Analysis: CRS is bigger than FATCA

1st March 2016

With effect from 1 January 2016, new due diligence and reporting obligations came into effect under the OECD's international common reporting standard regime (CRS). It is good practice to communicate to investors that additional information will have to be gathered and reported, co-writes Niyamat Fazal of Langham Hall, with Mark Brailsford and Elizabeth Shanahan of Osborne Clarke.  

The CRS significantly widens the scope of a UK fund manager's due diligence and reporting obligations. It has been introduced as part of a global drive to ensure that tax authorities receive greater information. CRS applies to "financial institutions", but this is widely defined and will capture persons who carry out investment management functions or custodial activities and funds that are managed by professional managers.

The need to carry out due diligence

UK funds and fund managers will need to carry out due diligence in respect of all investors, creditors and account holders in order to be able to comply with expanded reporting obligations. In certain circumstances, information about investors'/creditors' ultimate beneficial owners will also be needed. There are a number of data protection and privacy issues around the collection and processing of information about individuals.

Legal advice should be sought to ensure that obligations under data protection law are not breached and careful consideration should be given to ensure that any self-certification forms used are appropriate.

Reporting obligations

As a fund manager you will need to report on investors who are tax resident in any one or more of at least 69 jurisdictions, including all EU Member States, Australia, Canada and India.  HMRC will publish a final list of the reportable jurisdictions but this may not be until shortly before the first reporting deadline on 31 May 2017 (the deadline in respect of the 2016 calendar year). This means that tax reporting is no longer a "US issue".

It will now be far more likely that a fund will have reportable investors, and less likely that it will be able to ring-fence its investor population to exclude reportable investors. It will be difficult for a fund to definitively exclude investors with EU links, for example. It should be remembered that an individual living and working in the UK may be tax resident elsewhere!

Reporting is to be made through HMRC's online portal. HMRC is not the only tax authority that a fund may have to register with, however: there may be a practical need to register with the IRS and obtain a global intermediary identification number (“GIIN”). This is the case even if a fund has no US connection and no US investors, because other financial institutions (e.g. the fund's bank) may ask you to confirm the status of the fund and provide a GIIN.

Monitoring

Additionally, there will be ongoing obligations to monitor the investors'/creditors' information to identify any change of circumstances and whether additional reports need to be made as the regime continues to expand to new jurisdictions.

What is CRS? - A comparison with FATCA

Conceptually CRS is an expanded reporting version of FATCA, in which the information to be gathered and reported will be on investors residing in the jurisdictions which have signed up to CRS and which are identified in HMRC's published list. 

Whilst there is guidance available on what reporting will be required under CRS, there are a few finer points which are currently being deliberated between the legal community and HMRC. 

However, a few apparent differences between CRS and FATCA are:

(a) CRS divides all financial institutions into just two categories: Reporting Financial Institutions and Non-Reporting Financial Institutions (whereas FATCA has various sub categories of reporting (i.e. non-exempt) financial institutions, each with slightly different obligations).

(b) CRS requires additional information to be gathered such as (i) date of birth and (ii) place of birth and (iii) jurisdiction(s) of tax residence for each person holding a reportable account. In our experience, it would be good practice to document all the jurisdictions in which the account holder is tax resident which will aid reporting requirements as they become clearer. 

(c) Certain exemptions under FATCA, such as not reporting low value accounts or listed and regularly traded shares or debt, are not available under CRS.

(d) Different jurisdictions signing up to CRS may impose different reporting requirements when it comes to reporting of balances or value of reportable accounts (although UK funds will only need to consider their obligations under UK law).

(e) CRS will not require amounts to be withheld from any payments, unlike FATCA. 

Action

Given the matters set out above, as a starting point, it will be good practice to communicate to investors that additional information will have to be gathered and reported to meet CRS requirements with effect from 1 January 2016. 

If you would like to discuss the impact of CRS on your reporting obligations or gain some more clarity on it, feel free to contact the authors of this paper: 

Niyamat Fazal, Head of Private Equity, Langham Hall

E.   niyamat.fazal@langhamhall.com
T.   +44 20 3597 7927
M.  +44 75 0080 2368

Niyamat is a chatered accountant and has extensive experience in auditing and valuations of Private Equity Funds. She has more than 12 years of work experience with two of the Big 4 Accounting Firms (PwC and KPMG). 

Mark Brailsford, Consultant

E. mark.brailsford@osborneclarke.com
T. +44 20 7105 7438
M. +44 07880 007516

Mark joined Osborne Clarke in 2012 as a consultant after working as a corporate tax partner at Allen & Overy for 15 years. He was head of UK tax there for five years. He has over twenty-five years' experience in corporate tax, and wide expertise in the UK and international tax arena. 

Elizabeth Shanahan

E. elizabeth.shanahan@osborneclarke.com
T. +44 117 917 3380

Elizabeth is an associate in the corporate tax team at Osborne Clarke. She has experience advising on a broad range of corporate and business tax issues, including domestic and cross-border fund investment structures, FATCA, CRS and other cross-border tax information exchange regimes, securitisations and finance transactions and international tax structuring.