Sovos is predicting the majority of transmittals submitted by qualifying financial institutions to early adopter tax jurisdictions in the next two months may be rejected and returned for correction and resubmission. As a result, institutions may require several rounds of resubmissions before their data is accepted.
The majority of transmittals submitted by qualifying financial institutions to early adopter tax jurisdictions in the next two months may be rejected and returned for correction and resubmission, predicts Sovos, a global tax compliance solution provider. Some institutions may require several rounds of resubmissions before the respective authorities accept their data, thereby putting their compliance departments under considerable strain, Sovos suggests.
Twenty-nine tax jurisdictions have set deadlines in May and June. These are the dates by which financial institutions must submit data as part of the new Common Reporting Standard (CRS). The CRS will require all qualifying financial institutions to upload considerable volumes of information about their account holders to a new portal.
The UK is amongst the forty ‘early adopter’ countries and HMRC has set May 31 as its deadline.
The CRS is part of the OECD’s new automatic information of exchange (AEOI) regime designed to facilitate greater global tax transparency.
Sovos commissioned the Aberdeen Group to carry out a research study into FATCA filings made by financial institutions in the US last year. It found that only 44 per cent of filings submitted by the respondents were accurate and complete. Using this figure as a baseline, it predicts that only four in every ten transmittals for this year’s first CRS filing will be accurate (40 per cent).
The company points to five factors which it believes supports its prediction. These are:
- Volume of data
The volume of filings expected under CRS will be five times higher than under CDOT. Sovos believes this unprecedented number will put a significant number of financial institutions under considerable pressure to meet the deadline. It also questions whether HMRC’s new portal will be able to cope with the large number of financial institutions who are expected to upload their data at the last minute on the deadline date.
- Inconsistency across jurisdictions
Despite the OECD’s attempts to create a global standard for the automatic exchange of information (AEOI), a significant number of jurisdictions have introduced local variations or requested additional information. For example, India’s tax authorities have asked for the account holders’ parents’ dates of birth. This inconsistency has hindered financial institutions in preparing for CRS.
- Lack of support received from jurisdictions
Sovos believes HMRC has provided a very high level of support to financial institutions, but this support varies dramatically across jurisdictions.
- Degree of subjectivity found in the OECD Schema
The OECD’s schema ‘carries a high degree of subjectivity’, according to Sovos, and this has meant financial institutions have had to seek guidance from the jurisdictions or their in-house legal teams or sought professional advice from other sources. This has further delayed their preparations.
- Level of technical expertise available to compliance departments
Compliance departments will be expected to upload considerable quantities of data to the new portals and Sovos believes the level of IT support they have received varies dramatically. Smaller financial institutions, in particular, are at risk of attracting penalties for non compliance as their IT resources are smaller than those found in large institutions.
Commenting on the company’s prediction, Scott Freedman, Director Product Strategy, said, “We have a full time staff of compliance attorneys constantly monitoring jurisdictional changes across the world and, on average, we are currently implementing over 10,000 tax rule changes to our products every month. This level of regulatory change is unprecedented.
“We are particularly concerned that the first major CRS filing deadlines in May and June will be challenging. Financial institutions which are relying on in-house tactical solutions may find CRS transmittals particularly difficult. The financial penalties and loss of reputation associated with non-compliance may motivate them to look at centralised automated solutions which offer more robust validation engines.”