CRS goes live
Tax Alert - July 2017
By Troy Andrews and Vinay Mahant
The Common Reporting Standard (CRS) which forms part of the OECD’s automatic exchange of information (AEOI) initiative commenced for New Zealand Financial Institutions on 1 July 2017. Entities that fall under the scope of CRS are required to identify and report certain financial account information held by non-New Zealand residents.
CRS builds on US Foreign Account Tax Compliance Act (FATCA). Though it is built on similar principles, it is not the same, as it is based on OECD principles and is not US centric. Where FATCA requires Financial Institutions to report on US account holders only, CRS requires Financial Institutions to report on all other non-New Zealand resident account holders. CRS also provides fewer exemptions than FATCA. Similar to FATCA, CRS breaks down pre-existing due diligence requirements by low value individual accounts, high value individual accounts and entity accounts. There are different timeframes by which Financial Institutions are required to complete due diligence on these existing account holder types.
CRS generally will apply to Financial Institutions that fall within the ambit of FATCA. There are essentially four types of Financial Institutions (similar to FATCA):
- Depository institution;
- Custodial institution;
- Specified insurance company; and
- Investment entity.
Many entities that would not normally be considered to be in the financial services industry may be caught within the above. The definition of entity is broad for both FATCA and CRS and covers legal persons and legal arrangements including partnerships, limited partnerships and trusts.
A particular focus will be applying CRS to various New Zealand trusts. For example, a family trust may be regarded as an Investment entity (and therefore a Financial Institution that may have due diligence or reporting obligations) if the trust is managed by another Financial Institution. This may simply be by using a share broker under discretionary investment management services (DIMS).
Most individuals and entities will need to know their CRS status as part of the account opening process with a Financial Institution. It is not always a straightforward exercise to determine what the CRS status should be and specialist tax advice should be sought where it is unclear (noting that an entity’s status under CRS may not necessarily be the same as its FATCA status).
An area of focus in implementing CRS is that the list of reportable jurisdictions committed to entering into agreements to promote the AEOI is expected to evolve over time. Inland Revenue has recently published a list of the current reportable jurisdictions and also intends on publishing a list of participating jurisdictions shortly. New Zealand has adopted the wider approach to due diligence and reporting in an effort to minimise compliance costs. This means it is mandatory for Financial Institutions to identify all non-resident account holders irrespective of whether the account is from a reportable jurisdiction.
To promote compliance, the penalties for non-compliance with CRS are extended beyond reporting Financial Institutions and include account holders and controlling persons. For trusts this could include the settlor, trustees and beneficiaries. This includes where an account holder fails to provide a Financial Institution with information required for due diligence or fails to provide an update if there has been a material change in circumstances effecting a previous certification. The penalty for non-compliance by account holders and controlling persons includes civil penalties of $1,000 per offence. This is potentially very wide ranging and Inland Revenue is currently running a targeted public awareness campaign to highlight the impact of CRS.
Inland Revenue is currently working through submissions received on excluded entities and accounts for CRS and has issued determinations which state that Kiwisaver schemes should be non-reporting Financial Institutions for CRS purposes and that a Kiwisaver member’s account in a Kiwisaver scheme should be an excluded account. Further determinations may be published following Inland Revenue’s review process.
Inland Revenue has published Automatic exchange of information (AEOI) guidance material to assist New Zealand Financial Institutions comply with CRS from 1 July 2017. This includes useful guidance on the impact of CRS to New Zealand trusts, partnerships and collective investment vehicles. Inland Revenue has also recently published a memo on the impact of CRS on residual superannuation and workplace saving schemes to provide guidance on where such entities may be exempt or otherwise have excluded accounts under CRS.
The first CRS reporting period covers 1 July 2017 to 31 March 2018 (annually to 31 March for subsequent years) and information should be exchanged with Inland Revenue by 30 June 2019. The New Zealand CRS legislation provides an option for a 3 month grace period for the first two reporting periods to allow additional time to conduct due diligence procedures. However any reportable information gathered during the grace period will need to be reported in the relevant AEOI report. The mechanism for reporting information to Inland Revenue is expected to be in XML format (similar to FATCA) in line with the OECD prescribed schema.
Please contact us if you believe you may be within the scope of CRS and we can further discuss the implications.