How Financial Institutions Should Respond to the Challenges of CRS

Scott Freedman
October 11, 2017

Although financial institutions (FIs) certainly struggled to comply with the Foreign Account Tax Compliance Act (FATCA) during its first reporting season in 2015, panelists at SIFMA’s Global Tax Symposium in New York City agreed that FATCA is far less complex than the Common Reporting Standard (CRS).

One panelist noted that the biggest challenge in complying with CRS was the ability to keep up with jurisdiction-specific guidance, including additional data requirements, varying deadlines, residency definitions, data privacy laws and reporting portals.

FIs received a glimpse into those challenges with FATCA Model 1 jurisdictions, but the complexities have grown nearly five-fold since FATCA’s first season and will continue to do so as CRS fully unfolds. The panel also discussed other complexities of CRS, including over-reporting and under-reporting. There is no de minimis rule under CRS, but reporting requirements can still vary by jurisdiction.

Enforcement: The Calm before the Storm  

SIFMA panelists all agreed that the number one challenge of their first year reporting under CRS was keeping up with jurisdiction-specific guidance but openly wondered how much risk is actually involved with non-compliance.  =What or who, they wondered, is enforcing compliance across jurisdictions—and how?

Unlike FATCA, CRS does not have withholding to enforce compliance. Instead, compliance enforcement for CRS involves issuing audits and penalties. Two different types of audits are beginning to unfold, but most FIs are only familiar with the one that affects them directly—a regulator auditing the FI. However, many regulators are waiting for the exchange of information to take place before issuing audits.

The second form of audit comes from a peer review by the OECD to the regulator, which will begin soon after the exchange of information has taken place. The purpose of these audits is to ensure that the data being submitted is complete and accurate in compliance with CRS. Once this audit piece is completed, there might be a resulting increase in the amount of regulator audits being conducted with FIs.

With regard to penalties, panelists noted that a couple of jurisdictions are issuing penalties. Luxembourg is currently issuing penalties for FIs that have a GIIN registered with the IRS but did not submit a transmittal or NIL report, and Hong Kong’s Inland Revenue is issuing penalties amounting to $500 per day for unfurnished returns.

More penalties are on the way, however, as late-adopter jurisdictions are still in the process of signing on to CRS and setting up their penalty structures. Penalties, then, will soon be a real threat to non-compliant FIs.

The Importance of Data Centralization in Creating Flexibility

In their attempts to get their data in line for CRS compliance, FIs are struggling to collect responses from self-certification solicitations, and those received are likely to be incomplete, inaccurate or contain conflicting data in comparison to W-8s solicited through FATCA. As a result, many FIs are already looking for a better way to handle their data.

One of the SIFMA panelists noted that she saw a trend in FIs gravitating towards centralizing their data to one system, allowing for cross checking data between lines of businesses and tying processes for AEOI (FATCA and CRS) reporting with 10-series (1099 and 1042-S) reporting.

FIs need to merge data collection processes into a single operation to prevent miscommunication and overlap, and ultimately to avoid errors and penalties. The key is to have systems in place that are flexible and adaptable, and that can enable FIs to react quickly to changing thresholds and shifting jurisdictional requirements.

The panel advocated for a triangle of three business groups working together constantly to centralize and streamline reporting processes: tax, tax operations and IT.  Being both nimble and prepared for change will significantly soften the blow of adapting to updated regulations and will enable FIs to stay compliant and avoid both penalties and expensive ad hoc process modifications. Ultimately, flexibility and adaptability will enable FIs to avert the loss of both reputation and customer accounts.

Managed Services: The Advantages of Outsourcing

Automation is a major component of process centralization, and many FIs are looking for an automated AEOI solution.  Two major factors FIs need to consider are ease of implementation and how a solution fits into an FI’s current processes.

Another element to consider is which team will manage the solution and how many people need to be pulled away from their primary jobs to manage the reporting process.

One panelist noted that an industry trend involves adding a managed services offerings when adopting an automated solution. Managed services place the primary responsibility for system changes and rapid adaptations on the solution provider rather than on the FI itself.

FIs that use managed services have historically had a better record of meeting deadlines and a higher transmittal acceptance. They can also effectively outsource the creation and maintenance of reporting processes to a solution provider, freeing up the FI’s own employees to continue with critical job functions and not be sidetracked by reporting duties.

FIs that choose managed services partner with their vendor throughout the entire reporting process. Managed services offerings typically include assistance with:

  • Providing jurisdiction-specific knowledge
  • Assisting with registrations to portals
  • Staying up-to-date with guidance and deadlines
  • Transmitting to portals
  • Managing system security
  • Pilot processing season

Just Scratching the Surface

As it grows and develops, CRS will present FIs with new and increasingly complex challenges. As the SIFMA panelists noted, the key to meeting those challenges will be flexibility and adaptability brought on by data and process centralization.

In addition, FIs should consider outsourcing reporting to a managed service and sparing their employees from getting bogged down in tax reporting. CRS isn’t about to become any less time-consuming or complex. As CRS moves forward, FIs need to be ready to both avert penalties and protect their reputations and their customers.

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Scott Freedman

Scott Freedman is Director of Product Strategy for AEOI solutions at Sovos. Scott has over 15 years of experience in strategic marketing and product strategy. He has worked for business-to-business software and SaaS solution companies like Thomson Reuters and with Fortune 500 companies as a business consultant. Scott has a background in law and earned his J.D. and undergraduate degrees from the University of Chicago and University of Illinois.
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