September 2017

BACK OFFICE VIEW: The CRS challenge

Udi_VithanageFirst of all, what is the Common Reporting Standard (CRS)? It is essentially a tax-transparency initiative, developed as a response to the G20 request and approved by the OECD Council in 2014. It came in to force on January 1, 2016, with the first reporting periods falling in 2017. Under CRS, jurisdictions are required to obtain information from their financial institutions and annually exchange that information with other participating jurisdictions. As of August 1, 2017, there were 101.

The regulation sets out details of the account information that needs to be exchanged and the financial institutions required to report. It also determines the different types of accounts and taxpayers covered, as well as common due diligence procedures that institutions need to follow.

Challenges for fund managers
The biggest challenge and irony is the absence of a common reporting framework, as each jurisdiction determines its own requirements. For example, Luxembourg requires full details of the person submitting the information, whereas Guernsey and Jersey require only registration numbers. Cayman and Bermuda stand alone in asking for institutions to submit CRS returns per reportable jurisdiction the entity has.

The list of reportable jurisdictions varies from country to country too, depending on agreements between countries. For instance, the UK requires reporting on Austrian account holders, yet Jersey or Guernsey doesn’t. Each jurisdiction will also impose their own reporting date, which complicates matters further, particularly given that fund structures often comprise entities across multiple jurisdictions. Some of those jurisdictions even have different deadlines for CRS and FATCA.

Our experience with fund managers dealing with different jurisdictions covers jurisdictions typically used in fund structuring. A common theme was the different reporting portal interface, process, requirements and rules in place. Some portals, such as Jersey, required very little information to register a reporting entity, whereas Cayman required authorisation letters from the director of the entity to be filed with the tax authorities. The usability of the portals also varied by jurisdiction, with some more user-friendly than others.

The inconsistency also extended to dealings with the tax authorities. Some responded to queries in a couple of hours, others in a couple of weeks. Some strictly enforced deadlines, others were more flexible.

What can fund managers do to prepare themselves for the next round of reporting? First and foremost, they need to be as proactive as possible. This means monitoring the list of participating countries for each jurisdiction and registering in advance with the portals when they become available.

Each jurisdiction’s requirements must be carefully examined at the outset, with initial queries and questions raised at the earliest opportunity. This will enable any necessary system or process enhancements to be introduced and the right external advisers engaged in a timely fashion.

Last but not least, learn from past experiences – evaluating what has worked well and what hasn’t and not being afraid to change how you do things. Flexibility and adaptability are key.

Udi Vithanage, head of regulatory reporting, The Aztec Group

©2017 funds europe