In an effort to identify tax evaders, the Organisation for Economic Co-operation and Development (OECD) created the Common Reporting Standard (CRS). The CRS is a global exchange of tax and financial information that the OECD intends to occur automatically among participating countries.
“While some believe that the CRS will only target those who deliberately try to hide their finances, the implications are much more far reaching,” warns Richard Cayne.
The CRS: share and share alike?
Previously, one country would have to ask another country to share information when investigating potential tax evaders. There was no mechanism in place for this to happen automatically, much less at all. And if there was cooperation, the type of information shared wasn’t necessarily uniform across jurisdictions.
Since most nations rely on tax revenues to fill their coffers, some (specifically the G20 countries) requested that the OECD develop a standard to automate and normalise information sharing. Using the FATCA rules from the US, the OECD came up with the CRS. These standards set out which financial institutions must disclose what information for specified types of accounts and account holders.
While this sounds simple enough, the rules are hundreds of pages long, which suggest things may be more complicated.
For starters, only countries that agree to the CRS must comply, but how they comply can be left to interpretation since some definitions are unclear, such as what is a non-reporting financial institution. Also, the status of account holders and whether financial institutions must share their information can be murky.
What are the negative impacts?
Although they are based on the FATCA rules, the CRS is not exactly the same. So, the fact that the US has yet to agree to comply with the CRS means that many financial institutions as well as account holders must deal with two different sets of reporting requirements. For some, more paperwork may just be the start of the headaches.
There are any number of loopholes and contradictions that many parties, from financial institutions to rights groups, have pointed to as pitfalls to the CRS. In the forefront for many are privacy issues and individual awareness.
Richard offers an example: “What if you are the trustee of a financial trust that must provide information. It is unclear as to how your information, if any, will be shared and how it will be received. And what if the beneficiary of the trust is a minor or indigent person? In some countries, they would not be scrutinised by tax authorities, but are their mechanisms in place to prevent their privacy from being violated?”
The CRS is not easy
Lawyers and financial professionals are very aware of the CRS intricacies and problems, but this is not front-page news for most people. If you haven’t already, you may want to discuss your holdings with someone who knows about the CRS and make sure that you aren’t exposed and that your current and future financial decisions are sound.