Financial Services Quarterly Report - Second Quarter 2016: OECD Common Reporting Standard: The Next Steps

by Dechert LLP
Contact

The Common Reporting Standard (CRS) of the Organisation of Economic Co-operation and Development (OECD) came into effect on 1 January 2016 in “early adopter” jurisdictions1, including the UK and popular fund jurisdictions such as the Cayman Islands, Ireland and Luxembourg. The CRS imposes new investor due diligence and reporting obligations on funds and other financial institutions based world-wide in 100+ participating jurisdictions (excluding the United States2).

The CRS imposes different reporting and due diligence obligations for new accounts (those opened on and after the 1 January 2016 effective date) and pre-existing accounts (those opened before the effective date). By now, financial institutions in early adopter jurisdictions should have updated and amended their marketing and subscription materials to collect investor information and adapted their due diligence procedures in respect of new accounts to capture the CRS information that will need to be reported to local tax authorities – such reporting is expected to take place around 31 May 2017. In turn, the local tax authorities will exchange relevant information with tax authorities in other participating jurisdictions where the account holder is tax resident – this is expected to take place around 30 September 2017. Financial institutions yet to take such steps should do so promptly.

All financial institutions in early adopter jurisdictions should now give thought to the due diligence they will need to perform in respect of pre-existing accounts. Due diligence for “High Value” pre-existing accounts (thresholds set forth below) must be completed before 31 December 2016 – this information will be reported in May 2017. Due diligence for “Lower Value” pre-existing accounts (thresholds set forth below) must be completed before 31 December 2017 – this information will be reported in May 20183.

Failure to comply by the relevant deadlines may subject financial institutions to penalties in the relevant jurisdictions.

Due Diligence

Financial institutions must collect the required information from investors with respect to new accounts at the time of account opening, via a self-certification form.

With respect to pre-existing accounts, there are different time frames for financial institutions to conduct their due diligence, as well as different standards for the required due diligence, based upon the value of the accounts and whether the account holders are individuals or entities. Financial institutions will have more time to carry out due diligence on “Lower Value” pre-existing accounts than “High Value” accounts. In addition, for pre-existing accounts, financial institutions may first rely on information already collected and maintained for regulatory or customer relationship purposes. This is in part because the OECD has recognised that it is more challenging and costly for financial institutions to obtain new information from pre-existing account holders.

Note, however, that the CRS generally gives financial institutions the alternative of electing to apply the new account due diligence procedures to pre-existing accounts (by completion of a self-certification form, without reference to the relevant thresholds).

High Value Accounts

Due diligence for the following types of pre-existing accounts must be completed by 31 December 2016 in early adopter jurisdictions:

  • Pre-existing individual accounts whose value exceeded $1 million on 31 December 2015; and
  • Pre-existing entity accounts whose value exceeded $250,000 on 31 December 2015.

In respect of pre-existing High Value individual accounts, the financial institution should undertake what is referred to as “enhanced review”. This means that the financial institution must undertake an electronic record search for residence indicia or a paper record search if the electronic record is not sufficiently detailed4. In addition, the financial institution must treat as a reportable account any High Value account assigned to a relationship manager, if the relationship manager has actual knowledge that the account holder is resident in a CRS jurisdiction. If the financial institution only has a “hold mail” instruction or “care-of” address in the electronic search, the financial institution should seek to obtain a self-certification to establish tax residence of the account holder.

In respect of pre-existing High Value entity accounts, a financial institution will need to review information in its possession to determine the tax residence of the account holder and whether it is a reportable person. Further, the financial institution must determine whether or not the account holder is a passive non-financial entity by obtaining a completed self-certification form, unless the financial institution can determine from publicly available sources that the entity is not a passive non-financial entity.

Lower Value Accounts

Due diligence for the following types of pre-existing accounts must be completed by 31 December 2017 in early adopter jurisdictions:

  • Pre-existing individual accounts whose value did not exceed $1 million on 31 December 2015; and
  • Pre-existing entity accounts whose value did not exceed $250,000 on 31 December 2015.

In respect of pre-existing Lower Value individual accounts, the financial institution should check whether it has in its records a current residence address of the individual. The financial institution may then treat the account holder as being a resident for tax purposes of the jurisdiction in which the address is located. Alternatively, if the financial institution does not hold a current residence address, it should review its electronic records for other residence indicia. If none are identified (such as a current mailing address), the financial institution will not need to take further action until there is a change in circumstances or the account becomes a High Value account. If the financial institution only has a “hold mail” instruction or “care-of” address in the electronic search, then it should seek to obtain a self-certification to establish tax residence of the account holder.

In respect of pre-existing Lower Value entity accounts, the financial institution may elect that such accounts do not have to be reviewed, identified or reported as a reportable account until the account balance exceeds $250,000 as of the last day of any subsequent calendar year from 31 December 2015.

Treatment of Undocumented Accounts

Financial institutions must make proper endeavours to obtain any self-certification forms from account holders, including issuing follow-up letters on at least an annual basis. Subject to local implementing laws, where a financial institution has contacted an account holder for a self-certificate but the account holder has not responded, the account should generally be treated as “undocumented” 90 days after initiating contact.

Financial institutions often have the power under their constitutional or subscription documents to request further information from investors. Even if this is not the case, a financial institution may be able to convince investors to provide such information by indicating that non-compliant investors will be required to: reimburse the fund for any potential related fines imposed on the fund; or have their shares redeemed.

If an account holder fails to respond and the holder’s account remains “undocumented”, the financial institution should generally not need to close the undocumented account but should report the undocumented status to the local tax authority. It is our understanding that local tax authorities may make enquiries if particular financial institutions appear to have a disproportionately high number of undocumented accounts.

Conclusion

Financial institutions in early adopter jurisdictions should consult with their CRS service provider or internal specialists to ensure that adequate due diligence procedures are in place to meet the 31 December 2016 deadlines for High Value pre-existing accounts.

Footnotes

1) A list of the CRS participating jurisdictions, and the early adopter jurisdictions, can be found here.

2) The United States is not a participating jurisdiction under CRS. The United States established its own global tax information collection regime in 2013, known as FATCA. FATCA requires due diligence and reporting in respect of US account holders only and is not currently reciprocal. The CRS represents the global implementation of cross-border tax sharing that was pioneered by FATCA.

3) Note, however, that if any Lower Value pre-existing reportable accounts are identified on or before 31 December 2016, information must be reported in 2017 rather than 2018.

4) A paper record search is not required where the electronically searchable information includes the following information about the account holder: (a) residence status; (b) residence address and mailing address on file; (c) telephone numbers, if any, on file; (d) whether there are standing instructions to transfer funds; (e) whether there is a current “care-of” address; and (f) whether there is any power of attorney or signatory authority for the account.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.