By Jeffrey Cronin
For many years, world leaders sought to develop a worldwide tax compliance protocol to curb tax evasion and money laundering. In the United States, tax evasion through Swiss banks led Congress to pass the Foreign Account Tax Compliance Act (FATCA). Many other countries soon followed with similar legislation (e.g. the UK’s Crown Dependencies & Overseas Territories [CD/OT]). Common Reporting Standard (CRS), adopted by 97 other countries, is a more recent universal response to the issues that prompted FATCA.
CRS: A Nuanced Protocol
FATCA relies on intergovernmental agreements between the US and individual foreign countries. Either a competent tax authority or a foreign financial institution (FFI), including private funds, must report US taxpayer information to the IRS. When a foreign tax authority has a reciprocal protocol, this information transacts bilaterally.
In contrast, CRS does not rely on a regulatory body like the IRS or the HMRC, but rather on an amalgamation of thought created by the Competent Authority Agreement (CAA), a result of the collaboration between the Organization for Economic Co-operation and Development (OECD) and other international institutions.
For now, the United States will not adopt CRS. However, many private funds with onshore entities also have parallel offshore entities that will require CRS compliance.
A key difference between FATCA and CRS is that the Unites States requires all citizens to pay taxes regardless of where they live. In contrast, most other countries base their tax regimes on residency. Determining residency is more difficult than determining citizenship. Many investors have multiple residences, and many entities operate across borders.
Under CRS, pre-existing accounts under $250,000 may rely on information gathered during the AML and KYC processes, but also need to perform an electronic indicia check. Larger and new accounts will require self-certification as well as a review of specific indicia. Accounts may report the aforementioned information through several multilateral tax sharing systems.
The wide adoption of CRS increases the responsibility of compliance for many industry professionals. CRS is complex; the idea is clear, but the implementation is a challenge. Our CRS portal technology, together with in-house subject matter experts, are available to simplify this process. We also offer related solutions for FATCA and UK CD/OT. With a nuanced protocol such as this, it is important to remain informed.