Crown Dependencies and Overseas Territories (CDOT)

Overview

In 2014 the United Kingdom commissioned and implemented CDOT, or Crown Dependencies and Overseas Territories, with a goal similar to FATCA to improve tax transparency and combat tax evasion. CDOT, also sometimes referred to as “UK FATCA”, introduces new reporting requirements for Financial Institutions (FIs) to comply with centered on sharing financial information with the tax authority, Her Majesties Revenue & Customs (HMRC). Reporting is set to begin in 2016.

The UK has established agreements with the 3 Crown Dependencies and 7 Overseas Territories:

Crown Dependencies

  • Jersey
  • Guernsey
  • Isle of Man

Overseas Territories

  • Anguilla
  • Bermuda
  • British Virgin Islands
  • Cayman Islands
  • Turks and Caicos Islands
  • Gibraltar
  • Montserrat

In an effort to reduce the compliance burden on effort and systems that the impacted FIs have in place to already meet their FATCA obligations, the executed agreements with these covered jurisdictions are similar to the UK-US Model 1 IGA under FATCA. For instance, the de minims thresholds are the same as FATCA. Accounts of individuals with $50,000 or more will now be reportable and companies with accounts of $250,000 or more are required to be reported. Unlike FATCA however, reciprocation of information sharing exists between certain covered jurisdictions and the UK. These include Jersey, Guernsey, Isle of Man and Gibraltar.

More importantly, the HMRC has also already stated that they intend to fold CDOT into the more global reporting regime Common Reporting Standards (CRS) in the future. In order to make that possible, CDOT does depart from certain FATCA regulatory criteria and aligns itself with specific CRS requirements. Most notably, under CDOT, determining reportable accounts is based on an individual’s Tax Residency, not citizenship as is the case with FATCA.

Impact

CDOT introduces yet another level of complexity to the tax information and regulatory reporting landscape, pioneered by FATCA, by facilitating the flow of financial information between the UK and the covered jurisdictions. Identifying what financial products are reportable, whose accounts must be reported, keeping up with constant changes by each covered local jurisdiction’s tax authority and adhering to deadlines results in more time, cost, resources and risk for financial institutions.

Challenges

Many of the same challenges that FIs experience with FATCA are also present with CDOT. Similarities in agreements between the Crown Dependencies and Overseas Territories does not mean there will not be any variation for financial institutions. Each local tax authority may require different data on accounts be transmitted in different formats with different reporting deadlines. Consolidating this information as well as transmitting it correctly and timely are layer incremental challenges for Financial Institutions. Identifying the Tax Residency of individuals who are supposed to self-identify is also problematic and may result in unintended non-compliance or over-reporting.

Financial Institutions can take key learnings from FATCA and apply them to their approach for CDOT, but the significant increase in volume and complexity that CRS will introduce needs to be kept on the horizon.

Timeline

Reporting for 2014 and 2015 is required by May 31st or June 30th, 2016 depending on the regulations of the specific covered jurisdiction. What will be required by each jurisdiction has yet to be determined.