To see previous articles with Deloitte and Northern Trust on the Common Reporting Standard, click here and here.

The global private client wealth management industry is gearing up for the Common Reporting Standard, the first stage of which got under way two weeks ago. Legal experts and others working in the field warn that the roll-out of CRS in coming years will prove far from smooth.

From the start of January, the 56 “early adopter” countries (such as the UK, Germany, France and Liechtenstein) have – or should have – collected data on accounts so that, from the start of 2017, such nations can automatically exchange information when sought; a second wave of countries start collecting data from 2017 so as to be ready to swap data from 2018. (Switzerland, the world’s largest offshore center, is in the second group, a fact seen as sounding the international death-knell of Swiss bank secrecy law. Singapore and Hong Kong are also both in the second group.)

The CRS is, in some ways, a sort of “global FATCA” – to use the acronym of the US Foreign Account Taxation Compliance Act. The US legislation, enacted in 2010 and taking effect in stages, established the idea of extra-territoriality in tax compliance, with Uncle Sam chasing after expat US persons for possible tax cheating, and requiring thousands of non-US financial firms such as banks to fret about complying with laws written in Washington DC. With CRS now taking shape, however, it is no longer just the US that is seen as flexing its international tax muscles. Everyone, it seems, wants in the game in the hunt for revenues, and to possibly grab a chunk of the $11 trillion of assets held offshore (source: Boston Consulting Group, 2015 report).

So what do industry professionals make of the situation so far? According to Marnin Michaels, Zurich-based partner at Baker & McKenzie, the global law firm, CRS is highly ambitious. “In many respects, CRS is the single most coordinated and unified approach to combating tax evasion ever seen on the planet. While the goals are commendable and understandably lofty, given the scope of the issue, CRS raises quite a number of concerns and challenges,” he told this publication.

“What is clear is that CRS will have ramifications above and beyond the goal of ensuring that taxpayers report their income. It will affect every element of the banking system, from taxation to cross-border regulation. It is possible that the information shared will lead to litigation, even if the taxpayer is compliant, because the information may be exchanged in a form that is not related to the way that the income is taxed in the residence jurisdiction,” he said.

Michaels also referred to the law that legislators frequently overlook: the Law of Unintended Consequences. Exchanging information could have unexpected effects, a view shared by Richard Cassell, a partner at Withers, the law firm.

"I don't think people have recognized the additional categories of information that will need to be reported,” he said. Cassell argued that the industry hasn’t realized that CRS is in fact not just a global version of the FATCA rules. The definition of "financial institution" under FATCA, for example - which can cover anything from a major bank such as Barclays or Deutsche through to a small trust in the Cayman Islands - doesn't always exactly translate into the "financial institution" as defined by CRS and financial institutions cannot sponsor other companies under CRS. Trusts, for example, should be treated as financial institutions, he said: "They should do their own reporting because they know where the money comes from."

There is some ambiguity under CRS as to what counts as a non-financial entity; in most cases, an active NFE [non-financial entity] is something like an operating business such as a retailer, hotel or factory; a passive NFE may include a property holding company or a small property trust; there are some cases where a business such as a trader or a property dealer falls into a gray area, Cassell said. The OECD handbook on CRS gives an impression of not really taking full account of the status of trusts and the Common Law traditions of which they are a part, he said.

Wrong data?

One major concern is that because of potential ambiguities, a person might find that inaccurate data about them is passed on by an FI and this triggers audits and investigations by revenue authorities, Withers’ Cassell said.

He gave the example of if, say, X is a protector of a trust and has the role of supervisory fiduciary, not a beneficiary. If authorities look at a bank account of the trust they might assume the protector owns the trust, which could lead to revenue authorities starting an investigation.

Thierry Haensenberger, senior vice president, EMEA, AxiomSL, a firm working in areas such as know-your-client analysis and compliance, said: “Of the changes to come, the beginning of CRS reporting in 2017 is likely to be the most challenging.

“Many firms are still getting to grips with FATCA, which involves reporting information about US account-holders only. As part of CRS, firms will ultimately need to report on account holders that are resident in more than 100 countries. The situation is likely to be made significantly more complicated by requirements to use very different formats to submit CRS reports to tax authorities in individual countries,” Haensenberger continued.

“Understandably, many firms are currently focused on the account opening and due diligence aspects of CRS. However, it is imperative that they also begin to prepare for the CRS reporting requirements. Due to the multitude of report formats that will be required, it is particularly important they consider the flexibility of their regulatory reporting systems,” he said.

No hiding place

Haensenberger warned that those banks and other institutions that have turned away expat Americans as a way of avoiding having to deal with FATCA rules will not find this approach is going to work with CRS.

With CRS, the number of people affected is “totally different” from that covered by FATCA, he said, adding: “CRS involves a very diverse set of reporting frameworks and people need reporting solutions that are flexible.”
Loss of data privacy also concerns those potentially affected by CRS, said Richard Morley, partner, BDO tax dispute resolution.

“A recent survey conducted by BDO amongst international private clients advisors suggested that the main concern their clients have with the CRS is the loss of financial privacy; more so than the prospect of an investigation into their tax affairs,” he said.

“It was revealed that people think the move away from financial secrecy has gone too far. However, the reality is the [UK] government is committed to taking a tougher stance on tax evasion and pushing its agenda for a new transparent world. People must realize that once CRS is implemented and tax authorities make enquiries into someone’s tax affairs, there will be nowhere left to hide. We recommend those who still hold undeclared private overseas assets act now, not doing so will see harsher penalties applied than if you disclose voluntarily,” he said.

Different impacts

BDO’s Morley said that financial centers such as those of Switzerland have already been affected by concerted global efforts to open up account data, so the CRS program is only another layer of change, rather than a revolutionary step. Other centers, such as those of Hong Kong and Singapore, will find the CRS more disruptive and challenging, he said.

Asked how well the industry is prepared, he said: “It is all pretty mixed. The large firms are in general all over this…it is more of an issue for these jurisdictions and intermediaries where they are not used to this sort of [automatic exchange of data] change.”

One risk could be that incorrect, or even excessive, data about persons could be exchanged as a result of banks and other institutions being fearful of compliance breaches, and taking the approach of sending over as much data as possible, he said.

“You are going to see situations where confidentiality [breach] is a very real risk. I get that [message] from lawyers I speak to, for example, in Miami and Panama where they are dealing with Latin American clients.” He said such clients are concerned not about tax but financial privacy and issues such as kidnap risk. “Those concerns are quite real,” Morley said.

Another concern is about uncertainty over what is meant by residency for a person – it is not always clear. “The scope for misinformation could be great,” he said. “Lots of clients will want to seek clarification about their offshore assets…they won’t want to be fending off constant queries from HMRC.”

He said that from the start of this year, CRS already overrides privacy protections afforded to persons connected to UK resident non-domiciles regarding their assets held in British Overseas Territories/Crown Territories such as BVI, Caymans, Isle of Man, Guernsey, Jersey, Gibraltar and Bermuda.

As at December last year, the following nations were “early adopters” (source: OECD): Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Columbia, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, South Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, the UK.

The jurisdictions undertaking exchanges by 2018 are: Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, the Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong, Indonesia, Israel, Japan, Kuwait, Marshall Islands, Macao, Malaysia, Monaco, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay.