The Common Reporting Standard
Implications for trusts
For some time now, countries globally have been engaging in the automatic exchange of information in order to tackle offshore tax evasion and other forms of non-compliance. In 2010, the United States enacted Foreign Account Tax Compliance Act (FATCA), requiring withholding agents to withhold 30 per cent of the gross amount of certain U.S.-connected payments made to foreign financial institutions unless the financial institutions agreed to perform specified due diligence procedures to identify and report information about U.S. persons that hold accounts with them to the IRS.
With the strong support of the G20, the OECD, EU and other stakeholders developed the Standard for Automatic Exchange of Financial Account Information, which has become known as the Common Reporting Standard, or CRS. CRS builds on FATCA, although it is different in many respects.
CRS was incorporated into Irish law by virtue of section 891F of the Taxes Consolidation Act 1997 and the enactment of S.I. No 583 of 2015. It covers numerous countries with the exception of the United States, which is dealt with by FATCA. The CRS’s reach is truly global, with over 100 countries having committed to exchanging information under the CRS and with a group of over 60 countries, including Ireland, having committed to the early adoption of CRS. Several offshore jurisdictions, such as Isle of Man, Jersey, BVI and the Cayman Islands, have committed to the CRS. This is to be welcomed to ensure its effectiveness.
What is the Common Reporting Standard?
The CRS contains the reporting and due diligence standard that underpins the automatic exchange of financial account information. In Ireland, the CRS applies to all reportable financial institutions that maintain financial accounts. A reporting financial institution must identify all such accounts using the due diligence procedures set out in the CRS. The reporting financial institution must then submit a return containing details of these accounts to Revenue on/before 30 June of the calendar year following the year for which a return is required. The first reporting will take place on 30 June 2017. This will mean that identification information, account details and financial matters shall be reported to Revenue in the first instance and Revenue will exchange this information with our automatic exchange partners.
Implications for trusts
The focus of this article is on how CRS will generally apply to trusts. Firstly, the location or residence of the trust must be understood to determine whether the trust is situated in a participating jurisdiction (i.e. any jurisdiction that has signed up to CRS).
An entity’s residence under the CRS is generally where it is resident for tax purposes. However, in the case of a trust it is considered to be resident for CRS purposes in the participating jurisdiction where one or more trustees are resident, unless all the information required is being reported elsewhere because the trust is treated as tax resident there.
If the trust is resident in a participating jurisdiction, CRS will generally apply if the trust is a “Reporting Financial Institution” (RFI) or a “Non-Financial Entity” that maintains a financial account with an RFI.
Is the trust a “Reporting Financial Institution”?
Reporting Financial Institution (RFI) is broadly defined. In general, a trust would be considered an RFI if it falls within the definition of an “Investment Entity”. An Investment Entity is one that: (a) primarily conducts as a business trading in money market instruments, foreign exchange, individual and collective portfolio management or otherwise investing, administering or managing financial assets or money on behalf of other persons; or (b) the gross income of which is primarily attributable to investing, reinvesting or trading in financial assets and is managed by another entity that would be considered an RFI.
In general, a trust that is a Financial Institution, will be considered to be a Reporting Financial Institution, unless the trustee itself is a Reporting Financial Institution and that trustee undertakes all information reporting in respect of all “Reportable Financial Accounts” of the trust.
If the trust is a Reporting Financial Institution, it is necessary to determine if the trust holds any “Reportable Financial Accounts”. If the trust is an Investment Entity, the CRS defines its Financial Accounts as debt and equity interests in the entity. In general, a Reportable Financial Account is a Financial Account held by one or more “Reportable Persons” or by a “Passive Non-Financial Entity” with one or more “Controlling Persons” that are “Reportable Persons”.
An account holder is a Reportable Person if the account holder is resident in a reportable jurisdiction for tax purposes and in such circumstances, the trust must report the account in relation to the account holder.
A Passive Non-Financial Entity is a trust which is not a Financial Institution but holds a Financial Account with a Reporting Financial Institution and primarily receives passive income or primarily holds assets that produce passive income (such as dividends, interest or rents).
The account held by a trust that is a Passive Non-Financial Entity is a Reportable Account if: (a) the trust is a Reportable Person; or (b) the trust has one or more Controlling Persons that are Reportable Persons. In the case of a trust, the term Controlling Persons is explicitly defined to mean the settlor, trustees, protector, beneficiaries, class of beneficiaries and any other natural person exercising ultimate effective control over the trust. The report is made by the Reporting Financial Institution rather than the trust itself.
If reporting is required – who should report and what should be reported?
Reporting is to be completed by RFIs by filing an electronic return with Revenue on or before 30 June in the following year. Even if there are no reportable accounts a nil return must be filed and records must be kept for a period of six years. The reportable information for each account includes:
- Name, address, jurisdiction of residence, tax identification number and date and place of birth (where applicable) of each account holder who is a reportable person whether a person or an entity
- The account number
- The name and identifying number of the reporting financial institution
- The account balance or value
- The amounts paid or credited to the account holder and
- The currency the balance is held in.
There are different due diligence rules for accounts held by individuals and entities as well as pre-existing and new accounts. A Reporting Financial Institution is permitted under the Irish regulations to appoint a person as its agent to carry out the duties and obligations imposed by the CRS.
In summary, all Irish trusts and trustees should consider their status under CRS and whether they have a requirement to report. A person required to make a return who fails to do so or who makes an incorrect or incomplete return shall be liable to a penalty of €19,045 and, if the failure continues, to an additional penalty of €2,535 for each day on which the failure continues.