The implementation of The Standard for Automatic Exchange of Information
A key component in facilitating this exchange of information is the Common Reporting Standard (CRS). The CRS functions as a framework of detailed due diligence requirements, essentially setting out how accounts that will be required to report are identified. Once these reportable accounts have been identified, following the identification procedures set out therein, the CRS stipulates what information must be exchanged. These due diligence requirements ensure consistency in the scope and quality of information exchanged. Thus, the CRS can be thought of as the set of rules used to "flag" accounts. It then imposes an obligation on the financial institutions that maintain these accounts to report the information to the relevant revenue authorities.
It should be noted that on its own, the CRS itself has no direct legal force. Rather, it only becomes effective once a country undertakes to follow the model competent authority agreement (MCAA) or any other underlying instrument as prescribed by the Standard, and implements this underlying instrument into its domestic law. The South African Revenue Service (SARS) has already implemented these regulations into our domestic law as of 2 March 2016 under Government Gazette No 39767.
The MCAA is perhaps the most preferable avenue to facilitate the exchange of information as 84 jurisdictions have currently adopted the treaty as at 19 August 2016, making it the most common platform globally to exchange information. Another avenue that participating jurisdictions may pursue would be to enter into a bilateral treaty with another participating jurisdiction.
The partner jurisdictions agree to exchange information about account holders that have their tax residence in the other jurisdictions and have been "flagged" via the application of the CRS due diligence procedures. Financial institutions, as defined in the CRS, report information to the tax administration in the jurisdiction in which they are located. The tax administrations then exchange that financial information between themselves.
The definition of financial institution under the CRS is broad and includes banks, investment and wealth managers, and insurance companies. The CRS essentially "follows the money", in that unless an individual keeps their money under their mattress, it must be held in a bank account at a financial institution. Assuming the requisite KYC procedures where complied with when opening the account, the financial institution would have the details of the account holder in its possession. This is the information that the CRS relies on for the Standard to be effective in its implementation.
For example, an individual who is a South African resident for tax purposes may have a bank account, held in his personal name with a bank located in Switzerland. Switzerland, being party to the CRS, would have reporting obligations in terms of the CRS. The Swiss bank would then apply the due diligence procedures as set out in the CRS and identify those accounts that are considered reportable accounts. Any information collected in respect of an account identified as reportable will be relayed to the Swiss Federal Tax Administration (FTA).
A reportable account in terms of the CRS is essentially any account maintained by a financial institution and held by any individual or entity that is tax resident in another jurisdiction that is party to the CRS.
Thus, in the above example, the bank account held by an individual who is tax resident in South Africa will be deemed to be a reportable account by virtue of the fact that South Africa is party to the CRS. The Swiss bank will then collect that information and pass it on to the FTA who will then report that information to SARS.
This is how the CRS is to work in theory, with each of the participating jurisdictions applying the due diligence procedures set out in the CRS, identifying reportable accounts, relaying that to their revenue authority who then exchanges that information with the revenue authority in the corresponding jurisdiction.
A problem arises, however, in that the CRS is silent as to with which financial institution the ultimate reporting obligation lies and how practically the information gathering is to work.
Thus where an individual has multiple accounts, as is often the case, with different financial institutions, such as banks accounts, various portfolio investment managers or insurance policies, who are all required to report the account information to the relevant tax authority, how is all this information actually collated? The CRS speaks about having a "relationship manager" assigned to different accounts who is to aggregate information relating to a particular individual or entity, as the case may be.
Practically speaking, the information to be gathered and exchanged is so voluminous and overwhelming, that revenue authorities are going to be hard pressed to ensure that the information exchanged is accurate.
The implications of incorrect information being exchanged are far-reaching, and may result in individuals or entities embroiled in a drawn-out fight with revenue authorities over account information of which they may have no knowledge.
Thus, while the CRS appears to tighten the noose on global tax evasion, it seems that confusion and litigation may be not too far behind.