British Virgin Islands: Adoption Of The OECD Common Reporting Standard In The British Virgin Islands

On 1st January 2016, an amendment to the Mutual Legal Assistance (Tax Matters) Act, 2003 came into force which implements the Organisation for Economic Co-Operating and Development (OECD) Common Reporting Standard for the exchange of tax information (CRS) in the British Virgin Islands (BVI). Globally this means that participating jurisdictions will obtain information from reporting financial institutions and automatically exchange with exchange partners on an annual basis financial information with respect to all “Reportable Accounts.” ] Going forward, this means BVI investment funds and other financial institutions (Reporting FIs) will need to report on the holders of Reportable Accounts which are tax resident in “Reportable Jurisdictions” to the BVI International Tax Authority (ITA) and that information will be reported by the ITA to the home tax jurisdiction of the account holders under procedures agreed between signatories to the CRS and related OECD measures.

These measures are similar to the financial reporting requirements under FATCA however there are some key differences which mean that even entities who were not impacted by FATCA need to consider the implications of CRS. One of the key differences between FATCA and the CRS is that the test used to identify tax payers under the CRS is based on tax residency rather than citizenship (contrary to FATCA). The CRS also does not apply any form of withholding tax (although the widespread adoption of intergovernmental agreements under FATCA has negated the risk of a withholding tax being applied by the US).

What actions need to be taken by BVI investment funds to comply with CRS?

BVI investment funds, to the extent they have not already registered as required under US and UK FATCA, must register with the ITA via the online portal. There are differences between the reporting obligations under FATCA and CRS. Accordingly, any non-reporting financial institutions under FATCA may now, however, be required to register with the ITA under CRS.

Constitutional, subscription and offering documents of each BVI investment fund will need to be reviewed to ensure account opening procedures for new investors allow the fund to request and obtain the necessary information to identify subscribers, tax residency and report to the ITA on an ongoing basis.

Self-certification forms are anticipated to be released by authorities in the BVI in January 2016 which reflects all information a BVI investment fund requires in order to classify and report under US and UK FATCA and CRS. These forms, or similar forms containing the relevant information, will need to be incorporated into the investor due diligence process when available.

Once a BVI investment fund has collected the necessary due diligence information in relation to its investor accounts, it will need to (i) determine the residence of the account holder for tax purposes, (ii) for entity accounts, determine if it is a passive non-financial entity (Passive NFE); and (iii) determine the tax residency of any controlling person of a Passive NFE.

Designation of Accounts

It is important to designate accounts as pre-existing or new. This is because Reporting FIs have a grace period within which they are able to carry out the due diligence on existing accounts. The deadline for due diligence reviews are 31 December 2016 for pre-existing high value individual accounts and 31 December 2017 for pre existing lower value individual accounts and pre-existing entity accounts over US$250,000 (the thresholds applicable to these accounts are set out below).

Where an individual or entity holds multiple accounts with a Reporting FI, the Reporting FI is required to aggregate all accounts held by that individual or entity but only to the extent that the Reporting FI’s computer systems link the accounts by client or TIN number and allow balances to be aggregated. This may impose earlier deadlines or trigger increased due diligence requirements as detailed below.

Pre-Existing Accounts

Pre-existing accounts are those that are in place as of 31 December 2015 and remain in place on 1 January 2016. For BVI investment funds, this means if an investor is invested in the fund on 31 December 2015 and remains invested on 1 January 2016, that account is a pre-existing account.

Pre-existing accounts will need to be reviewed during the course of 2016 and 2017 to ensure they comply with CRS. All pre-existing individual accounts must be reviewed regardless of value, although the level of due diligence varies depending on whether they are classed as “lower value” i.e. less than US$1,000,000 or “higher value” accounts. In relation to pre-existing entity accounts, there is a financial minimum threshold of US$250,000. If the value of a pre-existing entity account is less than the threshold, the account will not need to be reviewed until it exceeds that threshold. Reporting Financial Institutions do, however, have the option to elect to voluntarily dispense with the threshold and, adopting a risk-based approach, review all accounts.

New Accounts

Any account opened on or after 1 January 2016 will, for the purpose of CRS, be designated as a new account meaning due diligence information on all new investors to a BVI investment fund on or after this date must be obtained on subscription.

Are there any exclusions in relation to what has to be reported under CRS?

In situations where the BVI investment fund has no Reportable Accounts, it would not be required to make a return to the ITA however where a pre-existing reportable account is closed before the due diligence work has been completed, it must be included in any filing with the ITA.

IMPORTANT DATES TO REMEMBER

BVI investment funds must register with the ITA no later than 30 April 2016.
Review of all pre-existing high value individual accounts must be completed by 31 December 2016.

2016 is the first reporting year for the CRS and subject to the due diligence deadlines as set out above, reports for all new accounts and pre-existing high value individual accounts will need to be submitted by BVI investment funds to the ITA no later than 31 May 2017 in respect of the calendar year 2016.

Review of all pre-existing lower value individual accounts and pre-existing entity accounts must be completed by 31 December 2017.

During the course of 2017, due diligence information should be collected on any new accounts opened in that calendar year and reports for all new accounts, pre-existing lower value individual accounts and pre-existing entity accounts will need to be submitted by BVI investment funds to the ITA no later than 31 May 2018 in respect of the calendar year 2017.

As the majority of BVI investment funds have already been required to make changes to their financial reporting regime following the implementation of FATCA, we envisage that most entities will already be compliant with CRS. However we will be in touch with each of our clients over the coming months to ensure their fund documents are reviewed accordingly.