On 13 February 2014, the Organisation for Economic Co-operation and Development (OECD) released a framework document for the Common Reporting Standard (CRS), which is intended to become the new global standard for automatic exchange of financial information (covering bank accounts and other financial assets held offshore) as part of ongoing efforts to combat tax evasion, money laundering and other financial crimes.

Following in the wake of the US’s FATCA and “sons of FATCA” enacted by countries under their inter-governmental agreements (IGAs) with the US, this new proposed standard is intended to facilitate information exchange between participating countries.

Bermuda is part of a CRS Early Adopters Group which includes Ireland, Liechtenstein, Malta, the United Kingdom (UK), the UK’s Crown Dependencies of Isle of Man, Guernsey and Jersey; and the UK’s Overseas Territories of Anguilla, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands. As such, the development of the CRS is something businesses in Bermuda need to be following.

The CRS provides a common global approach for jurisdictions to obtain financial information from their financial institutions and to automatically exchange that information with other jurisdictions on an annual basis. The CRS outlines the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Core elements of the CRS and automatic exchange of information (AEOI)

The three core elements of the CRS are:

• Financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income,) but also account balances and sales proceeds from financial assets.

• Financial institutions that are required to report under the CRS include not only banks and custodians, but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.

• Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations). The CRS includes the requirement to look through passive entities to report on the individuals that ultimately control these entities.

The legal basis for AEOI will either be the proposed Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or alternatively a bilateral treaty. In either case, the OECD then envisages a bilateral Competent Authority agreement providing for automatic exchange of information.

Information exchange is envisaged to be reciprocal, but the same framework could in principle be used when there is no desire for reciprocity. In addition to the envisaged bilateral agreements implementing the exchange of information between jurisdictions, the OECD document provides common reporting and due diligence rules that will need to be introduced into domestic law of participating countries.

The OECD document makes the point that this is intended to be a minimum standard — countries can ask for more information and, crucially, it is not intended to restrict other types of AEOI. This raises the prospect that financial institutions might be required to report under multiple AEOI regimes simultaneously, thus significantly increasing the cost and complexity of compliance.

Like FATCA in some aspects

As with the FATCA regime, the scope of CRS will be broad to reduce the risk of circumvention. Thus, it will apply not just to banks, but also to certain brokers, investment firms, and some insurance companies.

Many aspects of the OECD proposals are consistent with the Model 1 IGA approach under FATCA. However, there are a number of areas where the standard deviates from the Model 1 IGA — such as the removal of minimum threshold limits and new account opening definitions. This will considerably increase the amount of work required by affected businesses.

CRS is on its way, so start preparing

There is overwhelming support for the CRS for the automatic exchange of tax information on a reciprocal basis. The CRS initiative was endorsed by the G20 at the recent meeting of Finance Ministers and Central Bank Governors in Sydney on 22-23 February 2014. The G20 announced that it will work with all relevant parties, including their financial institutions, to detail our implementation plan at its meeting in September 2014.

Bermuda announced as part of the CRS Early Adopters Group on March 19, 2014 a timetable for the introduction of procedures to implement the CRS. Procedures to identify the tax residence of customers and owners of companies and other entities will need to be in place by January 2016 and the first exchange of information (relating to the 2016 calendar year) will occur in September 2017.

On 29 September 2014, 51 jurisdictions signed multilateral competent authority agreements to implement.

On December 2, 2014 KPMG Bermuda is holding a US and UK FATCA Responsible Officer Training Session that will also cover the CRS. If you would like to receive further information on the session or wish to sign up to attend, please contact Barbara Grainge at barbaragrainge@kpmg.bm.

David Harper is a senior manager, in KPMG’s Investments & Banking Department.