Introduction

Grasping the Common Reporting Standard (CRS) is key for anyone handling international estate planning. This globe-spanning system fights tax evasion by swapping financial account info between nations automatically. Knowing why the CRS matters, its impact on managing your assets, and the vital insights needed to follow international rules will steer you clear of any trouble.

Understanding the Common Reporting Standard (CRS) for Financial Information Sharing

The Common Reporting Standard (CRS) is a worldwide system created to fight tax evasion by automatically sharing financial account information between tax authorities. Developed by the Organization for Economic Co-operation and Development (OECD), this standard requires financial institutions, such as banks, to collect and report information about accounts held by people who are tax residents of other countries. This collected information is then shared with the tax authorities in those respective countries, making sure individuals with overseas financial accounts are following the tax laws of their home country.

For example, the CRS means that financial institutions must report data on accounts held by foreign tax residents to their own national tax office. Subsequently, this information is shared with tax authorities in the relevant foreign countries. In return, the national tax office receives information on accounts held by their residents from other participating countries, which helps to identify and prevent tax evasion.

The government committed to putting the CRS into practice. The relevant legislation was passed on March 18, 2016, and the CRS officially began on July 1, 2017. The first exchange of information took place in 2018.

The Importance of CRS in International Estate Planning

The main goal of the CRS is to make sure that financial institutions (FIs) identify and report accounts held by individuals who do not live in the country where their account is located. It’s very important in global estate planning for several reasons:

Increased Transparency and Compliance

The CRS increases transparency by requiring financial institutions to report account information of clients who are not residents to their relevant tax authorities. This helps to ensure that individuals and entities meet their tax obligations across different countries.

For anyone involved in global estate planning, it is vital to understand CRS obligations to avoid legal issues related to tax evasion or failure to disclose information.

Preventing Tax Evasion

One of the key aims of the CRS is to prevent tax evasion. By automatically sharing financial information, tax authorities can more easily detect hidden assets and unreported income.

For example, if a financial institution in one country opens an account for someone who is a tax resident of another country, the institution must report the account details to the first country’s tax authorities. If both countries participate in the CRS, the first country’s authorities will share this information with the other country’s authorities. This automatic exchange ensures that tax authorities know about their residents’ financial holdings in other countries, allowing them to check if the correct taxes have been paid.

Estate planners need to make sure their clients’ financial arrangements follow CRS rules to avoid any unintentional or intentional tax evasion, which could lead to significant penalties.

How CRS Impacts Asset Structures

The CRS affects how assets are arranged and managed within an estate. For instance, using offshore trusts, foundations, or other structures may draw attention under CRS. When advising clients on how to structure their global assets, estate planners must consider the reporting requirements and any possible tax liabilities that might arise under the CRS.

Impact on Beneficiaries

The CRS also impacts the beneficiaries of international estates. Because financial institutions must report account details, beneficiaries who live in different countries may have to deal with reporting requirements and tax consequences. Proper planning is needed to reduce any negative effects on beneficiaries, ensuring they are fully aware of their obligations under the CRS.

Global Coordination

The CRS encourages global cooperation among tax authorities, making it harder for individuals to take advantage of differences in tax systems between countries. When creating a global estate plan, estate planners must take a comprehensive view, considering the tax laws and CRS obligations in all relevant countries.

Who is Subject to the CRS?

The CRS has implications for various parties, including financial institutions, their clients, and tax advisors. Each of these groups has distinct responsibilities and obligations within the CRS framework.

Responsibilities of Financial Institutions

The CRS places specific obligations on financial institutions (FIs). These obligations require these institutions to determine and verify the tax residency of individuals when they establish new accounts. If an account holder is a tax resident in a different country, the financial institution is required to report that account’s details to their national tax authority. This reporting is mandatory regardless of whether the other country has adopted the CRS. The national tax authority then shares this information with tax authorities in other participating countries—more than 100 jurisdictions have committed to implementing the CRS.

While the CRS dictates information exchange between countries that have implemented it, it also operates in conjunction with the United States’ Foreign Account Tax Compliance Act (FATCA). FATCA regulates information exchange between other countries and the United States. The CRS framework is largely based on the intergovernmental agreement approach used to implement FATCA, which assists in managing legal complexities, simplifying implementation, and reducing compliance burdens for financial institutions.

Impact on Financial Institution Customers

The CRS also has a major impact on customers, investors, and account holders of financial institutions. If you have an existing account, your financial institution might contact you to confirm your country or countries of tax residency. This process is essential to determine whether any of your accounts must be reported under CRS or FATCA laws.

Since July 1, 2017, financial institutions have been required to ask new account holders to declare their tax residency when opening an account. This declaration may involve filling out forms and providing supporting documents. If you are a tax resident of another country, you will need to provide your taxpayer identification number (TIN) or a similar number.

Under the CRS, individuals who control or are the beneficial owners of an entity, or who have a particular link to it, might be identified and reported in relation to the entity’s financial accounts. This rule applies to many types of entities, such as companies, trusts, partnerships, and associations. The CRS focuses on people who are tax residents of other countries and the financial accounts these entities hold. This ensures that tax responsibilities are met across different countries.

Role of Tax Professionals

Tax professionals must have a thorough understanding of how the CRS can affect their clients. It is essential for tax professionals to ensure their clients correctly disclose any assets held in other countries and any income from foreign sources.

Key Aspects of the CRS: An Overview

The CRS system is made up of two main parts:

The Model Competent Authority Agreement (Model CAA)

• Purpose and Structure: The Model CAA is the legal foundation linking the Common Reporting Standard (CRS) with international legal agreements, such as the Convention on Mutual Administrative Assistance in Tax Matters or existing tax treaties between countries. This link allows for the automatic sharing of financial account information between countries that participate in the agreement.
• “Whereas” Clauses and Sections: The Model CAA includes a series of “whereas clauses” and seven main sections. The “whereas clauses” provide essential information about the reporting and due diligence rules in each country that support the exchange of information under the agreement. These clauses also address privacy, data protection, and the necessary infrastructure for efficient information sharing.
• Summary of Key Sections:
  • Section 1: Definitions: This section gives precise definitions for the terms used in the agreement, ensuring that the CRS is applied clearly and consistently.
  • Section 2: Information to Be Shared: This section specifies the types of financial account information that must be shared between different countries.
  • Section 3: Timing and Method of Sharing: This section details when and how the information should be shared, to ensure the process is efficient and accurate.
  • Sections 4, 6, and 7: These sections cover important areas such as discussions between authorities, cooperation on compliance and enforcement, and how the agreement can be changed, suspended, or ended.
  • Section 5: Privacy and Data Protection: This section outlines the necessary steps to protect the privacy of the shared information and make sure it is handled securely.

Common Guidelines for Reporting and Due Diligence

• Purpose and Structure: The CRS establishes the rules for reporting and due diligence that support the automatic sharing of financial account information between participating countries. It requires financial institutions to report specific financial data and follow due diligence procedures. These procedures, described in Sections II through VII, apply to both individual and entity accounts, and they differentiate between account types and set procedures accordingly.
• Summary of Due Diligence Procedures: The CRS outlines specific due diligence procedures that financial institutions must follow to identify accounts that need to be reported. These procedures are detailed in Sections II through VII of the CRS and distinguish between different types of accounts:
  • Existing Individual Accounts: Financial institutions must review these accounts without any minimum threshold. The rules vary between Higher and Lower Value Accounts. For Lower Value Accounts, institutions may use a permanent address test based on documentation or conduct a search for indicators. If these indicators are unclear or conflicting, the institution may need a self-declaration or further documentation. For higher-value accounts, more thorough checks are needed, including a review of paper records and an assessment by the relationship manager.
  • New Individual Accounts: For these accounts, the CRS requires that financial institutions obtain a self-declaration from the account holder confirming their tax residency. This declaration needs to be reasonable and is required without any minimum threshold.
  • Existing Entity Accounts: Financial institutions must determine if the entity holding the account is a Reportable Person. This is often assessed using existing information, such as Anti-Money Laundering (AML) or Know Your Customer (KYC) procedures. If the entity is classified as a Passive Non-Financial Entity (NFE), the institution must also identify and report on the residency of the controlling individuals. Countries may allow financial institutions to exclude existing entity accounts below a certain threshold from review.
  • New Entity Accounts: The due diligence process for new entity accounts is similar to that for existing accounts, but without a minimum threshold, as it is usually easier to obtain self-declarations when the account is opened.
  • Implementation and Compliance: Section IX of the CRS outlines the rules and administrative procedures that countries implementing the CRS must have in place. These measures ensure that the CRS is implemented effectively and that compliance is ongoing, which helps to promote tax transparency and reduce the potential for tax evasion globally.

What Happens if You Don’t Follow the CRS Rules?

Not following the CRS rules can lead to serious financial, legal, and reputational problems for both individuals and Reporting Financial Institutions (RFIs). Here are the main consequences of not complying with the CRS, along with examples to show what might happen:

Financial and Reputational Risks for Individuals

People who live in other countries or have assets in foreign countries must declare their overseas bank accounts, income, and assets to their tax office. If they do not, they could face large financial penalties and damage to their reputation, especially if the non-compliance is seen as tax evasion.

For example, if Sarah, a resident in one country, does not declare her foreign income to her national tax authority, and the tax authority finds out about her overseas account through the CRS, Sarah could face large penalties for not reporting her income, and she could be accused of tax evasion, which would seriously damage her reputation.

Non-compliance Penalties for Reporting Financial Institutions (RFIs)

RFIs that do not comply with their obligations can face various penalties:

• Penalties for Late Submissions: RFIs that fail to submit tax-related statements on time may be penalized.
• Penalties for False Information: If an RFI provides false or misleading information about tax-related matters, it could face penalties.
• Administrative Penalties: RFIs that do not collect self-declarations as required by the CRS may face additional penalties.

For instance, if a financial institution fails to collect a self-declaration from a new client who is a tax resident of another country, and as a result does not report that client’s account details to the tax office. Upon discovering this during an audit, the tax office might penalise the financial institution for failing to comply with CRS due diligence procedures.

Non-Compliance Regarding Record Keeping

RFIs must keep proper records to show they are following CRS reporting rules. These records should detail the steps taken when preparing their Automatic Exchange of Information (AEOI) reports, ensuring that the tax office can check the accuracy of the information submitted. The record-keeping requirements are similar to those in other tax laws:

• How Long to Keep Records: RFIs must keep records for five years from the date the statement was due. If no statement is provided in a particular year, records must be kept until July 31st of the sixth year after that year.
• What to Include and Language: The records should accurately show the steps taken to determine the information that must be reported and must be in English or easily translated into English.

Records should include proof of the steps followed during the CRS due diligence process, such as self-declarations and other relevant documents. The records must clearly show that the self-declaration was verified, using methods such as voice recordings or digital records. For other evidence, RFIs can keep certified copies, photocopies, or detailed notes of the documents reviewed.

Penalties for Not Keeping Proper Records

Any entity that does not keep the required records as mandated by tax laws may face penalties. These penalties are designed to reinforce the importance of keeping accurate and complete records to ensure compliance with CRS obligations.

Need Help with CRS? Contact Us Today!

The Common Reporting Standard plays a vital role in global estate planning, making sure that financial accounts are transparent and that tax obligations are met across borders. Being aware of CRS rules can help you avoid costly mistakes and ensure your assets are managed correctly. If you need help understanding how the CRS impacts your estate planning, contact Samoa Offshore Legal today. Let’s protect your financial future, together.