Preparing for the OECD Common Reporting Standard
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The OECD Common Reporting Standard (CRS) aims to facilitate the automatic exchange of taxpayer information between jurisdictions, necessitating significant changes in financial institutions' practices. This compliance roadmap outlines the complex adjustments required for effective onboarding, due diligence, data management, and reporting, particularly in the UK. With over 98 jurisdictions on board, CRS represents a broader regulatory framework than its predecessors, addressing concerns of tax evasion and operational inconsistencies.
Preparing for the OECD Common Reporting Standard
- 1. Preparing for the OECD Common Reporting Standard The CRS calls for a redesigning of IT and business architecture. Here’s a roadmap for compliance. Executive Summary The Common Reporting Standard (CRS), an initiative by the Organization for Economic Cooperation and Development (OECD), aims to set a standard for exchanging information about taxpayers between different jurisdictions. Financial institutions (FIs) will have to modify existing processes and practices to comply with the additional requirements of CRS. The changes entail increased complexity in customer onboarding and due diligence procedures, enhanced data management systems and increased reporting. Global FIs will also have to take into account the variations in the interpreta- tion of regulations across different jurisdictions. FIs in the UK will have to be cognizant of two particular aspects of CRS. Firstly, the bilateral/ multilateral agreements signed by the UK with different jurisdictions. Accounts related to all of these jurisdictions would have to be identified and reported. Currently, over 98 jurisdictions have publicly committed to CRS with nearly 55 (including the UK) committing to the first automatic exchange of information by Q3 2017. Secondly, FIs will have to keep tabs on Her Majesty’s Revenue and Customs (HMRC) interpre- tations of the standard itself. The OECD standard for automatic exchange of information is much broader in scope than previous tax compliance reporting regimes. Existing tactical approaches cannot be upgraded directly. It calls for a redesigning of information technology (IT) and business architecture that can adapt to new countries coming on board. This white paper presents the considerations and challenges in complying with the CRS requirements, and offers a roadmap for the necessary transition. Overview Automatic Exchange of Information The recent Panama papers leak has underlined the need for cooperation between tax adminis- trations in the fight against tax evasion and to protect the integrity of tax systems. Exchange of information is a key aspect of such cooperation. OECD Automated Exchange of Information (AEOI) and the CRS are built on previous regulations for sharing tax data, such as FATCA (U.S. Foreign Accounts Tax Compliance Act) and the EU Saving Directive. The automatic exchange of information enables countries to receive taxpayer informa- tion systematically and periodically from other countries. The first exchange of information (under CRS) is scheduled for Q3 2017 (see Figure 1) by 55 countries including the UK, its crown dependen- cies of the Isle of Man, Guernsey and Jersey, and the UK’s overseas territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos. cognizant 20-20 insights | february 2017 • Cognizant 20-20 Insights
- 2. cognizant 20-20 insights 2 CAA and CRS The framework of AEOI is based on two components: CAA and CRS. The Competent Authority Agreement (CAA) is a model of an agreement between jurisdictions allowing for automatic exchange of financial account infor- mation. CAA provides the governance framework and each jurisdiction retains the right to revise the provisions of the agreement. CRS provides the standard for exchanging information and defines the reporting and due diligence standards for each jurisdiction. OECD has modeled CAA and CRS on FATCA Model 1 Intergovernmental Agreement (Model 1 IGA). The principal changes include removal of U.S. specificities (to make it generic for multiple countries) and provisions concerning the with- holding of taxes. It aims to provide national tax agencies with enhanced taxpayer information. CRS Requirements Additional Due Diligence/Onboarding Require- ments CRS requires all in-scope account holders to be classified regardless of the balances in the accounts. This translates to changes in due diligence procedures to classify and identify the reportable individual and entity accounts. Self- certification of tax residency is to be used as a means for identifying indicia for all types of reportable accounts. For individual accounts, tax residency will be determined by an enhanced review process that includes: documentary evidence, indicia search and, in certain cases, paper record search and actual knowledge testing of the relationship manager. Any gaps in electronic searches would mandate the use of paper record search. All new individual accounts will go through the same due diligence procedure as preexisting individual accounts. There is no de-minimis threshold for individual accounts. For entity accounts, individual jurisdictions can take a decision to exempt accounts below a de-minimis threshold. For new accounts, there is no de-minimis threshold, but the other require- ments are similar to those for preexisting entity accounts. Reporting Requirements Financial institutions will have to submit annual reports to the corresponding competent authority of the participating jurisdictions. Reportable information includes interest, dividends, account balance/value, income from certain insurance products, sales proceeds from financial assets and other income generated from assets held in the account or payments to the account. The format/schema of CRS reporting in extensible mark-up language (XML) is presented in Figure 2 (next page). The CRS schema reuses the FATCA schema and elements of the OECD’s Standard Transmission Format (STF). So there are some elements in the CRS schema that are not required for the purposes of reporting and exchange under CRS (e.g., pool report and nationality). CRS timeline Figure 1 Model Common Reporting Standard Released •Feb 2014 Over 60 Jurisdictions Publicly Support the CRS •May 2014 New Account Procedures to Record Tax Residence to be in Place •Jan 2016 Commencement of Information Exchange Between Competent Authorities •Sep 2017 Early Adopters Sign Competent Authority Agreements •Oct 2014 Reporting by FIs in Early Adopter Jurisdictions •Mar 2017 Due Diligence for Identifying Low-Value Preexisting Individual Accounts and Entity Accounts •Dec 2017
- 3. 3 CRS Reporting Schema Figure 2 HEADER BODY REPORTING FI REPORTING GROUP SPONSOR (NON CRS) INTERMEDIARY (NON CRS) ACCOUNT REPORT DOC SPEC ACCOUNT NUMBER ACCOUNT HOLDERS CONTROLLING PERSONS ACCOUNT BALANCE PAYMENT ORGANIZATION INDIVIDUAL INDIVIDUAL ORGANIZATION POOL REPORT (NON CRS) CRSSchema FATCA and CRS The scope of CRS is largely the same as that of U.S. Model 1 IGA across three key dimensions: financial information to be reported, financial institutions that are required to report and reportable accounts. The key differences have been highlighted in Figure 3. In spite of the differences, the similarities allow partial leveraging of existing FATCA capabilities to support delivery. Figure 4 (next page) highlights areas of reusability of existing FATCA capabilities by financial firms. Comparison of CRS and FATCA Figure 3 Key Differences FATCA CRS De Minimis Limits $50,000 (all individual accounts) $250,000 (preexisting entity accounts) $250,000 (preexisting entity accounts) Indicia Focused on U.S. citizenship and residency. Focused on tax residency alone. Due Diligence Separate due diligence for preexisting and new accounts, and for individuals and entities. Significantly different processes between FFI agreement and model 1 IGA. Due diligence modelled on IGA, but with a number of key differences. Definition of FI Most financial institutions, unless specifically exempted as being lower risk. Similar to FATCA, but no exemption for local smaller entities excluded under FATCA. Account Scope Most banking products unless low risk; some insurance; most asset management. Banking and asset mgmt. broadly similar, though regularly traded exemption removed for interest in investment entities. CRS has no back book exemption for insurance. No Sponsorship Model Under FATCA, an entity is permitted to sponsor multiple entities in the group, allowing a single entity to undertake and submit reports on behalf of the sponsored entities. CRS does not have a sponsorship model. Reporting Primarily to U.S. (some U.S. reporting obliga- tions to non-U.S.). Account balances from 2014, with income and sales phased in. Many-to-many, via local authority. Account balances, income and sale proceeds from day one. Must include countries of residence. cognizant 20-20 insights
- 4. cognizant 20-20 insights 4 Reusing FATCA for CRS Figure 4 Issue Gap to Model 1 IGA Preexisting Individual Identification Additional indicia checks required but only for high value accounts, or accounts where no current residence address is held. Accounts which are sub-$50k or otherwise FATCA exempt must also be considered. New Individual Identification 1. Current self-certification must be amended to cover all countries, rather than a “U.S. or not U.S.” declaration. 2. No de minimis. 3. Systems need to allow for multiple statuses per customer. Preexisting Entity Identification Minor changes to entity types – documentation standards and workflow largely preserved. New Entity Identification A number of changes needed, including a self-certification on residency for all new entity accounts. Reporting Possible multiple statuses per customer. Additional customer details reportable. Withholding Only applicable to non-IGA countries for FATCA. Is not applicable for CRS. Compliance As with Model 1 FATCA, compliance is under local law. Legend Process change and new information requirements Minor or no redesign effort Impact of CRS CRS covers different kinds of financial institu- tions, including custodial institutions, depository institutions, investment entities and specified insurance companies, with some institutions eligible for exclusion as they pose a low risk of being used for tax evasion. CRS is tougher on exemptions as compared with the FATCA regulations or IGAs. Some financial institutions that were exempted under FATCA have been brought under the ambit of CRS. These include certain retirement funds, sponsored investment vehicles, financial institutions with a local client base, local banks, some investment advisors and investment managers, certain investment trusts and financial institutions with only low-value accounts. CRS will have the most impact on the following areas: • Data: Various aspects of data must be managed to comply with CRS. These include aggregating data from disparate sources of information to determine customer classifica- tion, and creating a data repository to track customers’ CRS status for reporting. Another challenge is normalizing of data from various source systems to allow centralized storage of data to drive the reporting for CRS. • Systems: FIs will be revisiting their existing AML/KYC systems to make sure that all CRS requirements are met. They will be required to classify client information across lines of business, types of accounts and countries. Reporting systems also need to be enhanced in order to send automated reports as well as generate ad-hoc reports for both internal and external reporting. • Operations: > KYC and due diligence: The due diligence procedures mandated by CRS in most cases need to be considered in conjunction with local regulations. For example, the draft reg- ulations published by HMRC enable financial institutions to apply the due diligence procedures required under the DAC for reporting for non-EU jurisdictions as well. > Client documentation: The responsibil- ity of stakeholder management pertaining to various activities would lie with the FATCA/CRS operations team. Existing KYC/ AML procedures need to be reviewed to identify gaps and new client onboarding/ account-opening procedures will need to
- 5. cognizant 20-20 insights 5 be developed. The operations team needs to ensure that relevant CRS indicia data elements are captured for new accounts. It also needs to identify existing accounts and conduct a review of all such accounts to classify. Relationship managers and/or the CRM team must enhance their client commu- nication strategy to obtain CRS-related infor- mation from clients. > Reporting: Tax authorities are working on a single report model, based on FATCA, covering multiple reports required under different regulations. This will involve changes to the existing reporting processes. Impact of CRS Figure 5 KYC and Due Diligence Client Documentation Reporting Schema(s) Target Operating Model Business Operations IT Operations Data Extraction, Normalization and Validation Remaining FATCA and CD Reporting Requirments Impactofthe Common Repor tingStandard SPECIFIED INSURANCE COMPANIES INVESTMENT ENTITIES CRS CUSTODIAL INSTITUTIONS DEPOSITORY INSTITUTIONS Looking Forward: Challenges and Opportunities Differing Interpretations Across Different Jurisdictions A CAA can be bilateral, multilateral or nonrecip- rocal in nature. This implies that each jurisdic- tion would require reporting of a different set of accounts. There may be differences in CAA between different jurisdictions as well as differ- ences in local implementation. Also, CRS relies heavily on local AML and KYC requirements. As these requirements vary across jurisdictions, international financial institutions may face dif- ficulties standardizing their approach. The laws regarding tax residency are also complicated, and differ by country. The self-certification validation procedures may therefore not be straightfor- ward. Definitions of financial institutions and exemptions to CRS may vary across jurisdictions. However, the due diligence procedures and broad- based customer classifications are expected to be the same across jurisdictions.
- 6. cognizant 20-20 insights 6 Data Privacy Laws Local law and data privacy considerations will require closer analysis at the country level. Accommodating Other Regulations Areas impacted by CRS are impacted by other regulations as well. Difficulties in standardizing an approach to customer classification will arise out of differences between CRS, FATCA, the European Savings Directive (EUSD) and the Directive on Administrative Cooperation (DAC). With FATCA, agreeing upon and implementing IGAs is a time- consuming process. This suggests it may be unlikely that all jurisdictions intending to par- ticipate will be able to enter into and implement agreements in the same timeframe. Larger Scale of Business Operations and Solution Delivery FATCA primarily dealt with accounts tied to U.S. citizens. The minimum threshold on CRS is also lower than FATCA for both new and preexist- ing accounts. There is more information to be collected from account holders with multiple tax residencies, more information to be checked and more information to be reported. For example, when there are conflicting indicia and self-cer- tification is not provided, the account has to be flagged for multiple tax residencies and the account info has to be reported to all concerned jurisdictions. There is a need to create scalable agnostic processes and systems that can meet the current and tentative future requirements. Changes to Existing Systems and Processes Clean and consistent data from upstream systems will require changes to those systems and associated business processes (i.e., onboarding and due diligence). The aggregation of customer accounts across various business lines and systems will introduce additional complexity. References • G20 CRS Implementation Plan (2014). • HM Revenue & Customs. (March 26, 2015) Implementing Agreements under the Global Standard on Automatic Exchange of Information to Improve International Tax Compliance. www.gov.uk/government/ uploads/system/uploads/attachment_data/file/417635/Implementing_Agreements_under_the_Global_ Standard_on_Automatic_Exchange_of_Information_to_Improve_International_Tax_Compliance_-_ summary_of_responses.pdf • OECD (2014) Automatic Exchange of Information. www.oecd.org/tax/exchange-of-tax-information/auto- maticexchange.htm • OECD (October 29, 2014) Multilateral competent authority agreement. www.oecd.org/tax/exchange-of-tax- information/multilateral-competent-authority-agreement.htm • OECD (February 23, 2014) Standard for Automatic Exchange of Financial Account Information. www.oecd. org/ctp/exchange-of-tax-information/automatic-exchange-financial-account-information-common-report- ing-standard.pdf • OECD (July 21, 2014) Standard for Automatic Exchange of Financial Account Information in Tax Matters. www.keepeek.com/Digital-Asset-Management/oecd/taxation/standard-for-automatic-exchange-of-finan- cial-account-information-for-tax-matters_9789264216525-en#page1
- 7. About the Authors David Paris is Head of Governance, Risk and Compliance for Cognizant’s Banking and Financial Services Group in the UK. He has over 30 years of experience as a financial services industry professional, having worked in major financial institutions such as Deutsche Bank, Reuters Instinet and Wells Fargo Bank, as well as in major services and technology vendor firms such as HCL, IBM and Ernst & Young. David has worked extensively in Europe, Asia and the U.S. in senior management and consultancy roles for risk, operations and technology leaders across both the banking and securities businesses. He has an M.B.A. in finance from the American Graduate School of International Management and a degree in Chinese and Russian history from Washington University. David can be reached at David.Paris@cognizant.com | LinkedIn: https://uk.linkedin.com/in/david-paris-6862513. Kapil Lodha is a Director within Governance, Risk and Compliance for Cognizant’s Banking and Financial Services Group in the UK. He has over 15 years of experience in banking and financial services with spe- cialization in regulations and compliance. Kapil has worked on large-scale transformational programs with tier-one banks and financial institutions in the UK/Europe and at consultancy firms such as Cap Gemini. He holds an M.B.A. and a B.Tech. degree and a certification from Carnegie Mellon University, U.S. Kapil can be reached at Kapil.Lodha@cognizant.com | Linkedin: https://uk.linkedin.com/in/kapil-lodha-628a31a1. Anil Mandavilli is a Senior Consultant within Governance, Risk and Compliance for Cognizant’s Banking and Financial Services Group in the UK. He has over six years of experience as a financial services industry professional, with specialization in the compliance space. Anil has worked in multiple banking domains including transfer agency, derivatives and collateral management. He holds an M.B.A. from Indian Institute of Management Kozhikode (India) and a B.Tech. from National Institute of Technology, Trichy (India). He can be reached at Anil.Mandavilli@cognizant.com | LinkedIn: https://uk.linkedin.com/in/anil-satya-mandavilli-98a95b49. About Cognizant Cognizant (NASDAQ-100: CTSH) is one of the world’s leading professional services companies, transforming clients’ business, operating and technology models for the digital era. Our unique indus- try-based, consultative approach helps clients envision, build and run more innovative and efficient businesses. Headquartered in the U.S., Cognizant is ranked 230 on the Fortune 500 and is consistently listed among the most admired companies in the world. Learn how Cognizant helps clients lead with digital at www.cognizant.com or follow us @Cognizant. World Headquarters 500 Frank W. Burr Blvd. Teaneck, NJ 07666 USA Phone: +1 201 801 0233 Fax: +1 201 801 0243 Toll Free: +1 888 937 3277 Email: inquiry@cognizant.com European Headquarters 1 Kingdom Street Paddington Central London W2 6BD Phone: +44 (0) 20 7297 7600 Fax: +44 (0) 20 7121 0102 Email: infouk@cognizant.com India Operations Headquarters #5/535, Old Mahabalipuram Road Okkiyam Pettai, Thoraipakkam Chennai, 600 096 India Phone: +91 (0) 44 4209 6000 Fax: +91 (0) 44 4209 6060 Email: inquiryindia@cognizant.com © Copyright 2017, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein is subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. Codex 2379