The Organisation for Economic Cooperation and Development (OECD) on 6 April 2017 released two updates related to the common reporting standard (CRS).
The first was an updated second edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters. According to the OECD, the updated version:
…expands the last part on the CRS XML Schema User Guide. It also sets out additional technical guidance on the handling of corrections and cancellations within the CRS XML Schema, as well as a revised and expanded set of correction examples. The other parts remain unchanged relative to the first edition that was issued in 2014.
The updated version is available for sale on the OECD website.
The second update was a set of 12 “frequently asked questions” (FAQs) [PDF 634 KB] providing guidance about the CRS. Below is a review of each of the new FAQs. In the discussion below, certain capitalized terms that are not otherwise defined have the meanings set forth in the CRS.
FAQ 10 clarifies that usufruct arrangements may be treated either as joint accounts or as trusts for CRS purposes. Accordingly, both the bare owner and usufructuary may be considered either joint “Account Holders” or “Controlling Persons” of the trust for due diligence and reporting purposes.
Notwithstanding the lack of the qualifier, “subject to provisions in domestic law,” as found in FAQ 9, each financial institution needs to check its domestic law or guidance to see if one treatment or other is mandated.
FAQ 5 clarifies that the status of an intermediate entity as a “Reporting Financial Institution” is irrelevant when determining or reporting such “Controlling Persons.” In other words, the Controlling Persons of a “Passive NFE” must be determined even if the Passive NFE is owned by a “Reporting Financial Institution.”
FAQ 6 clarifies that in applying the CRS due diligence rules, financial institutions should use the “AML/KYC Procedures” to which it is subject at that point in time, so long as, for “New Accounts,” those procedures are consistent with the 2012 FATF Recommendations. When there is an amendment to the AML/KYC Procedures, any additional information collected must be used to determine if there is a change in circumstances in relation to the identity or reportable status of the “Account Holder” or Controlling Person. For example, if the additional information is inconsistent with the self-certification of the Account Holder or Controlling Person, that would constitute a change in circumstances.
FAQ 23 clarifies that a widely held, regulated, trust-type “Collective Investment Vehicle” or trust-type pension fund resident in a “non-Participating Jurisdiction” need not identify Controlling Persons beyond those required to be identified and documented under domestic AML/KYC Procedures, so long as, for “New Accounts,” the AML/KYC Procedures are consistent with Recommendations 10 and 25 of the 2012 FATF Recommendations. This clarification is helpful to Reporting Financial Institutions that previously interpreted the requirement more broadly to necessitate the collection of self-certifications from all trust beneficiaries as Controlling Persons, which was impracticable.
It is not clear to what extent this guidance—i.e., the reliance on AML/KYC Procedures—applies in other cases in which AML/KYC does not require the identification of a Controlling Person (generally referred to as a “beneficial owner” for AML/KYC purposes). For example, while not entirely clear, it does not appear that the OECD intends to adopt the general “risk-based” approach of AML/KYC Procedures for purposes of the CRS.
FAQ 24 clarifies that when “New Account” due diligence is applied to “Preexisting Accounts,” a relationship manager inquiry is not applicable. The FAQ goes on to remind Reporting Financial Institutions that when a relationship manager is assigned to an account, that relationship manager, and thereby the Reporting Financial Institution, may have reason to know that the self-certification is incorrect or unreliable if a reasonable prudent person with knowledge of the facts would question the claims being made on the self-certification.
Given the reason-to-know requirements, it may be advisable for Reporting Financial Institutions to implement a procedure similar to the relationship manager inquiry for both Preexisting and New Accounts.
FAQ 25 clarifies that a lack of tax residence on a self-certification for an Account Holder that also has an address for AML/KYC Purposes constitutes a reason to doubt the reasonableness of the self-certification, which would require a reasonable explanation and documentation to confirm the self-certification. The FAQ notes that Reporting Financial Institutions may want to make account holders aware that jurisdictions may monitor and review Account Holders that have not indicated a tax residence on their self-certification as part of the jurisdiction’s compliance procedures for Reporting Financial Institutions.
FAQ 4 clarifies that while jurisdictions may not rely on the Model 1 FATCA IGA definition of “Investment Entity” for purposes of the CRS, the two definitions can be read consistently using the CRS definition to interpret the less prescriptive aspects of the Model 1 FATCA IGA definition—e.g., the gross income test of the CRS may be used to interpret when an Investment Entity is engaged in a business of one of the enumerated activities.
FAQ 8 clarifies that no special rules apply to classifying electronic money providers as Financial Institutions under the CRS, and that all the facts and circumstances must be considered in making the determination. Tax professionals note that this might lead to uneven application of the CRS for equivalent electronic money products between traditional financial institutions and non-traditional providers such as telecommunications companies.
FAQ 7 clarifies that jurisdictions may not simply exclude electronic money accounts as low-risk without ensuring that the accounts present a low-risk of being used for tax evasion, have substantially similar characteristics as another category of “Excluded Account,” and that their status as excluded does not frustrate the purposes of the CRS. The FAQ cites the example in section VIII(C)(17)(g) as illustrative guidance: a Depository Account subject to financial regulation (1) that provides defined and limited services, so as to increase financial inclusion, (2) on which monthly deposits cannot exceed U.S. $1,250, and (3) for which Financial Institutions have been allowed to apply simplified AML/KYC under the 2012 FATF Recommendations.
FAQ 8 clarifies that for CIVs formed as trusts that have the characteristics of publicly offered CIVs can treat their registered unit holders as the Account Holders for purposes of CRS. Those characteristics include, the trustee and beneficiaries are unrelated parties, the interests in the CIV are unitized, the CIV is required to keep an up-to-date register of its unit holders, certain unit holders are “Custodial Institutions” that maintain the units in “Custodial Accounts” for investors, and the units are freely transferable. The FAQ notes that the CRS excludes non-Financial Institution intermediaries from classification as Account Holders. It also notes that the Custodial Institutions will be required to report on Custodial Accounts of reportable unit holders.
FAQ 9 clarifies and restates the rule in section VIII(C)(1)(b), under which “Debt or Equity Interests” in an Investment Entity are not Financial Accounts if the Investment Entity is only classified as such solely because it (1) renders investment advice to, and acts on behalf of, or (2) manages portfolios for, or acts on behalf of, a customer for purposes of investing, managing or administering Financial Assets, unless the class of interests was established with the purposes of avoiding reporting under the CRS.
FAQ 5 clarifies that an entity other than a corporation cannot be an “Active NFE” by virtue of having “stock” that is regularly traded on an established exchange, because “stock” is limited to shares in a corporation. This would exclude, for example, U.S. publicly traded partnerships from qualifying as Active NFEs under that provision.
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