Your taxes: Info exchange inner workings

The OECD Common Reporting Standard (CRS) and FATCA in the United States are long-winded. So the OECD published on August 7 a much shorter and lighter guide: the “Common Reporting Standard Implementation Handbook” (the CRS Handbook).

The CRS and FATCA represent a sweeping change toward automatic information exchange and away from secret nest eggs.

How information exchange will work: Financial institutions in Country A will enter information about Country B account holders to an electronic platform of the Country A tax authority. If Countries A and B are parties to an information-exchange agreement – bilateral or multilateral – the Country A tax authority will forward the information to the Country B tax authority.

Until now, Country B had to ask Country A whether Mr. Brown has an account in Country A. Soon Country B will get the information anyway.

How soon? More than 90 countries have given the OECD a commitment to implement the CRS in 2017 or 2018; in Israel’s case, by 2018. This is likely to happen on time as the OECD’s CRS is closely modeled on the US’s FATCA (Foreign Account Tax Compliance Act) being implemented internationally right now.

If an account holder in Country A has links to more than one country, each country’s tax authority will get the information.

Definitions: A reportable person is reportable jurisdiction person unless specifically excluded. The main exclusions are for corporations with stock regularly traded on a securities market and a related entity of theirs, governmental entities, international organizations, central banks and financial institutions.

Controlling persons are defined in detail and include the natural person(s) who directly or indirectly exercise control over the entity; for example, 25 percent of the shares or voting rights of the entity, or if no such person exists, exercises control over the management of the entity.

Due diligence on individuals: The crème de la crème due-diligence procedure is a signed self-certification of their residence for tax purposes by the customer. This is needed for new accounts after the CRS is implemented.

For lower-value accounts (below $1 million) of individuals existing before the CRS is implemented, an electronic check for country of residence “indicia” may suffice.

The electronic indicia are: ID, mailing address, most recent phone number, where funds are sent to, address of power of attorney holder or signatory. Failing this, a paper-record search is needed and, if necessary, an inquiry with the relationship manager.

If this also fails, the financial institution should get such documentary evidence of residence from a government or a signed self-certification from the account holder.

Above $1m., the financial institution should check it has documentary evidence of a residence address from a government. If not, it should conduct an electronic indicia search and get documentary evidence of residence or a signed self-certification from the account holder.

Any “hold mail” or “in care of” addresses ring alarm bells as they are reported to the tax authority of that country as “undocumented accounts” and imply an anti-money-laundering failure.

However, the OECD allows countries to jump straight to signed self-certification by the customer for preexisting accounts, and countries like Israel and Switzerland have done so.

Due diligence on entities: For lower-value accounts (below $250,000) of entities existing before the CRS is implemented, no reporting is needed by the financial institution to the tax authority of that country.

For preexisting accounts of entities above $250,000, the financial institution must obtain signed (or otherwise positively affirmed) self-certification by someone authorized to sign, or use public information maintained for regulatory or customer-relationship purposes.

For new accounts of entities, signed self-certification is needed.

In the case of an account holder that is a passive NFE (nonfinancial entity), its controlling persons must be identified and included in the due diligence process.

For preexisting accounts below $1m., anti-money-laundering information on file may be used. Above that level and for new accounts opened after the implementation of CRS, signed self-certification is needed.

Where do entities reside? The CRS residence rules for entities are complex because some entities have branches elsewhere.

Regard will be had to where the entity is resident for tax purposes, incorporated, has a place of management, is subject to financial supervision or maintains accounts.

What about trusts? A trust is general resident where one or more trustees are resident.

A trust is considered to be an entity in the CRS – usually a passive NFE. The account of a trust is reportable if the trust is a reportable person or any of its controlling persons are reportable persons.

The controlling persons of a trust are the settlor(s), the trustee( s), the protector(s), the beneficiary(ies) or class of beneficiary( ies), and any other natural person(s) exercising ultimate effective control over the trust.

Discretionary beneficiaries would generally be reported regardless of whether a distribution is received.

What gets reported? Identifying information reported as of the end of the year includes: name, address, jurisdiction(s) of residence, tax identification number, date and place of birth of individuals and controlling shareholders, the account balance, gross interest, gross dividends, other income from assets held, gross proceeds from the sale or redemption of financial assets.

Comments: The OECD CRS gets its backbone from the US FATCA system. But there are still some chinks in the armor. Not all countries have committed to participating in the CRS, although most undoubtedly will do so sooner or later. People who switch banks and phone numbers and/or make aliya may also slip through.

As always, consult experienced tax advisers in each country at an early stage in specific cases.