CRS is here, and it will have a big impact on the Channel Islands’ financial services sectors. The question is, how big?
The Common Reporting Standard (CRS) for the automatic exchange of financial institutions’ client information was approved by the OECD in July 2014. Its origin was the desire among G20 government leaders to combat tax evasion, by requiring financial institutions (FIs) and local tax authorities to share information. Global transparency would light the dark corners where unpaid tax was being salted away.
So far, more than 100 jurisdictions have signed up to CRS. Jersey and Guernsey were among a group of 54 ‘early adopters’, for whom the first CRS reporting period began on 1 January 2016 and ended on 31 December. Financial sector businesses that fall within the scope of this legislation must report to their local tax authorities by 30 June this year.
“Four types of FI are defined under CRS,” explains Kelly Tadier, Senior Tax Manager at PwC Channel Islands. “There are depositary institutions, which relate to those specifically carrying out banking (or similar) business. There are custodial institutions, which would align with investment houses, custodial banks and clearing organisations. There’s a category for specified insurance companies, which is fairly narrow. But the largest group is termed ‘investment entities’.
“That can include any trust companies and trustees, but also a number of private arrangements or entities that wouldn’t typically be seen as financial in nature – the trusts themselves, for example.
“It’s a category that’s wide-ranging. If you have or are investing into a professionally managed structure, you could very well have a connection to an investment entity without knowing it.”
What these FIs must actually report varies by the type of institution, but broadly it includes details of the account holders and investors, alongside all types of investment income and account balances, and the proceeds of financial asset sales.
Moreover, the accounts can be held by businesses, trusts or private individuals. Where accounts are held by nominees or trusts, they must report the individuals who are the ultimate beneficiaries.
In the beginning…
The path towards CRS was blazed by the Foreign Account Tax Compliance Act (FATCA). This piece of US legislation, dating from 2010, required foreign FIs to report on the accounts of American account holders, either through their own tax authorities or directly to the US Internal Revenue Service (IRS). Failure to do so meant that the FIs would incur withholdings on their profits in the US.
A similar piece of legislation was introduced by the UK in respect of its British Crown Dependencies and Overseas Territories (CDOTs), dubbed ‘UK FATCA’.
These weren’t the first information exchange agreements, however. As Greg Murray, Head of Compliance at Zedra in Jersey, points out: “Before CRS and FATCA came into force, there were tax information exchange agreements (TIEAs) or bilateral tax agreements between many countries. Jersey, for example, had around 38 such agreements.
“These TIEAs allowed the sharing of tax data between two jurisdictions. However, they were very limited in the way they could be used.”
The crucial difference CRS now makes is that the exchange of information is mandatory and automatic. And it’s also truly international. US FATCA was a one-way street of information leading to the US tax authorities; CRS is designed for the information to be exchanged between all tax jurisdictions in the world.
Although relatively few of these jurisdictions are effectively up to speed so far, the principle, which was a long time in the making, is now firmly established.
In the wake of FATCA and the other bi-lateral information sharing agreements, FIs have had an opportunity to prepare their systems and personnel for the task that CRS poses.
As Kelly Tadier says: “Jersey and Guernsey will be exchanging information in the summer. They’re only obliged to exchange information with other members of the early adopters group. The legislation is in place and they’re going to be enhancing the portals that they’ve utilised previously for US and UK FATCAs.
“They’re in a pretty good position comparatively but it’s not run-of-the-mill business yet. The great challenge is the volume of data that local FIs are going to be asked to hand over.”
And CRS is going to be felt across the islands’ finance industries. As Zedra’s FATCA Requirements Manager, Steven Sardo, states: “It’s hard to see any financial services business in the islands that isn’t impacted in quite a considerable measure.”
Additional work
Lisa McCleane, Senior Manager for Tax at EY, adds: “It’s especially difficult when you’re reporting on so many jurisdictions. It’s a burden of work for people in the Channel Islands and is taking them away from their day jobs.
“Smaller businesses have handed their technical tasks to people like us, or they’ve got a team internally who are looking after it and will raise particularly difficult questions with us.
“There are technical updates constantly coming through from the OECD or local governments that you have to keep up with. This then needs to be translated into the information required and that has to be submitted in special formats for the tax offices. It’s a lot of work.”
The sentiment locally is, therefore, very similar to that relating to the other waves of financial sector regulation that have broken over the industry since the financial crisis – one of quiet resignation.
Furthermore, it’s not immediately clear to many organisations whether they will fall within the scope of CRS.
“This is so wide-ranging that even if you aren’t an FI, it can be worthwhile speaking to somebody to learn whether and exactly how CRS may affect you,” says Tadier. “It doesn’t automatically mean that you will have an obligation to report, but at the same time there could be penalties for failing to report or for providing inaccurate information.
“There are fewer than 7,000 entities in each of Jersey and Guernsey that had registered as FIs with the United States IRS under US FATCA.
“Under CRS, we would expect that number to increase significantly, and certainly there will be more scrutiny around how local businesses have attended to their obligations, both in classification and reporting.
“We have seen in Jersey that there are going to be audits run by the Comptroller of Taxes, though they have yet to be framed. How they will materialise is yet to be made clear to the financial services industry, but all businesses should be prepared.”
The message from experts BL spoke to about the still-nascent CRS compliance levels is loud and clear. They say that now is the time for all types of financial sector firms to reach an understanding of how they may be affected by it.
Meanwhile, even private individuals, especially those involved with trusts, may find that they too will need to render returns to their tax authorities. They could receive notification from their banks or investment advisers any day now.
CRS and trusts
The inclusion of trusts in the scope of CRS brings particular concerns. Trusts are used for a variety of purposes.
David Dorgan, Partner and Group Head of Private Client & Trusts at Appleby in Jersey, lists some: charitable and philanthropic purposes; to structure commercial investments with multiple investors; holding and structuring family businesses; to hold wealth for future generations. While he sees no reason why CRS would change the “fundamental legitimate reasons why people use trusts to structure their affairs”, there are challenges.
CRS aims to identify individuals who exercise ‘the ultimate effective control’ of trusts. These could be a protector, a trustee or a settlor in relation to a trust. Often, such people can be non-trust professionals, such as family members or friends of those who established the trusts. Such people may, in the coming months, receive requests from their banks, financial advisers or other financial services companies for information about their financial affairs, which will need to be submitted to the tax authorities.
Meanwhile, further guidance is expected from the OECD on the treatment of trusts in March, when it is likely to release its updated Implementation Handbook.
“It’s worth remembering that this is a data collection exercise,” says Andrea Daley Taylor, a Director and family office specialist at Trust Corporation International in Guernsey. “This isn’t about raising additional taxes, it’s about a cross-border exchange of tax information. CRS is a drive to combat tax evasion. There doesn’t seem to be an intent to tax someone for something they don’t benefit from. Nonetheless, this won’t encourage people to take positions such as trustee or protector without good knowledge of this legislation.”
Another issue related to CRS’s treatment of trusts is whether it’s really possible to marry privacy and security with disclosure. For example, exchanging details of personal trust arrangements with certain jurisdictions could compromise the personal safety of wealthy individuals or those in the public eye. They could become targets for robbery, bribery or kidnap.
Dorgan says: “As we move into the age of transparency and disclosure, it would seem to be incumbent upon each competent government authority, FI, professional or person with a legitimate interest seeking the disclosure of private information, to keep it as secure as possible because, for some, the ramifications of not doing so could be deadly serious.”
Alternatively, greater transparency into trusts and their beneficiaries reduces the number of hiding places available to tax evaders, money launderers and others with malign intent.
But will the Channel Islands’ early adoption of CRS drive away trust business to ‘greyer’ jurisdictions? “There are 1,300 bi-lateral agreements in place involving more than 50 jurisdictions signed up to CRS,” says Taylor.
“So you’re going to have to look harder and harder for grey jurisdictions – and how long will it last?
“I would make the distinction between privacy and secrecy,” she adds. “We can offer privacy for our clients by ensuring that their estate planning and family governance are protected from public scrutiny – if they’re people in the public eye, for instance.
“The use of nominees is still appropriate in some circumstances. We still offer privacy but we can also be part of the tax evasion fight, which is ultimately something we support.”And this, of course, is the overall goal of CRS – and that’s just beginning to bite.