Introduction

Understanding the Common Reporting Standard, or CRS, is key for those diving into international estate planning. This system, created to tackle tax evasion, swaps financial account info between nations faster than a kangaroo crossing the Outback. It’s crucial to grasp how CRS shakes up asset management and what one must do to keep pace with global rules. Imagine the feeling of knowing one’s financial secrets are safe and sound. Compliance isn’t just a buzzword; it’s the lifeline in a sea of regulations. So why should one care? Well, keeping on top of CRS can save heaps of stress and potential fines.

What is the Common Reporting Standard for the Automatic Exchange of Financial Account Information (CRS)?

The Common Reporting Standard (CRS) is a globally recognised framework developed to combat tax evasion through the automatic exchange of financial account information between tax authorities. This standard, established by the Organisation for Economic Co-operation and Development (OECD), requires financial institutions such as banks to collect and report information on accounts held by foreign tax residents. The data gathered is then shared with the tax authorities of the respective foreign countries, ensuring that individuals with financial accounts abroad comply with their home country’s tax laws.

For example, under the CRS, Australian financial institutions are mandated to report information on accounts held by foreign tax residents to the Australian Taxation Office (ATO). This information is subsequently exchanged with the tax authorities of the relevant foreign jurisdictions. In return, the ATO receives data on Australian residents’ financial accounts from other participating countries, helping to detect and deter tax evasion.

The Australian government committed to implementing the CRS as part of its Mid-year Economic and Fiscal Outlook for 2014–15. The corresponding legislation was enacted with royal assent on 18 March 2016, and the CRS officially took effect on 1 July 2017, with the first exchange of information occurring in 2018.

Why is the CRS Important for International Estate Planning?

The primary purpose of the CRS is to ensure that financial institutions (FIs) identify and report accounts held by individuals who are not tax residents in the country where the account is opened. It plays a crucial role in international estate planning for several reasons:

Transparency and Compliance

CRS enhances transparency by requiring financial institutions to report account details of non-resident clients to their respective tax authorities. This helps ensure that individuals and entities comply with tax obligations across borders.

For those engaged in international estate planning, understanding CRS obligations is vital to avoid potential legal issues related to tax evasion or non-disclosure.

Preventing Tax Evasion

One of the primary purposes of CRS is to combat tax evasion. By automatically exchanging financial information, tax authorities can more easily detect hidden assets and unreported income.

For example, under the CRS, if a financial institution in Switzerland opens an account for a tax resident of the Netherlands, the institution is required to report the account details to Swiss tax authorities. Since both Switzerland and the Netherlands participate in the CRS, the Swiss authorities will then pass this information to their counterparts in the Netherlands. This automatic exchange of information ensures that tax authorities are aware of their residents’ financial holdings abroad, enabling them to assess whether the appropriate taxes have been paid.

Estate planners must ensure that their clients’ financial structures are compliant with CRS to prevent any inadvertent or deliberate tax evasion, which could result in significant penalties.

Impact on Asset Structuring

CRS impacts how assets are structured and managed within an estate. For example, the use of offshore trusts, foundations, or other entities may attract scrutiny under CRS. Estate planners need to consider the reporting requirements and potential tax liabilities that may arise under CRS when advising clients on how to structure their international assets.

Beneficiary Considerations

The CRS regime also affects beneficiaries of international estates. Since financial institutions must report account information, beneficiaries who are residents in different jurisdictions may face reporting obligations and tax consequences. Proper planning is required to mitigate any adverse effects on beneficiaries, ensuring they are fully informed about their responsibilities under CRS.

Global Coordination

CRS fosters global coordination among tax authorities, making it more challenging for individuals to exploit differences in tax regimes across countries. Estate planners must take a holistic approach, considering the tax laws and CRS obligations in all relevant jurisdictions when developing an international estate plan.

Who Does the CRS Apply to?

The CRS applies to various groups, including financial institutions, customers, and tax agents. Each of these groups has specific obligations and responsibilities under the CRS framework.

Financial Institutions

The CRS imposes obligations on financial institutions (FIs) through Subdivision 396-C of Schedule 1 to the Taxation Administration Act 1953 (Cth). These obligations require financial institutions in Australia to determine and certify the tax residency of individuals opening accounts. If the account holder is a tax resident of another jurisdiction, the financial institution must report the account details to the Australian Taxation Office (ATO). This reporting occurs regardless of whether the other jurisdiction has adopted the CRS. The ATO, in turn, exchanges this information with tax authorities in other participating jurisdictions—over 100 jurisdictions have committed to implementing the CRS.

While the CRS governs information exchange between Australia and other countries that have implemented the standard, it operates alongside the United States’ Foreign Account Tax Compliance Act (FATCA), which regulates information exchange between Australia and the United States. The CRS framework borrows heavily from the intergovernmental agreement approach used to implement FATCA, which helps manage legal challenges, simplify implementation, and reduce compliance costs for financial institutions.

Customers of FIs

The CRS also significantly impacts customers, investors, and account holders of financial institutions. If you have an existing account, your financial institution may reach out to confirm your country or countries of tax residence. This process is necessary to determine whether any of your accounts need to be reported under CRS or FATCA laws.

Since 1 July 2017, financial institutions are required to ask new account holders to certify their residence for tax purposes when opening an account. This certification may involve providing forms and supporting documentation. If you are a foreign tax resident, you will need to supply your taxpayer identification number (TIN) or its equivalent.

Under the CRS, individuals who control or beneficially own an entity, or have a specific connection to it, may be identified and reported concerning the entity’s financial accounts. This applies to a broad range of entities, including companies, trusts, partnerships, and associations. The CRS focuses on foreign tax residents and the financial accounts held by these entities, ensuring that tax obligations are met across borders.

Tax Agents

Tax agents must be well-versed in how the CRS may impact their clients. It is crucial for tax agents to ensure that their clients accurately disclose any offshore assets and foreign-sourced income.

General Overview of the CRS: Key Points to Know

The CRS framework is structured into two main components:

Model Competent Authority Agreement (Model CAA)

• Purpose and Structure: The Model CAA serves as the legal backbone connecting the Common Reporting Standard (CRS) with the international legal agreements, such as the Convention on Mutual Administrative Assistance in Tax Matters or bilateral tax treaties. This connection allows for the automatic exchange of financial account information between participating jurisdictions.
• “Whereas” Clauses and Sections: The Model CAA consists of a series of “whereas clauses” and seven key sections. The whereas clauses include essential representations concerning the domestic reporting and due diligence rules that support the exchange of information under the competent authority agreement. These clauses also address confidentiality, data protection, and the necessary infrastructure required for effective information exchange.
• Summary of Key Sections:
  • Section 1: Definitions: This section provides precise definitions for the terms used within the agreement, ensuring clarity and consistency in the application of the CRS.
  • Section 2: Information to Be Exchanged: Specifies the types of financial account information that must be exchanged between jurisdictions.
  • Section 3: Time and Manner of Exchange: Details the timeline and the method by which the information should be exchanged to ensure efficiency and accuracy.
  • Section 4, 6, and 7: Cover critical aspects such as consultations between competent authorities, collaboration on compliance and enforcement, and the amendment, suspension, and termination of the agreement.
  • Section 5: Confidentiality and Data Safeguards: Outlines the necessary measures to protect the confidentiality of the exchanged information and ensure its secure handling.

Common Standard on Reporting and Due Diligence

• Purpose and Structure: The CRS provides the framework for reporting and due diligence that supports the automatic exchange of financial account information between participating jurisdictions. It requires financial institutions to report specified financial data and follow due diligence procedures. These procedures, outlined in Sections II through VII, apply to both individual and entity accounts, distinguishing between types of accounts and establishing procedures accordingly.

• Summary of Due Diligence Procedures: The CRS outlines specific due diligence procedures that financial institutions must follow to identify reportable accounts. These procedures are detailed in Sections II through VII of the CRS and distinguish between different types of accounts:
  • Pre-existing Individual Accounts: Financial institutions must review these accounts without applying any minimum threshold. The rules differentiate between Higher and Lower Value Accounts. For Lower Value Accounts, institutions may use a permanent residence address test based on documentary evidence, or conduct an indicia search. In cases where indicia (signs or indicators) are conflicting or unclear, a self-certification or further documentation may be required. For Higher Value Accounts, more rigorous due diligence is required, including a paper record search and an assessment by the relationship manager.
  • New Individual Accounts: For these accounts, the CRS mandates that financial institutions obtain a self-certification from the account holder, confirming their tax residency. This certification must be reasonable and is required without any minimum threshold.
  • Pre-existing Entity Accounts: Financial institutions must determine whether the entity holding the account is a Reportable Person. This can often be assessed using available information, such as Anti-Money Laundering (AML) or Know Your Customer (KYC) procedures. If the entity is classified as a Passive Non-Financial Entity (NFE), the institution must also identify and report on the residency of the controlling persons. Jurisdictions may permit financial institutions to exclude Preexisting Entity Accounts below USD 250,000 from review.
  • New Entity Accounts: The due diligence process for new entity accounts mirrors that for preexisting accounts, but with no minimum threshold, as it is generally easier to obtain self-certifications at the account opening stage.
  • Implementation and Compliance: Section IX of the CRS outlines the rules and administrative procedures that jurisdictions implementing the CRS must have in place. These measures ensure the effective implementation and ongoing compliance with the CRS, thereby reinforcing the global effort to promote tax transparency and reduce opportunities for tax evasion.

What are the Consequences of Not Complying with the CRS?

Non-compliance with the CRS can lead to severe financial, legal, and reputational consequences for both individuals and Reporting Financial Institutions (RFIs). Below are the key consequences of failing to comply with the CRS, with examples to illustrate potential outcomes:

Financial and Reputational Risks for Individuals

Australians who reside overseas or hold assets in foreign countries are required to declare their foreign bank accounts, income earned, and assets held overseas to the ATO. Failure to do so may result in significant financial penalties and damage to one’s reputation, particularly if non-compliance is viewed as tax evasion.

For example, suppose John, an Australian citizen living in Singapore, fails to declare his foreign income to the ATO. When the ATO receives information about his Singaporean account through the CRS, John faces substantial penalties for not reporting his income, along with the risk of being charged with tax evasion, which could severely damage his reputation.

Non-compliance Penalties for Reporting Financial Institutions (RFIs)

Failure to comply with their obligations can result in various penalties for RFIs:

• Penalties for Late Lodgement: RFIs that fail to submit tax-related statements on time may be subject to penalties.
• Penalties for False or Misleading Statements: If an RFI provides false or misleading information regarding tax-related matters, it may face penalties.
• Administrative Penalties: RFIs that do not collect self-certifications as mandated by the CRS may face additional administrative penalties.

For example, if AUS Bank, an Australian financial institution, fails to collect a self-certification from Maria, a new client who is a Canadian tax resident. As a result, AUS Bank does not report Maria’s account details to the ATO. Upon discovering this through an audit, the ATO imposes penalties on AUS Bank for failing to comply with CRS due diligence procedures.

Non-compliance with Record-Keeping Obligations

RFIs must maintain adequate records to demonstrate compliance with CRS reporting obligations. These records should detail the procedures used in preparing their Automatic Exchange of Information (AEOI) reports, ensuring that the ATO can verify the accuracy of the submitted information. The record-keeping requirements are similar to those in other Australian taxation laws:

• Retention Period: RFIs must keep records for five years from the due date of lodging the statement. If no statement is provided in a particular year, records must be kept until 31 July of the sixth year following that year.
• Content and Language: The records should accurately reflect the procedures used to determine the reportable information and must be in English or easily convertible into English.

Records should include evidence of the procedures followed during the CRS due diligence process, such as self-certifications and other relevant documentation. The records must credibly demonstrate that the self-certification was positively affirmed, using methods such as voice recordings or digital footprints. For other evidence, RFIs may retain certified copies, photocopies, or detailed notations of the documentation reviewed.

Penalties for Inadequate Record-Keeping

An entity that fails to retain the required records as mandated by taxation laws is liable to administrative penalties. These penalties serve to enforce the importance of maintaining accurate and thorough records to ensure compliance with CRS obligations.

Have Any Questions Regarding CRS? We Are Here to Help!

The Common Reporting Standard is a key factor in international estate planning, ensuring that financial accounts are transparent and tax obligations are met across borders. Staying informed about CRS requirements can help you avoid costly mistakes and ensure your assets are managed correctly. If you need help understanding how the CRS impacts your estate planning, reach out to our law firm today. Let’s protect your financial future, together.