Financial institutions face AEOI implementation challenges from common reporting standard to fight income tax evasion

CRS implementation challenge for financial institutions

Financial institutions prepare for common reporting standard to stem income tax evasion.

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With evidence of income tax evasion that starves governments of revenue and undermines the perceived fairness of tax systems, the G-20 asked the Organization for Economic Co-operation and Development (OECD) to develop a model Common Reporting Standard (CRS) for a global regime for automatic exchange of information (AEOI) on account information to facilitate tax transparency and reduce cross-border tax evasion.

The CRS implementation builds on the Model 1 Intergovernmental Agreement (IGA) under Foreign Account Tax Compliance Act (FATCA) to expand the AEOI to include account information for all non-resident account holders rather than just Americans.

Overcoming AEOI implementation challenges

Financial institutions that have not yet started to plan for AEOI CRS implementation should undertake an assessment to understand how they are impacted. Considerations may include:

  • The immense scale – The CRS eclipses FATCA and the IGAs in its scale, since CRS does not have account balance thresholds from new individual accountholders, nor does the CRS have exceptions for local banks and smaller institutions.
  • The costs of compliance – With the short AEOI implementation time frame, financial institutions face the need for systemic technology solutions and complex and costly customer outreach.
  • Lack of legal certainty – The information collection, storage and reporting required under the CRS would, in several jurisdictions, run afoul of data privacy rules and many financial institutions will require those governments to give them legal authority to do so.
  • A wider approach – Governments and financial institutions should work together to ensure the wider approach to collecting all tax residencies from its customers at one time. This would eliminate the need to resurvey entire customer bases each time a new country signs on.
  • A smooth landing – As there is still a lack of legal certainty, it is critical that governments allow their tax authorities to abate penalties where reasonable efforts to comply have been undertaken, ideally for some clear transitional period.
  • Higher customer response rates – The initial burden falls on financial institutions to identify the non-resident customers and overcome low response rates when collecting this information. Governments are considering penalties or fines for noncompliant customers.

Forward looking institutions have also seized on the opportunity that CRS presents in enhancing business models, improving customer service, streamlining operations and informing product development. Some firms are taking advantage of the improved data quality and connection of account information to build analytics capabilities to deliver more targeted services and products. Like any large change program, AEOI should have management considering business model improvements that can be driven by or added onto the required implementation.

What should organizations do now to prepare for CRS implementation?

For financial institutions in early adopter jurisdictions, a short term tactical solution is required for onboarding from 1 January 2016 and to capture year-end information on pre-existing customers. Thereafter, they should take a measured approach to designing a system solution that offers flexibility for future changes. In preparation, organizations should also consider:

  • What can we reuse from FATCA?
  • How much greater is the scale of the CRS on our organization?
  • What are the level of resources we need to implement and maintain compliant processes, systems and controls?
  • What training is required for front line staff working with customers? What customer communications should you develop?
  • Is your existing system architecture up to the task?
  • How will you ensure accurate and timely reporting with a minimum of government requests for additional information?

Since almost every function in a financial institution is impacted by a CRS program, a clear communication plan is required to bring together business units, functions and geographies that would not usually be connected.

The rise of “improvements” to common reporting standards

Governments are thinking about how they can get better quality information, both from the CRS and domestically, and increase their ability to match income to beneficial owners:

  • Domestic Reporting: Some governments are thinking beyond AEOI to improve tax resident information.
  • TIN Validation/Matching: Several governments are considering extending the CRS requirements to validate the format of taxpayer ID numbers.
  • Additional Schema Fields: The European Union (EU) is planning to introduce additional CRS reporting fields with information that will help them match the reporting to the beneficial owner.
  • Customer Notification: Some governments are considering requiring financial institutions to notify customers that they may be or are being reported.
  • Penalties on Customers: A few governments are considering penalties on customers, not only for providing knowingly false information, but also for providing inaccurate or incomplete data.

The CRS and all these possible improvements will require some higher level of advanced data infrastructure, which is likely to be a challenge for all governments and financial institutions around the world.

Next steps to achieve AEOI compliance

For larger institutions, management should prepared for a sustained effort to comply with these evolving rules. For smaller firms, keeping up with the rules and understanding how they impact your business is key. Compliance is anticipated to be complex and expensive, especially with the significant customer outreach efforts required and the expected customer annoyance that ensues. There are several technology tools in the market that can make compliance more effective and efficient, but they take time to deploy and integrate, so the time to start planning is now.

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