Introduction
On April 5th 2018, the OECD published the second edition of the Standard of Automatic Exchange of Financial Information in Tax Matters – Implementation handbook.
At this point the first tier countries, such as Ireland, have already undergone their first year of CRS reporting and are currently preparing for the second year, accordingly areas where implementation needs to be clarified were added in the new version of the handbook.
This release closely follows the publication of the first edition of the Model Mandatory Disclosure Rules (MDR) for CRS Avoidance Arrangements and Opaque Offshore Structures on 9 March 2018, which confirms OECD’s efforts to expand the information provided to tax administrators.
This alert focuses on the key changes applied in the new version of the handbook which touches upon the MDR, and also describes the suggested framework the OECD has explained in the MDR published. Our alert also pinpoints, based on the preparations that competent authorities are undertaking, what the Financial Institutions (FIs) in the respective jurisdictions need to be doing as well.
Key Highlights
Enforcement
A key theme in the Handbook is the significant emphasis on effective implementation, including requirement by governments to prevent circumvention of the CRS with reference to the newly published MDR – focusing on additional disclosures that go one step further in enforcing tax transparency.
The objective of MDR is to enforce the provision of additional information to tax authorities for FI’s tax compliance activities and create a deterrent effect from promoting tax structures and arrangements that result in tax avoidance. The framework as well as the Irish expected timelines by which MDR will be implemented is detailed in Appendix 2 of this Article.
The new edition has placed focus on the IT and administrative infrastructure of governments, it has highlighted the importance of data quality and data security which further implies the expectation that government will use data analytics tools to review reported information.
Notably, the new edition includes an extensive section covering a guide by which governments will be promoting compliance for CRS. Suggestions include implementation of a compliance review process whereby the tax authority should test the internal controls and review a sample of documentation to assess the compliance program of the FI.
Rule Clarifications
Updates to the Handbook also touched base several times on identification of Controlling Persons which was not extensively covered in the earlier version, including the importance of aligning the Know Your Client (KYC) forms to cover Anti Money Laundering (AML) requirements as well as CRS in addition to referring to Financial Action Tax Force (FATF) when FIs are identifying Controlling Persons.
Given that the classification of Trusts has raised many questions in different jurisdictions, the OECD in their new edition have dedicated a section to discuss circumstances where the Trust will not be classified as a FI, and the method of identifying its controlling persons provided it is classified as Passive NFE.
You may refer Appendix 1 of the Article for more detailed references on the changes applicable.
The Bottom Line
In the upcoming period, the compliance programs of FIs (especially those in jurisdictions that have local regulations in place and have completed their first year reporting, such as Ireland) should expect to be reviewed and tested. Governments that signed up with the OECD CRS and will be implementing MDR are required to assess the data quality of the information they are receiving, processing and sending, which ultimately come from the underlying operational compliance health of the FIs.
Accordingly, FIs can expect methodologies used by governments in terms of compliance enforcement to include:
MDR is on its way to be localised in Ireland for prevention of circumvention of the CRS with transposition expected in Ireland by 31 December 2019.
As an FI what do I need to do to be compliant?
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Appendix 1: Key details of changes between the first and second edition of the Standard for Automatic Exchange of Financial Information in Tax Matters – Implementation Handbook
| Part 1: Overview of the steps to implement the Standard | |
| Key Changes | Reference |
| Requirement: 1 translating the reporting and due diligence rules into domestic law, including rules to ensure their effective implementation | |
Substantive additional detail on how to integrate the commentaries to domestic Law, those include:
|
Pages 20-22 – Article 18-22 |
| Highlighting the minimisation of cost through implementation of the wider approach by Competent authorities and suggesting examples of the same | Pages 24-25 – Articles 27-29 |
| The expectation of more countries activating their bilateral agreements under the Convention | Page 26 – Article 32 |
| Identifying that transitory period have expired for countries that implemented CRS in 2017 – however will continue to apply for countries implementing in 2018 or have shown their commitment. This therefore impacts investment entities where controlling persons are reportable and when reporting should take place
|
Pages 27-28 – Articles 34-35-36 |
| Omitting reference to Annex 2 of FATCA for the identification of jurisdiction-specific low risk institutions and accounts. | N/A |
| Addition of example under “prevent circumvention of the CRS (anti-abuse provisions)” by referring to the domestic mandatory disclosure rules for arrangements that aim at circumventing the CRS | Page 30 – Article 43 – section 1 |
Addition of section: Promoting and reviewing compliance by Reporting Financial Institution, in this section the handbook identifies:
|
Pages: 31 – 40 |
| Requirement: 3 Putting in place IT and administrative infrastructure and resources | |
| Update on the IT and administrative infrastructure
|
Page 46 – Figure 3 |
| Ensuring governments have the right infrastructure for receiving information – undertaking data validation and resolving errors through comparison with CRS Schema of the information submitted. Undertaking more investigation for undocumented accounts
|
Pages 48-50 – Section 2 and addition to section 3 |
| Requirement: 4 Protect confidentiality and safeguard data | |
| Mandate of the Global Forum to conduct preliminary confidentiality and data exchange assessments to evaluate if they are meeting the required confidentiality and data safeguards prior to receiving CRS Information
|
Pages 53-54 Articles 110-112 |
| Part 2: Overview of the Common Reporting Standard and Due Diligence Rules
|
|
| Chapter 3: Financial Accounts which are reportable accounts | |
| More details on the identification of a controlling person for CRS | Pages 69-70 Articles 144-151 |
| Information to assist taxpayers to determine their residence(s) for tax purposes is added where tax residency rules and information on issuing TINs is published
|
Page 82 Article 182 |
| Identifying controlling persons of Passive NFEs
|
Page 95 – Article 216 |
| Chapter 6: Treatment of trusts in the CRS | |
| Where a trust is not classified as a Financial institution, the Trust would either be classified as a Passive/Active NFE. The new edition sheds light on the treatment of a trust that is a Passive NFE, whereas the first edition has given a more general perspective without specifying Active/Passive. Therefore it goes on to specify how to identify the Controlling Persons of a trust in chain of ownership
|
Page 112 – Article 262 Pages 114-122 – Articles 270-287 |
Appendix 2: MDR Implementation Framework
| Description | Reference | |
| Who is required to report? | Intermediaries which cover both Promoters and Services Providers | Page 11 – Article 10 |
| What is covered? |
|
Page 11 – Articles 8 and 9 |
| How to define what is reportable? | Hallmarks are specified in the agreement to recognise an arrangement that may fall under CRS Avoidance Arrangement (generic hallmark) and it includes examples for capturing those hallmarks (specific hallmarks) | Pages 24-29 – Commentary III Article 1.1 |
| How does reporting work? | Time of disclosure: 30 days after the time the arrangement is first made available or time the services are provided in relation to the arrangement | Page 37 – Article 64 |
| What is required to be disclosed? |
|
Pages 19-20 – Article 2 – Rule 2.3 |
| Reporting Limitations |
|
Page 22 – Article 2 – Rule 2.7 |
| Discussed details and initial plan/timeline by Irish Revenue.
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