The OECD Common Reporting Standard (CRS) which is designed to give effect to the new Automatic Exchange of Information (AEIO) standard is the latest addition to global co-ordination efforts to counter tax evasion; and builds on other information sharing mechanisms found in tax treaties, Tax Information Exchange Agreements (TIEAs), the OECD Multilateral Convention on Mutual Assistance in Tax Matters, FATCA and the EU Savings Directive.
It applies not only to income earned by corporate monoliths but also to individuals.
Since it is meant to implement the OECD AEIO standard it is broader in scope than information exchanges contemplated under FATCA.
Planned or existing FATCA compliance machinery in the private and public sector will not be sufficient to satisfy the CRS. What will be needed is a flexible approach which will meet the dictates of the existence compliance models while being capable of quickly and cost-effectively incorporating the expected changes, additions and modifications to global information sharing which will occur in the short to medium term.
Mauritius has just joined a list of 46 countries including the UK Overseas Territories and Crown Dependencies who have indicated that they will adopt the CRS by the 31st of December 2015. The list does not include the United States.
Banks are not the only entities who must comply with the CRS but the term financial institutions includes some entities that are excluded from FATCA Model 1 IGAs such as financial institutions with a local client base, local banks, certain retirement funds, financial institutions with a low-value accounts, sponsored investment vehicles, some investment advisors and investment managers and specified investment funds.
New ‘on-boarding’ procedures adopted by financial institutions will see some clients being dropped; and others will find it increasingly difficult to find a bank that will want to take them on as clients.
Not all financial institutions will survive the implementation of the CRS. The cost of compliance and the risks associated with non-compliance will be too high for some.
In like manner not all International Financial Centres will survive the global drive towards integrated mechanisms for information sharing.
No-one can be assured of confidentiality of the information transmitted. Already some some reports suggest that countries like the US will reserve the right not to exchange information if the confidentiality of their citizens cannot be adequately safeguarded by the state requesting the information.
What will happen to the mountain of information identified, collated, collected, verified, assimilated, transmitted and stored has to be determined at the firm level and the country level.
The IRS has announced that ‘FTCA-phishing’ has already stated; it will only be a matter of time before similar problems are faced under the the CRS.
The CRS has the potential to accelerate the purging of financial and quasi-financial institutions. For many OFCs –sooner rather than later- a decision about whether or not to continue to be involved in the competitive provision of financial services will have to be made as the cost of CRS implementation, compliance and monitoring; coupled with the emerging elements of the BEPS project; and pre-existing obligations under the transparency and information exchange protocols fast develop into a complex web of rights, roles, and responsibilities, the beginning the ending of which cannot, at this stage be determined with any certitude.