Early adoption of tax common reporting standard problematic
Many of the data submissions made by early adopters over the next two months under the new common reporting standard (CRS) are likely to be rejected and returned for correction and resubmission, adding to compliance costs, according to predictions from Sovos, a global tax compliance solution provider
The UK is among the 40 early adopters and is one of 29 tax jurisdictions that have set deadlines in May and June by which financial institutions must submit data as part of CRS, which requires uploading considerable volumes of information about their account holders to a new portal. HMRC has set May 31 as its deadline.
Sovos commissioned the Aberdeen Group to carry out a research study into Foreign Account Tax Compliance Act (FATCA) filings made by financial institutions in the US last year, which found that only 44% of filings submitted by the respondents were accurate and complete.
On this basis, Sovos predicts that only four in every 10 transmittals for this year’s first CRS filing will be accurate, and says some institutions may require several rounds of resubmissions before the respective authorities accept their data, putting their compliance departments under considerable strain.
The volume of filings expected under CRS will be five times higher than under the Crown Dependencies and Overseas Territories (CDOT) rules, adding to the pressure on financial institutions to meet the deadline. It also questions whether HMRC’s new portal will be able to cope with the large number of financial institutions who are expected to upload their data at the last minute on the deadline date.
Despite the OECD’s attempts to create a global standard for the automatic exchange of information (AEOI), a significant number of jurisdictions have introduced local variations or requested additional information. For example, India’s tax authorities have asked for the account holders’ parents’ dates of birth. This inconsistency has hindered financial institutions in preparing for the common reporting standard, while some jurisdictions have provided less support for early adopters than others.
The OECD’s plan ‘carries a high degree of subjectivity’, according to Sovos, and this has meant financial institutions have had to seek guidance from the jurisdictions or their in-house legal teams or sought professional advice from other sources, which has further delayed their preparations.
In addition, the large volumes of data to be uploaded to the new portals means that financial institutions require IT support and expertise which some may lack.
Scott Freedman, director product strategy at Sovos, said: ‘We have a full time staff of compliance attorneys constantly monitoring jurisdictional changes across the world and, on average, we are currently implementing over 10,000 tax rule changes to our products every month. This level of regulatory change is unprecedented.
‘We are particularly concerned that the first major CRS filing deadlines in May and June will be challenging. Financial institutions which are relying on in-house tactical solutions may find CRS transmittals particularly difficult. The financial penalties and loss of reputation associated with non-compliance may motivate them to look at centralised automated solutions which offer more robust validation engines.’
