New country-by-country reporting requirements for New Zealand headquartered groups
December 2015 Tax Alert
By Troy Andrews and Vinay Mahant
FATCA’s under control - what next? CRS (Common Reporting Standard) is the latest initiative to promote the global automatic exchange of information (AEOI) and improve cross-border tax compliance. CRS aims to build on the revolutionary US Foreign Account Tax Compliance Act (FATCA) that was enacted to combat offshore tax evasion by US persons. Financial Institutions should hopefully be able to leverage off investment they have already made for FATCA to make CRS an easier transition.
A key element to the successful implementation of CRS requires the creation of an international framework to allow the exchange of information between jurisdictions, which is well underway. Currently, 74 jurisdictions, including New Zealand, have committed to the exchange of information by entering into Multilateral Competent Authority Agreements.
CRS is intended to apply to financial institutions that would otherwise fall within the ambit of FATCA. The definition of a “Financial Institution” is therefore very wide. There are essentially four types of financial institution:
- depository institution
- custodial institution
- specified insurance company and
- investment entity.
A particular focus for many New Zealand taxpayers has been to understand when various New Zealand trusts fall within the definitions above. Inland Revenue has now issued its formal guidance that helps clarify its application (which we recommend all trustees should understand in detail). We expect CRS to also follow similar guidance.
Each type of financial institution has a wide definition and a number of exemptions that can apply. However, there are differences between CRS and FATCA (due to the global dimension of CRS). Financial institutions are expected to be able to maintain one system and approach for both. Among the differences between CRS and FATCA are the removal of US specific requirements, as it is OECD driven.
New Zealand had initially planned to implement CRS in two phases. The first phase was to apply from January 2017 with Financial Institutions commencing due diligence procedures on account holders to report in 2018. This phase was intended to be a voluntary initiative for financial institutions to be early adopters.
The second phase set out the mandatory timeline for implementing CRS and would apply from the beginning of 2018 with a view of reporting information from 2019.
After recent discussions, the New Zealand government has decided to withdraw the above voluntary phase. This should allow more time to process the necessary legislation and provide Financial Institutions more time to digest its impact. In our view, it is unlikely many organisations would elect to be early adopters in any event.
Discussions are currently taking place around the drafting of domestic legislation. The legislation is now planned to be set out in a Bill in September 2016 with the aim of being enacted by mid-2017. Financial Institutions should expect to commence due diligence procedures from the beginning of 2018 and reporting is expected to start from early 2019.
The method of reporting CRS information is expected to follow a similar approach to FATCA reporting, with information being reported to Inland Revenue, who will then exchange information with other jurisdictions. This reporting infrastructure will be crucial for Financial Institutions to understand. For FATCA, there have been a number of system changes and reporting uncertainty which is continuing to evolve. For some, this means refiling is required.
Many financial institutions are aware that failure to comply with FATCA may result in a 30% penalty on US withholdable payments. However, it is also important to understand that failing to register and comply with obligations under FATCA could result in a knowledge offence under New Zealand tax law. The penalty for non-compliance can be substantial and therefore if you have not already taken appropriate steps towards ensuring you are in compliance with FATCA, it is important to do so as soon as possible. We expect CRS domestic legislation will include similar offences for non-compliance to ensure it is applied strictly.
CRS is getting closer and is evidence that FATCA only formed the first step towards combatting tax evasion and revolutionising a new information reporting system on taxpayers. CRS will enhance the reporting phenomenon that FATCA introduced. This will inevitably create another compliance burden for financial institutions that aren’t well prepared.
As a closing note, our anecdotal experience is that FATCA is starting to ‘work’. Many “US” account holders are increasingly trying to understand how to deal with US tax liabilities they may have ignored in the past. CRS will only enhance this impact and expats around the world should be on notice.
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