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Obligations of the reporting financial institutions under CRS

For the purpose of CRS, depository institutions like banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and certain types of insurance companies are called financial institutions

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As discussed in our previous article, Common Reporting Standards (CRS) is the global standard developed by the Organisation of Economic Cooperation and Development (OECD) to automatically exchange the financial account information with the participating jurisdictions (partner state) to control tax evasion.

We highlighted that only reporting financial institutions (FIs) are required to identify the financial accounts held by the account holder who is a reportable person or passive non-financial entity (NFE) that is being controlled by the reportable person and report financial account information on an annual basis with the partner state via respective regulator or Ministry of Finance (MoF) as the case may be.

For the purpose of CRS, depository institutions like banks, custodial institutions like mutual funds, investment entities like hedge funds or private equity funds, and certain types of insurance companies are called financial institutions (FIs). There are two types of FIs: (i) reporting FIs and (ii) non-reporting FIs. Other than non-reporting FIs, all FIs are called RFI, and non-reporting FIs include government entities, international organisations, central banks, various funds, exempt collective investment vehicles, FIs carrying a low risk of evading tax like local banks.

Non-reporting FIs and Non-financials entities (NFE), either active or passive, are not required to report any information to other jurisdictions. The CRS only applies to RFIs [RFIs = FIs – Non-reporting FIs]. The definition of FIs and Non-reporting FIs is almost the same as given in Fatca, which we have already covered in our articles on Fatca.

The RFIs have certain obligations under the CRS, and their key responsibilities are as follows:

• Register with their regulators or MoF as the case may be.

• Perform due diligence on all financial accounts maintained by them.

• Annually report all reportable accounts that it maintains or file a nil return if it does not maintain any reportable accounts.

• Continuously monitor for changes in circumstances that result in the change of an account holder’s CRS status

The central part of the CRS is to perform due diligence on the accounts. By applying due diligence, RFIs apply various procedures to screen their customer and to establish whether a financial account is a reportable account. Chapter No. 4 of the Implementation Handbook on CRS, issued by the OECD, deals with due diligence. There are different due diligence rules and procedures for accounts held by Individuals and entities as well as for pre-existing and new accounts. These rules can be categorised into four sections based on the following types of accounts, and we will discuss these in detail in our next article.

• Pre-existing individual accounts

• New individual accounts

• Pre-existing entity accounts

• New entity accounts

The RFIs are required to identify the status of tax residency of the account holders and perform the due diligence of all account holders except the account holders who are residents of the US for tax purposes. Moreover, RFIs are required to identify the partner states and share all information about the reportable accounts held by the account holder except the account holders who are residents of the UAE or US for tax purposes. The US has been removed from the list since it has been covered under the Fatca. The UAE’s resident’s information is not required to be shared with other jurisdictions since the account holders are residents of the UAE only for tax purposes.

While performing the due diligence, the RFIs are required to perform the “reasonableness test” to make sure the information provided to RFIs under the self-certification, is correct, which establishes his/her tax residency. Wherever the RFIs have doubts about their information, they are required to apply enhanced due diligence procedures. The term “reasonableness test” means the information provided by the account holders is correct. While the word “self-certification” means, the information provided by account holders by themselves.

In case of any changes in circumstances that resulted in a change in the reportable account and/or in the account holder’s status, the information should be provided to RFIs under the self-certification scheme.

Penalties are applicable if the RFIs fail to get valid self-certification and/or, the account holder provides false certification.

The deadline for the CRS reporting is 30th June of the year following each reporting period unless the reporting deadline has been extended. If it has been identified during the due diligence that the account holder does not maintain any reportable accounts, RFI is required to submit a nil return via its Regulator or the MoF as the case may be.

In the light of the above guidance, the RFIs are required to identify the reportable person or passive NFE controlled by the reportable person, then report it accordingly by logging in to the respective regulator or MoF portal.

Mahar Afzal is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com

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