OECD amends CRS to expand scope and enhance reporting

In brief

The OECD on October 10 published Amendments to the Common Reporting Standard (CRS) to expand the scope of the CRS and enhance its reporting requirements. When adopted in 2014, the CRS was designed as a global framework for reporting, obtaining, and automatically exchanging information relating to financial accounts on an annual basis. However, the rapid adoption of the use of crypto-assets for a wide range of investments and financial intermediaries means that crypto-asset and related transactions are not comprehensively covered by the initial CRS and that tax administrators may not have adequate visibility into when taxpayers hold or engage in such transactions involving crypto-assets. The OECD amended the CRS to address this deficiency. 

The amendments to the CRS expand its scope to include digital financial products, such as specified electronic money products and central bank digital currencies (CBDCs). In coordination with the release of the Crypto-Asset Reporting Framework (CARF), changes also are made to the definitions of “financial asset” and “investment entity” so that the CRS covers derivatives that reference crypto-assets and are held in custodial accounts and investment entities investing in crypto-assets. The CRS now also contains provisions intended to ensure an efficient interaction between the CRS and the CARF, in particular to limit instances of duplicative reporting, while maintaining a maximum amount of operational flexibility of reporting financial institutions that also are subject to obligations under the CARF. 

The amendments also seek to enhance the reporting outcomes under the CRS, including through:

• the introduction of more detailed reporting requirements, 
• the strengthening of the due diligence procedures, 
• the introduction of a new, optional nonreporting financial institution category for investment entities that are genuine nonprofit organizations, and 
• the creation of a new excluded account category for capital contribution accounts.

In addition, the commentary to the CRS includes guidance to increase consistency in the application of the CRS and to incorporate previously released frequently asked questions (FAQs) and interpretative guidance.

Observation: The OECD’s publication of amendments to the CRS is the first step in the adoption and implementation of new reporting and due diligence requirements for financial institutions and other impacted stakeholders. The OECD’s next undertaking, in concert with local taxing authorities, is to put in place appropriate mechanisms to automatically exchange information pursuant to the amended CRS, including the exchange frameworks and an updated extensible markup language (XML) schema. Although appropriate implementation timelines have not yet been established, impacted stakeholders (financial institutions, administrators, transfer agents, etc.) should begin to assess the impact that the CRS amendments may have on their processes and systems that cover reporting, investor onboarding/account opening, etc.

Additional CRS amendments

The following amendments made to the CRS are intended to improve the quality and usability of CRS reporting.

Expansion of the reporting requirements

The reporting requirements under the CRS are amended as follows:

• The role of controlling persons in relation to the entity accountholder and the roles of equity interest holders in an investment entity are expanded to provide tax administrations with visibility into the roles a controlling person/equity interest holder plays with respect to the entity, allowing a distinction between those controlling persons/equity interest holders that have an interest through ownership, control, or as beneficiaries, as opposed to those that have a managerial role (e.g., senior management officials, protectors, and trustees) 
• The disclosure of whether the account is a preexisting account or a new account and whether a valid self-certification has been obtained now is required to give tax administrations visibility into the due diligence procedures applied and provide insight into the reliability of the information 
• The disclosure of whether the account is a joint account, as well as the number of joint accountholders, now is required to permit tax administrations to take into account the fact that the income and balance on joint accounts may not be attributable in full to each account holder, but may need to be apportioned, as appropriate, between the accountholders 
• The disclosure of the type of financial account (e.g., depository accounts, custodial accounts, equity and debt interests, or cash value insurance contracts) now is required to allow tax administrations to better understand the financial investments held by their taxpayers.

Reliance on AML/KYC procedures

The conditions under which a reporting financial institution can rely on anti-money laundering (AML)/know your customer (KYC) procedures to determine the controlling persons of a new entity accountholder have been moved into the text of the CRS itself. The updated text specifies that for new entity accounts, AML/KYC procedures must be in line with 2012 Financial Action Task Force (FATF) Recommendations. The updated text also clarifies that the reporting financial institution must apply substantially similar procedures if AML/KYC procedures are not consistent with 2012 FATF Recommendations.

Exceptional due diligence procedure

Reporting financial institutions must temporarily determine the residence of the account holders and/or controlling persons on the basis of the due diligence procedures for preexisting accounts. This is not a standard procedure and is not an alternative to the requirement to obtain a valid self-certification. 

Qualification of certain capital contribution accounts as excluded accounts

Contribution accounts are depository accounts used to hold and block amounts that are set aside for a limited period of time to fund capital contributions to companies in advance of their incorporation or pending capital increase. Contribution accounts are treated as excluded accounts only where the use of such accounts is prescribed by law and for a maximum period of 12 months. Additionally, a contribution account is treated as an excluded account only if there are adequate safeguards in place to avoid the misuse of such accounts.

Non-reporting financial institution category for genuine charities

The CRS now contains an optional new non-reporting financial institution category for genuine nonprofit entities that (1) reflects the substantive conditions of active non-financial entities (NFEs) and (2) makes the carve-out subject to adequate verification procedures by the tax administration of the jurisdiction in which the entity otherwise is subject to reporting as an investment entity. The commentary to the CRS now includes language outlining these conditions for excluding qualified nonprofit entities from CRS reporting obligations. The commentary also describes the confirmation a tax administration or other governmental authority would need to obtain before treating an entity as a qualified nonprofit entity.

Broadening the scope of depository institution 

The commentary to the CRS has been amended to expand the scope of the term “depository institution” to include entities that are merely licensed to engage in certain banking activities but are not actually so engaged.

Notions of customer and business in the context of investment entities

The scope of the definition of “investment entities” is clarified via the terms “customer” and “business” by the explicit confirmation in the commentary to the CRS that investors of funds can be considered “customers” and the funds themselves can be considered to conduct activities “as a business.” This modification is consistent with the interpretation of the definition of “financial institution” in the FATF Recommendations.

Reporting with respect to dual-resident accountholders 

The commentary to the CRS is revised to provide that, in case of dual-resident accountholders, all jurisdictions of tax residence should be self-certified by the accountholder and the accountholder should be treated as tax resident in all identified jurisdictions. The commentary further clarifies that reliance on tiebreaker rules to determine the jurisdiction of residence for self-certification purposes no longer is permitted on a prospective basis, once the changes to the CRS have taken effect.

Reflecting Government Verification Services

A Government Verification Service (GVS) may allow a third-party information provider, such as a reporting financial institution, to obtain a direct confirmation in the form of an IT-token or other unique identifier from the tax administration of the jurisdiction of residence of the taxpayer in relation to their identity and tax residency. Reporting financial institutions now can rely on a GVS procedure to document an accountholder or controlling person in the CRS due diligence procedures, with the aim of making the CRS futureproof for future IT developments. In this respect, the confirmation of an accountholder’s or controlling person’s identity and tax residence via a GVS or similar IT-driven process is recognized as a functional equivalent to a taxpayer identification number (TIN).

Look-through requirements in respect of Controlling Persons of publicly traded entities 

The interpretative note to FATF Recommendation 10 (customer due diligence) provides that financial institutions are not required to request information on the beneficial owners of publicly traded companies if such company already otherwise is subject to disclosure requirements ensuring adequate transparency of beneficial ownership information. The CRS is modified to include this exclusion in order to maintain alignment with the FATF Recommendations and in light of the limited utility of such information for tax-risk assessment purposes.  

Integrating CBI/RBI guidance within the CRS

The commentary to the CRS has been amended to include explanatory guidance that reiterates that a reporting financial institution may not rely on a self-certification or documentary evidence where it knows or has reason to know, that it is incorrect or unreliable. In making this determination, reporting financial institutions should take into account information published by the OECD on potentially high-risk CBI/RBI schemes. The guidance also includes a number of additional questions that reporting financial institutions may raise to determine the appropriate jurisdictions of CRS reporting.