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What is common reporting standard and its scope

The CRS requires that the government of each country should get detailed account information from its financial institutions and share the same with other jurisdictions on an annual basis. In addition, the OECD has issued the implementation guide, which contains three parts and various chapters under it

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To curb tax evasion, G20 countries requested the Organisation of Economic Cooperation and Development (OECD) to develop a Common Reporting Standard (CSR) to exchange information automatically with other jurisdictions. The concept was endorsed by 34 member and several nonmember countries of OECD.

The full version of CRS for the automatic exchange of information was developed and released by OECD in July 2014. The CRS requires that the government of each country should get detailed account information from its financial institutions (FIs) and share the same with other jurisdictions on an annual basis. In addition, the OECD has issued the implementation guide, which contains three parts and various chapters under it.

The government of the UAE committed itself and signed two agreements (the agreements), named; (i) Mutual Administrative Assistance in Tax Matters (MAC) and (ii) the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) in April 2017. These agreements are the instruments to implement the CRS for the automatic exchange of information with other jurisdictions. Later on, MAC was ratified with Federal Law no. 54 of 2018, and MCAA was endorsed by the Federal Law No. 48 of 2018.

The Ministry of Finance (MoF) of the UAE, being a competent authority, implemented CRS in the UAE, which was active and live on January 01, 2017. To regulate the CRS, the central bank, securities and commodities authority, Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) were appointed as regulatory authorities, and wherever these authorities are not regulating any financial institution, the MoF is responsible for the regulation of CRS.

The CRS requires that any Reporting Financial Institution (‘RFI’) is required to do the followings:

• Identify the financial accounts held by the account holder, which is a reportable person or passive non-financial entity (NFE) being controlled by the reportable person; and

• Report certain financial information on an annual basis to the respective regulator or MoF as the case may be. RFIs are liable to report nil returns where they don’t have anything for reporting purposes.

Where more than one persons are holding one financial account, then each person will be considered a reportable person and for the purpose of applying the aggregation rule, the full amount under the jointly held account will be considered while calculating the total amount held by a reportable person in its account.

Who comes under FIs

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 FIs. There are two types of FIs: (i) reporting FIs and (ii) non-reporting FIs. Other than non-reporting FIs, all FIs are called Reporting Financial Institutions (RFI), and non-reporting FIs include government entities, international organizations, central banks, various funds, exempt collective investment vehicles, FIs carrying a low risk of evading tax like local banks.

An entity that is not a financial institution is called non-financial entity (NFE), and NFE can further be categorized into (i) active NFE and (ii) passive NFE. All NFEs except active NFEs, called passive NFEs, and active NFEs include NFEs having a passive income of less than 50 per cent of their preceding calendar year gross income and assets held by them during the preceding year to earn a passive income are less than 50 per cent of total assets. Other examples of active NFEs include the public listed entities and its related parties, NFEs that are government entities, international organizations, central banks or entities wholly-owned by one or more of them etc. The term passive income includes the income from rent, interest, dividends and any other income which is earned without involving any extra effort.

Reportable person

The term ‘reportable person’ means any reportable jurisdiction person other than a financial institution, central bank, international organization, government entity, corporation, the stock of which is regularly traded on one or more established securities markets, and its related entity. While the term ‘reportable jurisdiction person’ means an individual or entity that is resident in a reportable jurisdiction under the tax laws of such jurisdiction or an estate of a decedent that was a resident of a reportable jurisdiction. If the entity has no residence for tax purposes, then the jurisdiction in which its effective management is located will be considered residence for CRS purposes.

Controlling person

The term controlling person for CRS purposes means any natural person controlling directly or indirectly more than 25 per cent of the entity. Where we can identify a controlling person based on these criteria, the controlling person will be the natural person who exercises control through other means like the board of directors or one or more individuals who have a substantial influence over the company’s affairs. If persons exercising control by other means cannot be identified, then the Controlling Person(s) will be the natural person(s) who holds the position of a senior managing official.

In the light of the above guidance, If you are RFI, it’s recommended 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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