AEOI Experts Discuss the Risks and Complexities of CRS Reporting

Jesse Rooney
September 19, 2017

Overview: Sovos AEOI Event in New York City

Sovos recently hosted its AEOI Global Compliance Series event in New York with an event focused on Automatic Exchange of Information (AEOI) reporting. Speakers for the event included Jennifer Sponzilli from KPMG, Darren Rykers from Ernst & Young, Chris Orchard from Hansuke and Lanu Chou from Pricewaterhouse Coopers. Here are some of the notable moments from the event.

Four Jurisdictions Lead the Way

Reporting under the Organization for Economic Co-Operation and Development’s (OECD) Common Reporting Standard (CRS) began in 2017.  Like the Foreign Account Compliance Act (FATCA) upon which it was based, CRS provides for the automatic exchange of asset information between nations. Unlike the US-centric FATCA, CRS involves the exchange of information among a broad range of countries.

Among the 55 jurisdictions that originally committed to exchange information in 2017, Cayman Islands, Ireland, Luxembourg and United Kingdom stood out as key bellwethers for financial institutions under the first wave of reporting under CRS. At the Global Compliance Series, Sponzilli broke down some of the differences in reporting between these four countries, highlighting the importance of local implementation for global compliance regimes. 

CRS Is neither Common nor a Standard  

Luxemburg, for example, stuck with its June 30 deadline for CRS reporting despite industry pressure for an extension, but the Cayman Islands pushed back its CRS filing deadline from July 31 to August 31 and left its portal open for reporting until September 13. Some nations also veered from the standards they used under FATCA. For instance, the Cayman Islands required nil reporting under CRS where it had not previously under FATCA.

Going forward, the importance of these nations in the global finance industry will position their regulatory bodies as leaders for future reporting developments. Orchard spoke about the potential for these new fields and how they reflect that the CRS standard is subject to further change and improvement. 

The UK’s tax agency, HMRC, wants to add to CRS reporting requirements fields for account treatment and account type, as well as a self-certification checkbox, and a checkbox for Unknown Controlling Persons. While each nation can set its own standards for CRS reporting, the UK’s potential addition of those fields could lead to adoption by other nations or even by the OECD itself.   

Cayman Islands, Ireland, Luxembourg and the UK reported the same information in slightly different ways, and they will likely innovate on the CRS standard on their own in the future. The experiences of reporting in these nations illustrate how CRS, despite being a global regime, requires local focus and insight into the future to maintain compliance.

TIN Formatting Comes to the Fore

Even though the first reporting season for CRS early adopter jurisdictions may be near completion, compliance teams should not relax their efforts. Sponzilli stated that a large trend with early adopter countries has been conducting TIN format checks upon accepting files. This already seemed to be the case for Germany and France this year, with more jurisdictions to follow in their footsteps, providing a level of complexity due to the issuing and formatting of TINs varying globally.

Financial institutions are also noticing that even though their customers are responding to self-certifications with up-to-date information, the format of the TINs and tax residencies’ TIN format requirements do not align. In response to this problem, the OECD will likely try to help get TIN formats from countries publicized for financial institutions to use during onboarding.

Penalties Are Here, and Some are Severe

Early adopters of AEOI are likely to issue audits and penalties in the near future. The United Kingdom’s new Corporate Criminal Offence branch will investigate financial institutions’ onboarding processes and ultimately hold an individual criminally liable for coaching tax evasion. Countries likely to follow with audit programs are Germany, Cayman Islands and Australia.

Orchard said that the potential for audits will snowball for financial institutions selected for review by regulatory bodies.  He noted that the new global compliance regime means that as basic data is shared between regulatory bodies, so too are risk assessments. Compliance needs to be universal, as when one regulator selects a financial institution for audit, other regulators in other countries are likely to follow suit on the theory that where there is smoke (or potential noncompliance), there is fire.  

Thus far, Luxembourg has been the only jurisdiction known to have enforced penalties related to CRS reporting. Penalties for Luxembourg have been targeted at organizations that have a GIIN registered with the IRS but have not submitted a filing. Penalties imposed by Luxemburg can be up to 5% of the total amount that should have been filed, a significant penalty for noncompliance. As CRS reporting matures, we can expect penalties to be fully established by a jurisdiction’s third year reporting under CRS.

The Future of AEOI

With FATCA in its fourth year of reporting and CRS just finishing up its first, AEOI reporting remains in its infancy and many challenges lay ahead for compliance. Rykers discussed the future of late adopters.  About 50 nations committed to report under CRS in 2017 as early adopters, and about another 50 have committed to joining as late adopters with 2018 reporting.

These late adopters include nations that pose reporting challenges, such as China, which has not yet passed FATCA or CRS legislation despite committing to both reporting systems, and Poland, whose data privacy laws may pose a significant barrier to the adoption of information exchange. 

Still other nations, such as Nigeria and Ecuador, are expected to commit to becoming super late adopters of CRS, with reporting to begin in 2019 or later. As the number of reporting nations increases, so to do the difficulties in compliant reporting.

Don’t Take on AEOI without Help

With AEOI compliance becoming more and more complicated, compliance burdens will increase. Although FATCA and CRS have established standards, local variances in reporting requirements means one-size-fits-all solutions will not work. Financial institutions need to partner with third parties that have not only deep knowledge of standards themselves but also the local knowledge to report accurately in every nation and foresight into future developments.

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Jesse Rooney

Jesse Rooney is regulatory counsel for Sovos. His research focuses on tax information reporting. He is a member of the Massachusetts bar.
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