As mounting regulation furthers the drive for international tax transparency, the consequences of non-compliance are becoming clearer for global financial institutions. From criminal tax penalties to a rise in audit activity to reputational damage, tax professionals around the world are implementing new procedures to maintain compliance with the utmost urgency.
By design, CRS is based on the FATCA Model 1 Intergovernmental Agreements (IGA) where financial institutions report to local authorities, who will then exchange the data with partner jurisdictions. While elements in the suggested OECD schema generally follow an IGA Model I reporting schema, it is important to note that variations exist between FATCA and CRS data (e.g., tax residency, citizenship) as well as in FATCA and CRS classifications and reporting requirements may vary from country to country based on specific Competent Authority Agreements (CAA).
I will try to outline some of the reporting differences and approaches some jurisdictions have adopted for CRS, but before that, it is important we look back and see what lessons we could learn from the past year of reporting.
While there are stark differences, the first two years of reporting under FATCA and CDOT have provided financial institutions with valuable lessons that should be taken into consideration when preparing for CRS reporting.
1. Regulatory changes: FI will be required to adopt a regimented process or subscribe to a comprehensive data source/solution for keeping up-to-date with regulation changes, as well as implementing requirements into their reporting process.
2. Generating reports: Employ a robust and flexible reporting system because IT changes are frequent. It is also not uncommon to find last minute schema changes that need to be implemented and tested and development times may be very short.
3. Data management: Employ a systematic approach to address data quality issues in order to reduce costly, inefficient and reoccurring manual remediation.
4. An eye to the future: Tax should be viewed as a strategic issue rather than a specific solution to a specific reporting problem or tax regime. Tax information reporting requirements are likely to increase even further in the future.
While there is no doubt global tax regulations will continue to evolve, applying these lessons will ensure a strong foundation for global compliance no matter what the future brings.
Understanding the 2017 Early Adopter Jurisdictions
As of June 2017, of the originally 54participating “early adopter” jurisdictions, who were required to file the first CRS reporting during 2017, one Jurisdiction delayed their reporting for 2018, 9 Jurisdictions are yet to release their final guidance. 25 jurisdictions have elected to adopt OECD’s CRS schema and 16 Jurisdictions developed a bespoke schema.
Even in those jurisdictions that have “fully adopted” the OECD schema, local variations may still exist. In some cases additional business validations are required based on specific local guidance released by the local tax authority. This is in addition to the schema validations required for the OECD’s suggested schema and could cause the file to be rejected when attempting to upload it to the jurisdictions submission portal. For example, particular schema changes may need to be applied for certain elements (i.e., making it mandatory that the local TIN is provided first in a payload) and specified formatting of any identifiers used in the submission.
Bespoke Schemas vs. Highly Bespoke Schemas
When it comes to the 16 early adopter jurisdictions that have adopted a bespoke schema, we can generally categorize these as bespoke schemas or highly bespoke schemas.
A bespoke schema could be based on the OECD suggested schema but include additional requirements. For example:
• The addition of new elements that might not be required under CRS, but required by the schema in order to generate correctly.
• Certain jurisdictions will choose to use the CRS schema, but will add their own wrapper in order to be accepted by their submission portal (e.g., the Luxembourg schema). Although they technically are using the CRS or 8966 schema, the submission alone won’t be accepted by the portal the government has developed. Changes need to be made to how the schema is developed to be accepted.
• Some jurisdictions develop their own schema to support multiple tax regimes in a single submission. This scenario requires a change of the existing submission process for any solutions built for CRS.
For jurisdictions using a highly bespoke schema, you must take into consideration that:
• The naming and elements of the schema will be provided in a foreign language. These would need to be translated and interpreted to determine which part of the OECD CRS schema they are referring to.
• New data mapping techniques need to be adopted to ensure the information being extracted from the data source is being uploaded to the relevant section of your system.
• A highly bespoke schema may sometimes be used outside of FATCA and CRS reporting (i.e., Canada). In this case, FIs must understand which fields in the schema are required under FATCA and CRS reporting, and which can be ignored, so as to not over report information on their client.