Common reporting standards: Expanding the landscape of financial information reporting

SUITS THE C-SUITE By Czarina R. Miranda

Business World (07/06/2015)

The Philippine and US governments are expected to soon sign the Inter-Government Agreement (IGA) which will provide guidance on how financial accounts of US persons should be reported to the US Internal Revenue Service (IRS) to comply with the Foreign Account Tax Compliance Act (FATCA). As Philippine financial institutions (FIs) await the signing and issuance of the IGA, they also need to prepare for the impact of the Common Reporting Standards or the CRS.

The CRS agenda was first introduced by the Organization for Economic Cooperation and Development (OECD) in February 2014. Six months later, on July 21, 2014, the Standard for Automatic Exchange of Financial Account Information in Tax Matters was published and introduced the CRS framework, a FATCA-like reporting system, which aims to provide for the annual automatic exchange of financial account information between Governments.

This information refers to the financial data reported by local FIs relating to account holders who are tax residents in other participating countries. The CRS describes the due diligence requirements for identifying and reporting on specific types of accounts under the agreement to be executed between jurisdictions and provides for additional definitions.

Our readers will recall that the FATCA was introduced by the US Government in 2010 as a means of curbing the perceived loss of billions of dollars in US tax revenue. FATCA’s objective is to implement an improved information reporting system to neutralize tax evasion by US persons investing or living abroad. FATCA aims to achieve this by requiring FIs all over the world to report to the US IRS, either directly or via their competent local authorities (in the Philippines, this may be the Department of Finance or the Bureau of Internal Revenue), details of any customers, either individual or entities, who are (or may be) US tax residents or citizens.

As FATCA has developed, several countries have already entered into IGAs with the US, thereby implementing FATCA locally and requiring compliance for locally domiciled companies. The Philippines has already agreed in substance to enter into a Model 1 IGA with the US.

The OECD leveraged on the reporting requirements of FATCA in designing the CRS and as such, CRS reporting is similar to FATCA’s, although with some modifications.

What is similar to FATCA are the reporting entities which include custodial institutions, depository institutions, investment entities and specified insurance companies. The information to be exchanged will cover all types of investment income. This includes interest, dividends, income from certain insurance contracts and other similar types of income, as well as account balances and sales proceeds from financial assets.

In contrast, the data required is different, and the volume of reporting is likely to be significantly greater under the CRS since this affects more institutions that are maintaining international assets for taxpayers in many more countries than just the US. Thus, instead of just purely identifying US citizens or residents, an FI will be required to identify the residency of all their reportable customers.

In addition, some of the low-risk FIs carved out of FATCA as registered “deemed compliant” institutions are not carved out under the CRS. Therefore, some organizations that have not taken steps to comply with FATCA will have to do so under the CRS. In addition, many of the de minimis limits under FATCA (e.g., $50,000 threshold for individuals) are not in the CRS. FIs will therefore be required to report significantly higher volumes of information to their competent authority. They may also need to reappraise their approach to compliance — particularly where only a “tactical” rather than “strategic” solution has been adopted for FATCA. The OECD models also do not provide for any form of withholding tax in the event that an FI is in a non-reporting jurisdiction.

Despite these concerns, having greater access to information may be an incentive for Governments to sign up for the CRS. In addition, jurisdictions may not wish to be seen as non-compliant in terms of their ability and willingness to automatically exchange information.

Since FIs are currently reviewing their systems and processes to deal with the impact of FATCA, it may be worthwhile to consider the flexibility of these systems to ensure that they can be enhanced to deal with the implementation of the CRS. If not, they may wish to consider incorporating the anticipated CRS requirements now, since the impact of CRS on FIs and their operations will be far-reaching.

From an operational point of view, the account on-boarding processes for new accounts, whether entities and individuals, are strongly impacted, as well as the completion of the documentation for pre-existing accounts. It will require a new review of indicia with specific objectives for the CRS. For example, account holder self-certification forms need to be performed again for CRS with a focus on the residence of the account holder and not on US citizenship. Monitoring and regular review of the accounts will also need to be performed.

With regard to reporting, the volume of information that feed into the reports will be much more important as it will include most clients of the FIs, as long as they are tax domiciled in a CRS participating country. In this context, a definition of the reporting operating model should be of primary concern, and each FI will have to choose between those that are developed in-house, acquired from a third party or outsourced.

From an IT perspective, in addition to the reporting consideration, the databases of the FIs will need enhancement to ensure there is sufficient volume for data storage, flexibility for research of client indicia, and the audit capability to understand the data used in reporting. Other implications to the organization include training, redesign of job descriptions, allocation of new or redistribution of resources to optimize the account documentation and report production processes.

One of the more important drivers defining the challenge, cost and complexity of CRS implementation will be the synergies that can be obtained from an FI’s current FATCA compliance program and its CRS plans. Those that have developed strategic FATCA solutions may be able to amend those processes and system solutions to meet CRS requirements, leveraging on the investments that have already been made for FATCA. However, those that have implemented limited FATCA solutions may find that they face more challenges when adopting CRS. FIs must therefore make it a priority to understand the key differences and similarities between the CRS and FATCA, and the corresponding impact on their approach to FATCA compliance.

Similar to what FIs have experienced during FATCA implementation is the realization that the CRS will continue to evolve over time, but whether Governments will adopt different positions in terms of implementation and interpretation is a primary concern. In addition, given the number of adopting jurisdictions, FIs will also need to monitor the differences in interpretation to ensure they remain compliant. Although the OECD mentioned that it “will seek to ensure that the Standard remains a single Standard also over time and that, as much as possible, it continues to be interpreted and operated consistently across different jurisdictions,” it remains to be seen if this will work in actual practice. Hopefully, countries like the Philippines will be able to cope with the demands of this expanding reporting landscape.

Czarina R. Miranda is a Tax Partner of SGV & Co.