The Common Reporting Standards - New Global Tax Information Exchange Regime Begins January 2016

by Dechert LLP
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The Common Reporting Standard (“CRS”) will impose new investor due diligence and reporting obligations on funds and other financial institutions based in “early adopter” participating jurisdictions, with effect from January 1, 2016. According to the OECD, all major financial centres have now signed up to the standard. Financial institutions should now be preparing for the commencement of CRS by ensuring that marketing and subscription materials are updated and that appropriate due diligence and reporting procedures are in place.

Background

We previously reported that the Organisation for Economic Co-operation and Development (“OECD”) had obtained the agreement of 52 countries, dependencies and territories throughout Europe, Asia, Africa and North and South America to share tax information regarding their residents using a Common Reporting Standard (“CRS”). As of today, 96 jurisdictions in total have committed to adopting CRS (including the United Kingdom and popular fund jurisdictions including Ireland, Luxembourg, Jersey, Guernsey, the Cayman Islands and the British Virgin Islands, all of which are “early adopters”) and further jurisdictions are expected to follow.

Obligations

CRS represents the global implementation of cross-border tax sharing that was pioneered by FATCA. It will impose investor due diligence and reporting obligations on financial institutions similar to those already imposed by US FATCA and UK FATCA (in the case of financial institutions based in the UK’s Crown Dependencies and Overseas Territories). However, while US FATCA requires due diligence and reporting in respect of US account holders only, and UK FATCA requires due diligence and reporting in respect of UK account holders only, CRS will require due diligence and reporting in respect of account holders based in all of the expected 96 (or more) participating jurisdictions.

In summary, CRS will require tax authorities in participating jurisdictions to obtain financial information from their financial institutions on reportable accounts and to automatically exchange that information with other participating jurisdictions on an annual basis. “Reportable accounts” will, broadly, be accounts held for the benefit of investors (or beneficial owners) resident in any other participating CRS jurisdiction. CRS also includes a requirement similar to US FATCA to look through passive entities to report on the individuals that ultimately control those entities. However, unlike FATCA, CRS does not include a withholding threat in the event of non-compliance by a financial institution.

In order to comply with obligations under the CRS, financial institutions in “early adopter” participating jurisdictions must perform due diligence to identify reportable accounts with effect from January 1, 2016. Although local regulations are continuing to develop, it is expected that financial institutions will be required to make their first reports to tax authorities in “early adopter” jurisdictions in early 2017 so that those tax authorities can prepare for the first exchange of information in September 2017.

Other jurisdictions, such as Hong Kong and Singapore, will start exchanging information from September 2018. Financial institutions in non-early adopter jurisdictions therefore have to collect information about reportable accounts from January 1, 2017.

Next Steps

Investment funds (including private equity funds and hedge funds) based in participating jurisdictions will be classified as reporting financial institutions for the purposes of CRS. Such funds should therefore:

  1. Ensure that their offering documents and other marketing materials include suitable disclosure and risk warnings regarding the need for the fund to report investors’ information pursuant to CRS.
  2. Update their subscription documents and distribution agreements to ensure that the information required to comply with CRS is collected with effect from January 1, 2016 and to ensure that the fund has the right to require investors to provide such other information as may be required.
  3. Engage with their administrators or such other service providers who will be instructed to perform the additional due diligence and reporting required by CRS. This will likely involve amending or extending the scope of existing US FATCA/UK FATCA service agreements.

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.

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