Next off the block – AEOI

You might have thought you have enough on your plate getting to grips with anti-money laundering rules closely followed by FATCA – but it’s not over yet! Next off the block is the Automatic Exchange of Financial Account Information in Tax Matters (AEOI). The AEOI, which we first provided an update on in 2014, imposes global rules for the purpose of avoiding offshore tax evasion through the exchange of financial information between tax authorities in different jurisdictions.

To this end, New Zealand’s Inland Revenue Department (IRD) recently released a special report on changes that have been made to the New Zealand Income Tax Act 2007 and Tax Administration Act 1994 to implement the G20/OECD standard for AEOI into New Zealand law. The legislative changes will apply to certain financial institutions (custodial institutions, depository institutions, investment entities and specified insurance companies) from 1 July 2017. It will therefore apply to managers of managed investment schemes, supervisors, debt issuers, custodians and other entities involved in the financial services sector in New Zealand.

The AEOI standard requires, among other things, financial institutions to:

• perform prescribed due diligence on their financial accounts with a view to identifying whether they are controlled by ‘non-residents’ (for example, non-tax residents of New Zealand); and
• report certain information about their clients’ identity (including tax residence) and financial information (including account balances and interest earned) to IRD.

The financial accounts affected are:

• Custody accounts
• Depository accounts
• Equity or debt interests in certain financial institutions (including interests in managed investment schemes)
• Cash value insurance contracts
• Annuity contracts.

The due diligence and reporting obligations are set out in an element of the AEOI standard known as the Common Standard On Reporting and Due Diligence For Financial Account Information (Common Reporting Standard or CRS).

The OECD has also released a comprehensive commentary to supplement the Common Reporting Standard.

Financial institutions must comply with the AEOI standard unless they meet one of the exclusions (for example, where it is a financial institution that presents a low risk of being used to evade tax).

Prescribed due diligence will need to be conducted on new financial accounts from 1 July 2017. For pre-existing individual financial accounts with balances exceeding NZ$1 million, due diligence will need to be completed by 30 June 2018. This threshold also determines what kind of due diligence is required to be performed. Due diligence on other pre-existing financial accounts must be completed by 30 June 2019, although those entities with balances of NZ$250,000 or less can be subject to a ‘de minimis’ exclusion at the financial institution’s discretion (there is no such exclusion for individuals).

With the exception of the period between 1 July 2017 and 31 March 2018, the annual reporting period for the Common Reporting Standard will be from 1 April until 31 March each year (Reporting Period), with an annual reporting deadline of 30 June.

The Common Reporting Standard will apply to all financial institutions that are ‘residents’ in New Zealand (for example, tax residents of New Zealand). Branches of non-resident financial institutions located in New Zealand will also be covered, but branches of New Zealand resident financial institutions located outside of New Zealand will be excluded.

A financial institution will be absolutely liable for each failure to comply with the Common Reporting Standard, and a civil penalty of $300 will apply to each failure. There will be relief for the period from 1 July 2017 until 30 June 2019, if the financial institution can demonstrate that:

• reasonable efforts to comply with the Common Reporting Standard were made; and
• the failure was corrected within a reasonable period of time after it became aware of it.

In addition, a financial institution that fails to take reasonable care to comply with the Common Reporting Standard (ie is negligent) can be subject to a civil penalty of up to $20,000 for a first offence and $40,000 for any subsequent offence (up to a maximum of $100,000 during a Reporting Period).

With an impending commencement date of 1 July 2017, financial institutions will need to start implementing systems now to comply with the Common Reporting Standard. The IRD has issued draft guidance to help you get started.