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called upon to report details pertaining to over 40 countries as of now. As many as 47 countries globally have opted for early adoption of the OECD’s CRS as of date. It is noteworthy that the Indian Government is also a signatory for the early adoption. Though the Sri Lankan Government to date has not executed an Inter-Governmental Agreement (IGA) with the United States (US) Government to exchange tax information, it provided specific instructions to local banks to comply with FATCA by following FATCA registration on their own.
It is interesting to evaluate the Sri Lankan Government’s approach with regards to OECD’s CRS? At present Sri Lanka has treaties with over 40 countries for prevention of double taxation. Would the global politics compel the Sri Lankan Government to enter into the Competent Authority Agreement under the CRS to provide tax information to various governments? Suresh R.I. Perera, Principal Tax & Regulatory, KPMG, sheds light on OECD’s Common Reporting Standard, which enables automatic exchange of information in a global platform:
Q: What is Common Reporting Standard (CRS)?
A: One could say CRS is a sibling of FATCA. In 2010 US Congress enacted Laws to implement a scheme for prevention of offshore tax evasion by US Citizens outside US territory and for creation for transparency. The FATCA mechanism entails other countries to enter into IGA with the USA and report tax information pertaining to the persons in the local jurisdictions. It also enabled where the local government fails to execute an IGA with the US Government, local FIs to enter in to an agreement directly with US IRS and report information on US accounts.
Common Reporting Standard has two main features: a Competent Authority Agreement (CAA), a model agreement for jurisdictions implementing the system among each other; and a Common Reporting Standard (CRS) for information exchange. CAA is a format of an agreement developed by the OECD, for any two or more countries to negotiate a contract for automatic exchange of information. CRS is a single ‘Global Standard’ for financial institutions for collection of financial account information on account holders who are residents in another jurisdiction.
"It is interesting to evaluate as to how the CRS would impact Sri Lanka. Ours is not an OECD country. Naturally the Sri Lankan Government would consider entering into an agreement to share information if that is beneficial to Sri Lanka or if it is compelled to sign the agreement due to the global politics. Does the Sri Lankan Government stand to protect tax revenue due to an agreement with a particular country? Is there tax evasion by Sri Lankans or others to the detriment of the Inland Revenue Department?"
This system bears a similarity to FATCA’s Inter Governmental Agreement (IGA) Model I. Under CRS, once the agreement is executed between the two or more Governments, upon passing the local legislations, the local financial institutions would be called upon to report tax information pertaining to the residents of the other country to the local Government annually. The local Government will transmit this bulk information to the Governments of the other countries. This scheme entails automatic exchange of information. Similar to FATCA this scheme also imposes the burden on financial institutions to report on reportable financial accounts.
Q: What are the financial institutions (FIs) covered under the CRS?
A: The FIs that fall within the CRS would include an investment entity, depositary institution, custodial institution or a specified insurance company, unless they present a low risk of being used for evading tax and are excluded from reporting. Certain Governmental entities, international organisations, central banks, certain retirement funds are treated as exempt from reporting.
The FIs would be called upon to report financial information with respect to individual and entity accounts covering interest, dividends, account balance, income from certain insurance products, gross proceeds from the sale or redemption of property. In relation a reportable person the name, address and TIN and date of birth for individuals should be reported.
Q: Why the need for a Common Reporting Standard?
A: Due to the rapid globalisation, there are many ways and means for a taxpayer to hold his or her investments through FI outside their country of residence. Such monies kept offshore may go untaxed. World Governments since the 1990s have been emphasising on transparency and the need for exchange of information. A series of scandals, the most famous being the UBS bank – Switzerland case involving tax evasion by US persons in 2008, gave a further drive to prevent tax evasion. Thereafter the US pushed for automatic exchange of information by introducing FATCA. Now comes the OECD’s CRS, which is to facilitate the effective exchange information, to fight against tax crimes and abusive tax schemes and to protect the integrity of the tax system.
Q: What are the countries that have opted for early adoption of CRS?
A: Almost 47 countries have endorsed a declaration to automatically exchange information. The European countries include such as United Kingdom, Spain, Poland, Norway, Switzerland, Poland, Portugal, Finland, France, Germany, Denmark, Ireland, Italy, etc. It is notable that India and China have signed up for automatic exchange of information. Other Asian countries include Singapore and Malaysia.
However the US has not indicated that they will be a party to the CRS. Since the US has been successful in obtaining participation of over 70 countries for the FATCA regime, it is interesting to see how the US would react to CRS.
Q: How does CRS differ from the exchange of information provisions which are already in DTAs?
A: I think globally the exchange of information mechanism set up under the Double Tax Avoidance Agreement has failed. This mechanism works only upon the request being made with regard to a particular tax payer. Sometimes these requests are not acted upon to the satisfaction of the other country. Under the CRS, the exchange of information would be in bulk and automatic hence this would be more efficient and successful.
Q: In comparing CRS and FATCA, what are the similarities and the differences between the two schemes?
A: In both FATCA and CRS, financial institutions worldwide play a pivotal role in collecting information and reporting information on account holders. Similar to FATCA, even CRS adopts the due diligence process which distinguishes between individual and entity accounts as well as provide for a distinction between pre-existing and new accounts. In CRS, the information exchange would be with the tax administrators of each country similar to IGA model I in FATCA. Of course, the obvious similarity would be that both schemes are implemented to fight against offshore tax evasion.
There are few differences as well. In case of US, tax is levied based on the citizenship, where as in other countries including Sri Lanka tax is based on residency. Naturally, OECD has developed its methodology for prevention of offshore tax evasion, by way of CAA and CRS based on the concept of residency.
As per FATCA mechanism a punitive 30% withholding applies on non-participative financial institutions and recalcitrant customer accounts. CRS relies on domestic legislation for penalties. Although no punitive withholding like the FATCA regime, ‘Investment Entities’ (fund managers) in non-CRS jurisdictions are treated as a passive non-financial entities that need to provide information about their controlling persons to entities within the CRS in which the Investment Entity holds financial accounts. This may be a burden to the financial Institution.
FIs which have obtained specific exemptions under FATCA reporting through IGA will be reporting under CRS. However this distinction is not relevant to Sri Lanka as we did not enter in to an IGA with US Internal Revenue Service. CRS does not require registration while FATCA requires online registration and the requirement to obtain a Global Intermediary Identification Number (GIIN). Another aspect which would be a relief to all financial institutions is that there is no role identified as ‘Responsible Officer’ (RO) in CRS as opposed to FATCA.
Q: What are the timelines pertaining to CRS?
A: New account on boarding procedures will need to be in place from 1 January 2016. Accounts till 31 December 2015 will be treated as pre-existing accounts. The due diligence procedures for identifying high-value pre-existing individual accounts need to be completed by 31 December 2016, and for low-value pre-existing individual accounts and entity accounts by 31 December 2017. Reporting deadlines would be in 2017.
Q: How would CRS affect Sri Lanka and should Sri Lanka become a party to CRS?
A: As mentioned earlier to prevent an economic nightmare due to the non-participation with FATCA, local FIs complied with FATCA though Sri Lanka to date has not signed an Inter-Governmental Agreement (IGA). Under this route there is no reciprocity and the information pertaining to the US persons in Sri Lanka will be reported to the US Government and not vice versa, i.e. no information pertaining to Sri Lankans in the USA will be reported by the US Government to the Sri Lankan tax authorities.
Unlike FATCA there are no provisions for the Sri Lankan FIs under CRS, to register on their own and to report information to the other Government. Under CRS mechanism, both Governments must execute a Competent Authority Agreement (CAA). Three draft CAAs covering bilateral, multilateral and non-reciprocal have been issued.
"The OECD Secretary-General Angel Gurria had mentioned at the launch of CRS that the scheme, I quote verbatim, ‘moves us closer to a world in which tax cheats have nowhere left to hide’. Both these mechanisms try to expose or eliminate hiding wealth in bank deposits and securities. However, the sophisticated tax evaders in this day and age use other means of parking money offshore, such as in paintings, real estate, gold, etc. Hence I am not too sure that CRS would sweep away off shore tax evaders entirely but it is a giant leap"
It is interesting to evaluate as to how the CRS would impact Sri Lanka. Ours is not an OECD country. Naturally the Sri Lankan Government would consider entering into an agreement to share information if that is beneficial to Sri Lanka or if it is compelled to sign the agreement due to the global politics. Does the Sri Lankan Government stand to protect tax revenue due to an agreement with a particular country? Is there tax evasion by Sri Lankans or others to the detriment of the Inland Revenue Department? A detailed analysis would be very interesting.
Foreign currency interest and dividends earned, by both individuals and companies are free from income tax. The income earned by Sri Lankan working abroad are exempt from income tax under Section 8 (j) and 13 (ddd) of the Inland Revenue Act. Prima facie, income generated outside Sri Lanka is not liable to income tax, hence there is no potential for tax evasion by Sri Lankan residents. However a study of tax law provisions reveals these exemptions are applicable only if the money is remitted to Sri Lanka through a bank account. If the money is retained outside Sri Lanka, on a strict interpretation the tax exposure remains.
One may observe that the Sri Lankan Government has been providing tax incentives to persons who are remitting money to Sri Lanka. A recent incentive granted was a five year tax holiday for the profits and income of the business established by citizens who are employed abroad who invest their foreign earnings. Hence still there is room for Sri Lankan Government to be motivated to ensure that Sri Lankans do not park the monies outside Sri Lanka. The CRS will provide lever to either collect tax liability attributable to the funds not remitted or to force remittance in to Sri Lanka.
Of Course, this would depend upon the quantum of the tax revenue that could be safeguarded. On the other hand, a country like India where large number of residents engaged in Sri Lanka or a country where whose corporates have investments largely in Sri Lanka, would be keen to secure its portion of the tax revenue, without leaving room for offshore tax evasion. This may result such a country persuading the Sri Lankan Government to enter in to a CAA under the CRS framework, even though the Sri Lankan Government may not find much benefit to the Sri Lankan tax department.
One must bear in mind Sri Lanka’s first double tax treaty with the UK in 1950, was entered into due to the requirement of the UK Government to ensure its planters who were running plantations in Sri Lanka be given relief from taxes suffered in Sri Lanka against UK Tax. At that time I am not sure whether Sri Lankans had heavy investments in UK, hence UK and their citizens may have benefited more from the treaty than Sri Lankans. So taking in to consideration the number of countries who have already committed to CRS, Sri Lanka gradually may take to signing the CAA’s with various countries enabling automatic exchange of information.
Q: What would be the role of the Sri Lankan Government with regard to CSR if it declares its intention to be part of the automatic exchange of information?
A: The Sri Lankan Government if complying with CRS, would need to embed the reporting and due diligence requirements in to the domestic law. The Sri Lankan Government has to take in to consideration how it would establish the requisite infrastructure/platform for the successful implementation of these agreements. This would entail passing of the requisite local legislation and establishing of systems for automatic information sharing.
Before entering into an agreement to exchange information automatically with another jurisdiction, it is essential that Sri Lanka has the legal framework and administrative capacity and processes in place to ensure the confidentiality of the information received. Data protection and confidentiality is vital under CRS. The Government should also establish the administrative and IT infrastructure to collect and exchange information automatically.
Q: What should be the Financial Institutions’ approach to CRS?
A: Well the FIs should be on the watch on the Government’s approach towards OECD’s CRS. Meanwhile many banks and financial institutions are in the process of changing their systems and the KYC process for FATCA purposes.
When introducing modifications, the FIs should address both FATCA and CRS together, which would assist to reduce incremental costs. Changes to the Know Your Customer (KYC), apart from US person indices, should cover the CRS indices as well. Mandates may be obtained from customers to disclose information to any other Government rather than restricted to the US. Due diligence should be carried out to address both FATCA and CRS requirements. A parallel approach to accommodate both FATCA and CRS requirements would assist the financial institution to reduce their compliance cost burden.
However in implementing CRS, there are still many ambiguities which the OECD should clarify. For example how to identify the ultimate controlling entity especially in trusts, how to deal with instances where individuals change their tax residence, dual citizens or where the residence status changes within a calendar year, concerns of the account holder confidentiality, etc.
Q: In your view, what is the impact of CRS on the developing countries?
A: The mission of the OECD is to promote policies that will improve the economic and social well-being of people around the world. OECD’s objective is economic development and reductions in poverty, and ideally this scheme must be implemented in the developing countries as well. The CRS standard provides for options for participating in either bilateral agreements or multilateral agreements. As an option is available, wealthy nations may select the countries they would want to exchange information with, which means chances are many developing countries may be left out of the agreement. Moreover, the developing countries may not have adequate resources such as systems, staff to adopt this sophisticated mechanism of automatic exchange of information.
Maybe the OECD would provide a flexible approach to developing countries such as allowing joining on a ‘non-reciprocal’ basis. OECD has already granted non reciprocity for tax havens. Also a point to note is that few developing countries including Argentina, Colombia, India, and Mexico have already pledged to follow CRS.
Q: Do you think with the introduction of FATCA and CRS there is no scope for global tax evasion anymore?
A: Interesting question! The OECD Secretary-General Angel Gurria had mentioned at the launch of CRS that the scheme, I quote verbatim, ‘moves us closer to a world in which tax cheats have nowhere left to hide’.
Both these mechanisms try to expose or eliminate hiding wealth in bank deposits and securities. However, the sophisticated tax evaders in this day and age use other means of parking money offshore, such as in paintings, real estate, gold, etc. Hence I am not too sure that CRS would sweep away off shore tax evaders entirely but it is a giant leap.
