many organizations that are not directly covered by the standard will also be affected. That is, many organizations will be asked by their financial institutions to provide CRS-related information, in some cases by completing an entity tax residency self-certification form. That may not sound like a time-consuming obligation — and in some cases it won’t be — but organizations that are tax residents in many CRS-committed jurisdictions will of course have to complete many forms.

It’s also worth keeping in mind that an organization may need to provide information related to multiple separate financial accounts in a single jurisdiction. Gathering and submitting that information can represent a significant administrative burden, especially when the organization is unprepared. And the more forms and information that must be submitted, the greater the likelihood that some obligations fall through the cracks and go unfulfilled.

There will be consequences for organizations that fail to comply. The CRS requires that jurisdictions adopting the standard have “effective enforcement provisions to address noncompliance.” As an example, the OECD commentary notes that a jurisdiction may choose to “[impose] significant penalties on account holders that fail to provide a self-certification, or on reporting financial institutions that do not take appropriate measures to obtain a self-certification upon account opening.” Penalties will vary by country, then, but the OECD in its example clearly recommends that those penalties be “significant,” for account holders as well as for financial institutions.

So if you’re a multinational with entities in many countries, it will be worth your while to understand your account-holder obligations under the CRS, and to keep track of whether or not you’ve fulfilled them. If you expect to get a request for information from a particular financial institution by a certain date and you do not , you should contact that institution for an update.

As mentioned, the OECD has a page showing a list of countries adopting the CRS, along with when they’ve committed to first exchanging information. Keep in mind that the list of committed countries is growing, and that some countries have already started exchanging information, while others have committed to first exchanging information in 2018 or in later years.