Hogan Lovells Publications | February 2016

The common reporting standard

The Organisation for Economic Co-operation and Development (OECD) has taken a big step towards combating offshore tax avoidance and improving cross-border tax compliance in promulgating The Standard for Automatic Exchange of Information (the Standard). The Standard operates as a globally coordinated approach to disclosure of income earned by individuals and organisations.

The Standard consists of four essential elements:

• The Multilateral Competent Authority Agreement (MCAA)
• The Common Reporting Standard (CRS)
• Commentaries that interpret the MCAA and CRS
• Guidance and technical solutions, which consist of the information technology (IT) platforms that provide for the exchange of information.

How does the Standard operate and what is the function of the CRS?

In order to discuss what the CRS entails, it is first necessary to have an understanding of the steps required to implement the Standard.

According to the CRS Implementation Handbook, there are four core requirements, with the final two relating to IT. For the purposes of this article, it is necessary to discuss only the following two steps:

• The first step requires translating the reporting and due diligence rules of the CRS into domestic law, including rules to ensure their effective implementation.
• The second step entails the relevant jurisdiction selecting a legal basis for the automatic exchange of information.

The first core requirement for exchanging information automatically under the Standard is to require financial institutions to collect and report the specified information to the tax administration in the jurisdiction in which they are located. The tax administrations are then able to exchange that information with their automatic exchange partners. This is the function of the CRS.

There are various routes to do this but all require a legal instrument to be in place, such as the abovementioned MCAA. The legal instrument provides the necessary protections in relation to data safeguards and confidentiality to ensure the information is treated appropriately. Other legal instruments at the disposal of the participating jurisdictions are Double Tax Treaties (DTTs) and Tax Information Exchange Agreements (TIEAs).

Those financial institutions required to report in terms of the CRS will report financial account information on certain account holders to the relevant tax authorities. These authorities will, in turn, provide information to other competent authorities in a partner jurisdiction under a systematic and periodic transmission of “bulk” taxpayer information - an “automatic exchange” of information.

Given the large number of signatories to the MCAA, joining the MCAA is probably the most efficient route to ensure information can be automatically exchanged with many jurisdictions under the Standard.

The CRS thus operates as a framework stipulating who is required to report, what information is to be exchanged and provides a standardised set of detailed due diligence and reporting rules for financial institutions to apply, to ensure consistency in the scope and quality of information exchanged.

What information is to be exchanged?

The CRS stipulates that inter alia the following needs to be exchanged: the identity and residence of financial account holders (including certain entities and their controlling persons), account details, reporting entity, account balance/value and income/sale or redemption proceeds.

When is the CRS going to come into effect?

From a South African perspective, the first reporting period for financial institutions obliged to keep records, apply with the due diligence requirements, commences on 1 March 2016 and ends on 28 February 2017. This will be followed by a due date for returns of about June 2017 and exchange of the information by South Africa by September 2017.

Simply put, financial institutions in South Africa will begin collecting information from March 2016, but will only begin actively exchanging information with other jurisdictions and competent authorities in September 2017.

97 countries have so far signalled their intention to adopt the legislation, with 58 of these formally committing to be early adopters and to begin collecting information as early as January 2016 and the first exchange to take place in September 2017.

What are the implications for participating jurisdictions?

If a country adopts the CRS, reporting financial institutions (that is, those institutions that are not exempt from reporting) will have to:

• engage in certain due diligence procedures that are outlined in the CRS to identify reportable accounts held by: 
  • residents of a reportable country; or 
  • certain passive entities that have controlling persons that are resident in a reportable country; and
• report those reportable accounts, along with financial information about those accounts, to their local tax authorities, for exchange with the relevant reportable country.

Financial institutions within participating countries will need to develop systems to review their existing customer base (which is likely to be more than once in certain countries that enter into a series of automatic exchange of information agreements over the course of years), and introduce new procedures to identify reportable accounts. They will also have to establish reporting systems to capture the required information, and report it to the relevant tax authorities.

What are the implications for South African tax residents?

The information exchange under the CRS could mean that SARS is likely to discover undeclared offshore funds, which may result in criminal prosecution and understatement penalties.

Application to SARS under the Voluntary Disclosure Programme (VDP), prior the undeclared funds being discovered, however, could grant relief from criminal prosecution, depending on the circumstances.

Once the CRS has been implemented into the participating country's domestic law, financial institutions, including insurance companies, banks and trusts, will need to provide their local tax authorities with financial data on relevant beneficial owners of bank accounts, and those with interest in trusts and other entities - who are residents in other participating countries. Using a standard reporting format, this information can easily be imported into the taxpayer database of each country, making it easy to identify those who may have evaded or avoided paying tax; as well as those who may have made an error when submitting their tax returns.

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