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2015.12.20 - Common Reporting Standard (CRS) – exchange of information about financial accounts among the countries.

 

The Common Reporting Standard (CRS) is a set of rules which determines the procedures for the automatic exchange of information about financial accounts among the countries.

The abovementioned standard was introduced by the initiative of the Organization for Economic Cooperation and Development (OECD).

A legislative base for introducing of CRS is the Convention on Mutual Administrative Assistance in Tax Matters; hereinafter – “the Convention”.

As of December 2015, 78 jurisdictions have adopted the Convention, including the 34 OECD member states, as well as other countries. These jurisdictions will perform the first exchange of information in September 2017, exchanging the data on financial accounts opened with financial institutions in the above countries as of 31st December 2016.

The reporting entities in accordance with CRS are banks as well as other financial institutions (e.g. investment companies, payment brokers, some types of insurance companies, etc.) in the countries that have joined the Convention. The reporting entities will provide to the tax authorities of their countries information on accounts held by tax residents of other member countries of the Convention. On this basis, tax authorities of the participating countries will freely be able to exchange the above information.

CRS does not require direct provision of the information from banks or other financial institutions to other countries as that would be breaching the rules related the confidentiality of client information. On the contrary, provision of the information to tax authorities of its own country does not contradict these banking secrecy rules.

According to CRS, reporting entities provide the information on the current balance of accounts as of the end of a calendar year, but for securities accounts it also includes the information on income (i.e. - amount of interest, dividends, income from insurance contracts, etc.) credited to such account during a year.

After joining the Convention, each participating country must adjust its national laws in line with the requirements of CRS, therefore granting proper procedures for the exchange of information.

As stipulated by CRS, financial institutions will analyze customer accounts at two levels:

  1. Account Holder. For the purpose of CRS, legal entities are considered as residents in the country, in which they have a Taxpayer Identification Number (TIN). Non-taxpaying legal entities (e.g. tax transparent entities like partnerships, or entities registered in tax-exempt jurisdictions) are considered to be residents in the country from which they are actually managed, or in the country where they are supervised by controlling institutions (i.e. where they submit their financial reports).
  2. Controlling Person. If a legal entity (account holder) has the status of passive NFE (non-financial entity), i.e. – over 50% of income of such company is originated not from commercial/trade operations but from passive investments or property (i.e. - securities, bonds, loan agreements, other financial instruments), or more than 50% of the company’s assets held for gaining the income consists of such property - in this case the tax residency of beneficiaries of such a company is also analyzed. In respect of accounts of active (commercial) companies, CRS does not oblige to analyze and submit the information on their beneficiaries.

CRS determines standard rules for financial institutions domiciled in the participating countries – however, each country has the right to adhere to some clauses in its national laws the difference from the standard requirements, for example:

  1. CRS does not stipulate financial institutions to collect information on the accounts held by non-reportable persons (i.e. - persons resident in non-participating countries). However, each country has, on its own initiative, the right to adopt the rule that reporting institutions must (or have the right on a voluntary basis) to also collect data on non-reportable persons and to retain this data ready for submission. Through the adoption of this principle financial institutions may be able to reduce future expenses – i.e., they will not need to reconsider their internal systems when any new country joins the Convention, because data on all customers, independently of their residence country, will have been previously collected.
  2. In regard of pre-existing accounts of legal entities (i.e. – the accounts opened before 31.12.2015.), CRS considers that the balance on bank account of the client may be more or less than 250.000 with no additional regulations for either amount. However CRS does allow, as an option, for each country to decide independently whether to include in its local legislation different requirements for each of the above two situations, i.e. - to stipulate that accounts with a balance of more than 250.000 USD must be analysed, while accounts with a balance of less than 250.000 USD – do not.

Comments by INTERNATIONAL OVERSEAS SERVICES:

Common Reporting Standard, likewise FATCA (Foreign Accounts Tax Compliance Act) and EUSD (European Union Savings Directive), through the involvement of banks and other financial institutions into this process is one of the measures for the development of the international system for taxpayer information exchange.

Introduction of CRS provides tighter control of the international operations of entrepreneurs. Businessmen are required to evaluate the conformity of their business structure in line with the laws of the country of registration of the company, as well as the laws of the country of their own tax residence.

It should be noted that as banks are required to submit information about the account balance to the Inland Revenue (IRD) of the country of registration of the company it is important to pay attention to the accuracy of the annual financial statement and to ensure that they truly reflect the actual economic reality of the company. Should there be differences in the information received by the IRD from the above two sources (the bank and the client), the businessman could face serious consequences.

Owners of the companies, being investment (not commercial/trading) entities, must re-check the accuracy of their own reports to ensure that they are in line with the financial situation of their companies.

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