Tax Insights: OECD releases amendments to the Common Reporting Standard

Issue 2022-27

In brief

On October 10, 2022, the Organisation for Economic Co-operation and Development (OECD) released amendments to the Common Reporting Standard (CRS). Draft amendments were originally published in a consultation document released earlier in 2022, at which time many industry stakeholders submitted comments on the proposed changes. The final amendments, which largely retain the changes originally proposed:

• require financial institutions to include additional information in their annual CRS reporting
• align the CRS with the new Crypto-Asset Reporting Framework (CARF), and include crypto-assets in relevant CRS definitions
• integrate certain frequently asked questions into the body of the CRS text and guidance

Participating jurisdictions, including Canada, will need to agree to these amendments and update their domestic legislation (i.e. for Canada, Part XIX of the Income Tax Act) to implement the more significant changes. While this process is expected to take at least 12 to 18 months, Canadian financial institutions should start planning for the policy, procedural and operational changes that will be required.

This Tax Insights provides details on the amendments to the CRS and highlights some of the more significant changes for Canadian financial institutions.¹

In detail

Changes to the information to be collected and reported by financial institutions

To increase transparency and provide tax authorities with the data required to effectively manage tax enforcement, the OECD’s CRS amendments add new data elements to the current list of information financial institutions are required to include in their annual information returns. As of the effective date of the amendments (to be determined by each jurisdiction as it enacts the amendments), financial institutions will be required to collect and report:

• the role of controlling persons as it relates to an entity account holder
• whether an account is a joint account, and, if so, the number of joint account holders
• whether an account is a new or pre‑existing account, as defined in the CRS 
• the type of account being reported (i.e. depository, custodial, etc.)

Many financial institutions may already have this information available, but may not have it saved electronically or organized in a format that will facilitate data collection and reporting; others may not have collected it at all. Some jurisdictions may have included these data fields in their current reporting, while others have not yet made them mandatory. The Canadian CRS filing schema already includes a data field for “controlling person type,” although this field is not mandatory for pre‑existing accounts unless the information is available in the reporting financial institution’s records.

Some participating jurisdictions have not included controlling person type in their standard self-certifications or filing schemas, and financial institutions in those jurisdictions may need to revise account opening procedures, or the customer data fields captured in their systems, to satisfy this new requirement. The amendments do provide some relief: a financial institution is not required to report the role of a controlling person for accounts on record before the effective date of the amendments, unless the information is available in the electronically searchable data maintained by the financial institution.

Determining whether an account holder is new or pre-existing may seem straightforward, but newly added CRS definitions may complicate matters. The amendments provide that an account that becomes a reportable account because of the amendments (for example, a crypto-asset account that may not previously have been captured under the CRS) is a pre‑existing account if it is opened before the effective date of the amendments. While this distinction is necessary for purposes of implementing the new crypto-related requirements, it creates multiple date based definitions of “new” and “pre‑existing” that many back offices may find challenging to document and maintain.  

Incorporation of crypto-assets and alignment with the CARF

The OECD simultaneously drafted and published the amendments to the CRS and the new Crypto-Asset Reporting Framework. The two regimes are meant to co‑exist with minimal overlap and maximum synergy. The CRS has been amended to incorporate crypto-assets into various existing definitions, as follows:

• specified electronic money products have been added to the CRS
• the definition of a financial asset will include crypto-assets and derivatives of crypto-assets
• a depository institution will include e-money providers that are not already depository institutions under the current CRS
• a depository account will include accounts that represent specified electronic money products and central bank digital currencies
• an investment entity will include entities engaged in investing in crypto-assets

Most of the commentary on the draft amendments to the CRS and the CARF addressed the new products and definitions and the potential difficulty of interpreting and applying these rules in practice. As a result of the final amendments and the CARF, it is expected that entities that do not currently have CRS obligations may become reporting financial institutions, and financial institutions that already adhere to the CRS requirements may find that they have additional accounts and products that will be subject to the amended CRS rules.

Canada is expected to adopt CARF, although the timing for the adoption and implementation of this new regime remains unknown. Given the significant interplay between CARF and the CRS amendments related to crypto currency, any timing mismatch between the legal implementation of these two regimes could result in additional efforts, mis-steps and operational challenges for industry participants. 

Other noteworthy CRS amendments

Other noteworthy CRS amendments include:

• clarifying that due diligence procedures should adhere to the 2012 Financial Action Task Force guidelines; however, questions remain about whether Canada’s anti-money laundering/know your customer regulations meet these standards, and how financial institutions can bridge any regulatory gaps
• adding certain capital contribution accounts as excluded accounts
• creating a new category of non-reporting financial institutions for “genuine” non-profit entities, in an effort to reduce problematic controlling person reporting resulting from being classified as passive non-financial entities
• clarifying that funds are conducting a business, and investors should be viewed as customers for purposes of the CRS definitions; the Canadian guidance already clarifies that funds are likely investment entities – this amendment will reduce conflicting outcomes in other jurisdictions 
• updating requirements when an account holder is resident for tax purposes in multiple jurisdictions, so that all jurisdictions of tax residence should be included on the self-certification and the financial institution’s CRS reporting; this prospective change replaces the current tax residence tie-breaker standards and will necessitate revisions to self-certification and reporting schemas

Implementation of the CRS amendments in Canada

To implement the CRS amendments in Canada, the Canadian government will be required to:

• agree to the changes in the CRS Multilateral Competent Authority Agreement
• make any needed legislative changes
• update the CRS guidance

The most likely vehicle for the legislative changes would be one of the budget implementation bills (normally there is one in the spring, shortly after the budget is tabled, and one in the fall). Consequently, the Canadian government will likely need to agree to the updated competent authority agreement and make an announcement with respect to CRS before, or in, the 2023 federal budget; otherwise, implementation of the CRS amendments may be delayed beyond 2023.  

The takeaway

For financial institutions already gearing up for potential Foreign Account Tax Compliance Act (FATCA) and CRS audits, these changes to policies, procedures and systems are an unwelcome addition to already busy workloads. In many cases, the system updates that will be required to collect and access data and incorporate it into existing annual reporting processes will be time consuming and costly. To the extent taxpayers are considering changes as a result of ongoing compliance reviews, it may be advisable to begin incorporating the data changes outlined in the CRS amendments.

^{1. For more information, see our PwC US Tax Insights “OECD amends Common Reporting Standard to expand scope and enhance reporting.”}