Combatting cross-border tax evasion remains a key priority for governments across the globe. The OECD Base Erosion and Profit Shifting (BEPS) recommendations, including the automatic exchange of taxpayer information between countries, is considered as being fundamental to addressing this issue.
As the global economy is still grappling with the effects of the unprecedented health and financial crisis as a result of the COVID-19 pandemic, governments are faced with the challenge of raising sufficient revenues to help curb the social and economic impacts of the pandemic, fund relief measures and look towards economic recovery.
As a result, the need to address tax evasion and ensure that businesses pay their fair share of taxes is all the more prevalent. Furthermore, public debates have resulted in heightened calls for increased tax transparency.
The OECD Common Reporting Standard (CRS) developed in 2014, has been a game changer in terms of standardizing financial compliance approaches and tax transparency standards globally.
As an internationally agreed standard it aims to create a level playing field for the automatic exchange of financial account information between jurisdictions. Effective implementation at international level is central to this purpose.
At the end of 2020, the OECD released two documents providing insight on the implementation of the CRS globally, namely:
- A report on the Peer Review of the Automatic Exchange of Financial Account Information 2020 (Peer Review Report), which summarises the conclusions of the peer reviews of the legal framework put in place by each jurisdiction to implement CRS
- A Guide on Promoting and Assessing Compliance by Financial Institutions (Compliance Guide), to assist government officials and financial institutions (FIs) with the obligations to monitor and ensure compliance of FIs who have CRS and US Foreign Account Tax Compliance Act (FATCA) reporting obligations. The Compliance Guide also aims to provide a practical overview of what a robust CRS and FATCA compliance regime may involve.
There are many differences and similarities between the two reporting standards.
Generally, FATCA is considered to be much narrower in scope than the CRS, particularly given the multi-national nature of the CRS. Whilst FATCA requires financial institutions to report only those customers who qualify as U.S. persons, the CRS involves more than 100 jurisdictions where all foreign investments handled by a financial institution become subject to a CRS report.
These regimes have necessitated changes to the way financial institutions operate with respect to compliance measures and new governance and internal control strategies.
It is essential that consistent, efficient and sustainable compliance strategies are put in place to ensure operational effectiveness, which will be instrumental in improving data quality and internal controls as well as establishing compliant mechanisms for tax audits.
The compliance process for financial institutions can be quite complex and it is therefore clear that to enhance effectiveness, consideration should be given to incorporating CRS into a holistic financial compliance strategy.
Compliance is an essential component of any financial strategy. It is particularly important to mitigate any potential financial and reputational risks in view of increased scrutiny related to tax transparency, which has come to the fore in recent years.
In this respect it would be of benefit for financial institutions to review the recommendations outlined in the OECD Peer Review Report to identify the potential impact related to jurisdictions relevant to them. Furthermore, the Compliance Guide provides valuable insight on potential focus areas of the upcoming compliance reviews and audits.
Financial institutions could conduct an internal assessment and audit readiness as outlined in the Compliance Guide to help address any existing issues as needed.
As part of a holistic, sustainable compliance strategy, it would be important for financial institutions to consider the following elements for inclusion:
- Governance structure
- Roles and responsibilities should be clearly defined, documented and specifically assigned
- Establish who is responsible for CRS implementation compliance
- Policies, procedures and processes
- Robust policies and procedures for documenting compliance implementation, which will be useful in providing a clear audit trail in terms of procedures
- Review and update internal processes and procedures to reflect international policies applicable to relevant jurisdictions
- Keeping track of CRS developments and reportable jurisdictions
- Review of reporting requirements well in advance of deadlines to ensure that systems are up to date
- Training Framework
- Provide regular training to staff responsible for compliance implementation
- Well-designed training strategy
- Data readiness
- How to gather, analyse, process and validate the data and documentation required to support global tax compliance
- Data collection, privacy & maintenance
- Managing the data and documentation requirements for CRS, e.g. self-certification
- Explaining CRS requirements to customers and updating data privacy notices
- Review processes over data maintenance and data storage
- Quality and control testing
- Internal and external audits to provide a clear understanding of ongoing compliance and possibility to remediate any issues encountered.
- Perform internal audits and health checks of the processes; consider commissioning external independent checks as well
- Functional tools to secure greater efficiency and consistent outcomes
- Jurisdictional requirements
- How to track and monitor all jurisdictions for CRS compliance
- CRS costs, remediation and complexity
- Managing the CRS compliance needs of clients across various jurisdictions
- Managing the CRS costs including data collection, remediation, regular monitoring and tracking
If you would like to enhance your understanding of CRS further, join our four-hour online certification, the Certificate on the Common Reporting Standard.
Starting from the basic knowledge of the CRS regime and its associated requirements, you will gain a deeper understanding of how to classify accounts following CRS criteria and learn more about due diligence reporting requirements and key considerations of the CRS. We will also present, discuss and work on practical case studies to apply your knowledge. Best practices will show you what a comprehensive compliance strategy could look like.