OECD Releases Updated Standard for Automatic Exchange of Financial Account Information in Tax Matters
On April 6, 2017, the Organisation for Economic Cooperation and Development released the Second Edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters, which contains the model Competent Authority Agreement for the automatic exchange of Common Reporting Standard information (CAA), the Common Reporting Standard (CRS), Commentaries to the CAA and CRS, and the CRS XML Data Schema User Guide. No changes were made to the CAA, CRS, or Commentaries. Instead, the Second Edition provides additional technical guidance on the XML data schema, in particular regarding the modification and cancellation of reports made by Financial Institutions.
The OECD also released updates to the Frequently Asked Questions (FAQs) to the CRS. For wealth owners, FI compliance departments, and advisers, the updated FAQs and responses to those questions should prove more relevant for planning and compliance purposes.
The CRS was developed by the OECD and the Group of 8 and Group of 20 countries to facilitate a global, multilateral exchange of financial account information. The CRS is based, in large part, on the U.S. Model 1 Intergovernmental Agreement implementing the Foreign Account Tax Compliance Act (FATCA), which was signed by key G8 and G20 countries. The OECD and its member states also developed during this process Commentaries to the CRS, which were first published with the CRS in 2014.
Following the release of the First Edition of the Standard, including the CRS and Commentaries, the OECD released its own responses to certain FAQs relating to the CRS. The first FAQs were released in 2015 and these have been previously updated in June and November 2016. The FAQs are not a direct part of the CRS or related Commentaries. Some jurisdictions may differ from
the OECD positions set forth in the FAQs, whereas others may directly incorporate the FAQs and responses into their own guidance by reference.
The updated FAQs include the OECD’s views on, among other topics, (1) the proper classification of an usufruct, (2) the determination of the Controlling Persons in cases of a chain of entities, (3) the reliability of an individual’s self-certification of no jurisdiction of tax residence, and (4) the permissible (or not permissible) reliance on the definition of an Investment Entity under the Model 1 IGA.
In addition, the OECD’s updated FAQs addressed electronic money issues and treatment of collective investment vehicles.
The OECD did not issue a conclusive response on the treatment of usufructs, instead noting that the bare owner (nu-propriétaire/Eigentümer) and the usufructuary (usufrutier/Nutzniesser) could be treated as either joint account holders or Controlling Persons of a trust for CRS reporting and due diligence purposes.
While this treatment of usufructs will likely be welcomed by many Financial Institutions in civil law jurisdictions, it is far more likely that the OECD’s updated FAQ addressing the determination of Controlling Persons in connection with chains of entities will have the greatest impact among the April updates:
For purposes of determining the Controlling Persons of a Passive NFE, does the CRS allow a Reporting Financial Institution to not determine/report such Controlling Person on the basis that there is a Reporting Financial Institution in the ownership chain between the Passive NFE and the Controlling Person?
No. The CRS status of intermediate Entities in the ownership chain is irrelevant for these purposes.
The articulated view introduces a number of questions and issues and may run contrary to current guidance or practice in many jurisdictions. Wealth owners will be particularly concerned with the likely increase of duplicative and inaccurate reporting by Financial Institutions resulting from this response. Additionally, despite its brevity, the OECD’s response does not add sufficient clarity to the proper procedure that must be followed to identify and report Controlling Persons in multi-tier structures. We expect further developments are still to come in the determination of Controlling Persons and related reporting and due diligence questions.
Baker McKenzie Webinar
The CRS has been in effect in most early adopting jurisdictions since 1 January 2016, and now the first reporting deadlines for many Financial Institutions are rapidly approaching, for reporting of 2016 information in 2017. For wealth owners, the issues have become what information must be provided to Financial Institutions, as well as what information will be reported by Financial Institutions and received by tax authorities, rather than when (or if) the CRS would come into force in a particular jurisdiction.
In addition to issues related to the reporting, exchange, and disclosure of information, the CRS will also impact wealth owners, families, and the Financial Institutions that serve them in ways that have not been as widely discussed. As previously mentioned, Baker McKenzie’s Wealth Management Group is pleased to host a free 1 hour training webinar on Tuesday, May 9, 2017, at 16.00 (London) / 17.00 (Brussels) / 10.00 (Chicago) time to discuss the unplanned consequences of CRS and how it impacts clients.
This webinar will bring together Baker McKenzie practitioners from the Wealth Management, VAT, Transfer Pricing, Tax Dispute Resolution, and Financial Services practice groups, and we are pleased to invite our clients to participate as well.