Chapter 2 - Key Common Reporting Standard due diligence and reporting obligations

 


Key Common Reporting Standard due diligence and reporting obligations

2.1 The CRS generally sets out the rules for:

  • Due diligence: The conduct of due diligence by reporting financial institutions on their non-exempt accounts to identify reportable accounts and undocumented accounts.[15] (There are different due diligence rules for pre-existing and new accounts, and individual and entity accounts. These procedures are elaborated upon in the Appendix and these terms are set out in the Glossary to this issues paper);
  • Collection of information: The collection by reporting financial institutions of details of financial assets and income in relation to any reportable accounts that they identify; and
  • Reporting of information: Reporting information on reportable accounts and undocumented accounts to the tax administration in the participating jurisdiction in which the reporting financial institution is located (that is, for New Zealand reporting financial institutions, the Inland Revenue Department).

2.2 The CRS also includes important ancillary requirements, including:

  • An obligation for reporting financial institutions to look through “passive NFEs” (this is a defined technical term in the CRS – see the Glossary at the end of this paper) and report relevant controlling persons from reportable jurisdictions; and
  • Obligations on participating jurisdictions to have rules and administrative procedures in place to ensure effective implementation of, and compliance with, the CRS reporting and due diligence procedures.

2.3 Participating jurisdictions are required to translate the CRS into domestic law, and to put in place the necessary systems and processes for giving it effect. The Global Forum will conduct in-depth monitoring and peer review of participating jurisdictions to ensure that the CRS has been correctly implemented and that no shortcuts are taken that would weaken the global effectiveness of the CRS. A key element of this will be determining whether there has been effective implementation of, and compliance with, the CRS reporting and due diligence procedures.

2.4 However the CRS and its Commentaries provide flexibility, and provide participating jurisdictions with options in certain areas, and in respect of these areas participating jurisdictions need to decide which approach it will take.

2.5 This chapter of the issues paper highlights some key areas where New Zealand is required, or able, to make implementation decisions regarding various CRS due diligence and reporting obligations (including who will have such obligations, what accounts will be the subject of such obligations, and what non-resident jurisdictions are within the scope of CRS due diligence and reporting), and seeks feedback on the design choices to be made in these areas. (Other legislative issues or options relating to CRS due diligence and reporting obligations are set out in Chapters 4 and 5).

Who must conduct due diligence?

2.6 CRS obligations apply to a broad range of entities, beyond simply banks, to include other financial institutions such as certain brokers, custodians, collective investment vehicles, managed entities, and insurance companies. The specific definition of the term “financial institution” in the CRS includes any: “depository institution”, “custodial institution”, “investment entity”, or “specified insurance company”. These specific categories are further defined in the CRS and its Commentaries.

2.7 New Zealand is generally required to implement CRS obligations for any “participating jurisdiction financial institution”. For New Zealand this will include:

  • Any financial institution resident in New Zealand (but excluding any of its branches located outside New Zealand); and
  • Any branch of a non-resident financial institution that is located in New Zealand.

2.8 The “residence” of a participating jurisdiction financial institution will be determined using domestic tax residence rules. However, for trusts, or financial institutions that do not have residence for tax purposes (for example, because they are treated as fiscally transparent, or located in a jurisdiction that does not have an income tax), the CRS Commentaries specify how a participating jurisdiction is to determine residence.

2.9 Only those participating jurisdiction financial institutions that are “reporting financial institutions” will (upon implementation in New Zealand) be required to carry out CRS due diligence on their non-exempt financial accounts to identify whether they have reportable accounts or undocumented accounts. The New Zealand reporting financial institution would need to report such accounts to Inland Revenue. In this issues paper, such financial institutions (that have CRS due diligence and reporting obligations) will be referred to as New Zealand reporting financial institutions. (Note that a New Zealand reporting financial institution may conduct due diligence on its accounts but not identify any reportable accounts or undocumented accounts).

2.10 The due diligence procedures that a participating jurisdiction must put in place for reporting financial institutions to use in determining whether a non-exempt account they maintain is a reportable account (held or controlled[16] by a reportable person) or an undocumented account, are set out in Sections II to VII of the CRS. A reportable person is a non-exempt natural person or entity[17] that is tax-resident (including sometimes treated as resident based on indicia that is not “cured”) in a participating jurisdiction.[18] A reportable person can also be a non-exempt entity (such as a partnership, limited liability partnership, or similar legal arrangement) that has no jurisdiction for tax purposes, in which case the CRS looks to the participating jurisdiction in which the place of effective management is situated. For CRS purposes, these are persons resident in reportable jurisdictions.

2.11 The CRS due diligence procedures that reporting financial institutions need to apply to identify such reportable accounts and undocumented accounts vary depending on whether the account is a pre-existing account or a new account and whether the account is held by an individual or an entity. In broad terms, a pre-existing account will be an account maintained by a reporting financial institution immediately before the date of implementation of the CRS (for example, 30 June 2017) and a new account will be an account opened on or after the date of implementation of the CRS (for example, 1 July 2017).

2.12 The different CRS due diligence procedures for pre-existing and new accounts are largely in recognition of the fact that it may be more difficult and costly for reporting financial institutions to collect information for pre-existing accounts than when opening a new account. The different procedures for individual and entity accounts also reflect the fact that a reportable person may hold an account directly or through an entity. There are also aggregation rules that apply where the account holder has multiple accounts with a reporting financial institution (including a related entity) in defined circumstances. These types of accounts and the due diligence procedures that apply to these types of accounts are set out in detail in the Appendix and Glossary.

2.13 Under the CRS, a participating jurisdiction financial institution (such as a New Zealand financial institution) will be a “reporting financial institution” if it does not fall within any of the categories of “non-reporting financial institution” set out in the CRS and its Commentaries.

2.14 The CRS sets out the following specific categories of non-reporting financial institution (that are not required to carry out due diligence procedures or report), together with the criteria for identifying them:

  • a “governmental entity”, “international organisation”, or “central bank”;[19]
  • a “broad participation retirement fund”, “narrow participation retirement fund”, “pension fund” of a governmental entity, international organisation, or central bank, or a “qualified credit card issuer”;
  • any other entity that presents a low risk of being used to evade tax, has substantially similar characteristics to the above-mentioned entities, and which is defined in domestic law as a non-reporting financial institution;[20]
  • an “exempt collective investment vehicle”; and
  • a trust to the extent that the trustee of the trust is itself a reporting financial institution, and reports all required information in relation to the trust.

2.15 Each participating jurisdiction (including New Zealand) will need to identify the specific financial institutions in its jurisdiction that will qualify as non-reporting financial institutions. Those coming under the category set out in CRS Section VIII.B(1)(c) of “any other entity that presents a low risk of being used to evade tax” and that have “substantially similar characteristics” to the relevant types of entities that are mentioned in the CRS, may be defined in domestic law as non-reporting financial institutions provided they meet the specific requirements of the CRS, and their classification does not frustrate the purposes of the CRS. Therefore, the scope for New Zealand to define a financial institution as a New Zealand non-reporting financial institution (under this part of the definition of non-reporting financial institution) is limited and would need to be based on these narrow criteria being satisfied.

2.16 The Global Forum has advised that the decisions made in this regard will be subject to stringent international scrutiny to ensure that the aims of the CRS are not frustrated. The expectation is that New Zealand will be able to clearly document its reasons for exempting any particular financial institution as a New Zealand non-reporting financial institution under domestic law (and in terms of the specific requirements of the CRS).

2.17 Note that the range of New Zealand reporting financial institutions that will be required to carry out CRS due diligence and reporting will not necessarily be the same as those that are currently exempted under US FATCA. For example, Annex II to the New Zealand/US FATCA intergovernmental agreement (IGA) exempts New Zealand financial institutions with a local client base or which only have low value accounts. However, no similar exemptions apply under the CRS to treat these as non-reporting financial institutions for CRS purposes.[21] Instead, the exemption of any entity as being a New Zealand non-reporting financial institution would need to be based on the narrow CRS criteria (referred to above) being satisfied.

Consultation question

2.18 We would appreciate your submissions regarding what entities would satisfy the CRS criteria (referred to in paragraph 2.15) for being New Zealand non-reporting financial institutions and, therefore, should be exempted from CRS due diligence and reporting obligations.

  • Submissions on this point should confirm that the specific criteria set out in paragraph 2.15 and in CRS Section VIII.B.1(c) of the CRS have been met, or if not, then explain any substitute requirements relied on and how they are substantially similar.

Determining which financial accounts will be the subject of CRS due diligence and reporting

2.19 The CRS sets out rules for reporting financial institutions conducting due diligence on non-exempt (excluded accounts or accounts exempted by threshold)[22] financial accounts that they maintain to identify reportable accounts and undocumented accounts.

2.20 In broad terms, the point of the CRS rules is for the reporting financial institution to conduct due diligence on their non-exempt financial accounts to identify reportable accounts that are held or controlled[23] by reportable persons, who are generally non-resident individuals or entities[24] that are tax resident[25] in participating jurisdictions that New Zealand has CRS obligations to exchange information with (reportable jurisdictions).[26]

2.21 However, some financial accounts are not subject to CRS due diligence or reporting, provided specific requirements are satisfied.[27] These accounts are referred to as “excluded accounts”. Examples of excluded accounts include:

  • certain retirement or pension accounts;
  • certain non-retirement regulated tax-favoured accounts;
  • a certain type of life insurance contract;
  • an account held solely by an estate if certain requirements are satisfied;
  • certain escrow accounts; and
  • certain depository accounts that exist solely because a customer makes a payment in excess of a balance due with respect to a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer.

2.22 The CRS also defines in CRS Section VIII.C.17 (g) an excluded account as including any other account that presents a low risk of being used to evade tax, has substantially similar characteristics to the other excluded accounts, and which is defined in domestic law as an excluded account, provided that the status of such account as an excluded account does not frustrate the purposes of the CRS.

2.23 Therefore, the scope for New Zealand to define a financial account as being an “excluded account” (under this part of the definition of excluded account) is limited and will need to be based on these narrow criteria being satisfied.

2.24 The Global Forum has advised that the decisions made in this regard will be subject to stringent international scrutiny to ensure that the aims of the CRS are not frustrated. The expectation is that New Zealand will be able to clearly document its reasons for treating any particular financial account as being an “excluded account” under domestic law (and in terms of the specific requirements of the CRS).

2.25 Note that the range of excluded accounts will not necessarily be the same as those that are currently excluded under US FATCA. Instead, treatment of any account as being an excluded account will be based on the account meeting the specific CRS criteria.

Consultation questions

2.26 We would appreciate your submissions regarding which financial accounts would satisfy the CRS criteria (referred to above) for being excluded accounts, and, therefore, should be exempted from CRS due diligence and reporting.

  • Submissions on this point should confirm that the specific criteria set out in paragraph 2.15 and in CRS Section VIII.C.17(g) of the CRS have been met, or if not, then explain any substitute requirements relied on and how they are substantially similar.

2.27 The CRS Commentaries also specifically contemplate that a participating jurisdiction has the option, in this regard, of defining certain types of dormant accounts as being excluded accounts. The CRS provides, as an example of a low risk excluded account, any dormant account with an annual balance that does not exceed US $1,000.[28]

  • Should New Zealand generally include a dormant account with a balance or value that does not exceed NZ $1,000 in the definition of excluded account?

Determining what non-resident jurisdictions are within the scope of CRS and reporting – the potential application of the “wider approach” to CRS

2.28 A potential difficulty under the CRS is that the list of reportable jurisdictions (those with which CRS reciprocal exchange obligations have been established) will not remain static. It can be expected to change over time, for example, as additional jurisdictions commit to become participating jurisdictions under the CRS and enter into exchange arrangements with other participating jurisdictions. For New Zealand reporting financial institutions, any updates to the list of participating jurisdictions could result in increased compliance costs, for example, as a result of having to undertake CRS due diligence and reporting each time a jurisdiction becomes a reportable jurisdiction vis-à-vis New Zealand for CRS purposes.

2.29 In recognition of this, and with a view to minimising implementation and compliance costs, the CRS Commentaries and the Implementation Handbook recommend consideration of what is described as a “wider approach” to CRS due diligence and reporting as a legislative option, and further elaboration of how this might work is provided in Annex 5 to the CRS Publication. Under the wider approach a participating jurisdiction could decide to treat all foreign jurisdictions as being reportable jurisdictions, and all non-exempt non-residents (including controlling persons of passive NFEs) as being reportable persons.

2.30 If the wider approach is adopted in New Zealand, a New Zealand reporting financial institution would be able to carry out due diligence on all of its non-resident account holders (and controlling persons of passive NFEs) to determine if it has any reportable accounts and undocumented accounts. This will help ensure that such New Zealand reporting financial institutions would not need to re-undertake CRS due diligence procedures and reporting every time that the legislative list of participating jurisdictions changes.

2.31 This option appears to offer the greatest scope for compliance cost reduction, if permitted by domestic legislation.

Consultation question

  • Should New Zealand adopt a “wider approach” to CRS due diligence and reporting, as stated in this paper?
 

15 The distinction between “Reporting” Financial Institutions and “Non-Reporting” Financial Institutions is outlined below.

16 This would apply where the reportable person is a controlling person of a passive NFE account holder.

17 For this purpose, the term “entity” is to be interpreted widely. For example, it includes trusts and hybrid entities.

18 There is also scope under the “wider approach” canvassed in this paper, for all non-resident jurisdictions to be treated as being reportable jurisdictions.

19 However, the CRS excludes payments derived from an obligation held in connection with a commercial financial activity of a type engaged in by a specified insurance company, custodial institution, or depository institution.

20 However, the CRS also provides that listing such entities under domestic law as non-reporting financial institution must not frustrate the purposes of the CRS: see CRS Section VIII.B(1)(c).

21 CRS Section VIII.B(1)(c), CRS Commentaries pp.166, and 170-173, and Implementation Handbook pp.38, 89, and 114-115.

22 The CRS generally does not contain threshold exemptions from due diligence and reporting (cf FATCA). However, as canvassed in this paper, there is scope for a participating jurisdiction to allow reporting financial institutions to exempt from review pre-existing entity accounts with a balance or value of less than US $250,000 at the relevant date (set in implementing legislation).

23 This applies to accounts held by passive NFEs. See the Glossary at the end of this issues paper.

24 For this purpose, the term “entity” is to be interpreted widely. For example, it includes trusts and hybrid entities. See the Glossary at the end of this issues paper.

25 As explained in detail in the Appendix, an account is sometimes treated as being resident for tax purposes in a jurisdiction based on indicia (of such residence) that is not “cured”. Furthermore, for the purposes of CRS due diligence, an entity such as a partnership, limited liability partnership or similar legal arrangement that has no residence for tax purposes shall be treated as resident in the jurisdiction in which its place of effective management is situated.

26 However, this is subject to the application of the “wider approach” which is canvassed in this paper.

27 CRS Section VIII.C.17 (Excluded Account).

28 See CRS Commentaries on Section VIII, page 190 (paragraph 103, example 6).