Analysis of the Common Reporting Standard Loopholes

Analysis of Common Reporting Standard Loopholes

CRS Commentary pg. 115 par (113)

FIs have until 14th January 2019 to investigate all residencies of pre-existing account holders who have presented a high-risk residence by investment jurisdiction

a Reporting Financial Institution has relied on the residence address test described in subparagraph B(1) and there is a change in circumstances that causes the Reporting Financial Institution to know or have reason to know that the original Documentary Evidence (or other documentation as described in paragraph 10 above) is incorrect or unreliable, the Reporting Financial Institution must, by the later of the last day of the relevant calendar year or other appropriate reporting period, or 90 calendar days following the notice or discovery of such change in circumstances, obtain a self-certification and new Documentary Evidence to establish the residence(s) for tax purposes of the Account Holder.

OECD announcement to address abuse of residence-by-investment

The OECD has officially informed Reporting FIs that pre-existing or current or new Account Holder that has presented their residence as a jurisdiction on the high-risk list, then the Self-Certification and Documentary Evidence is incomplete or unreasonable.
It is not up to the Reporting FI to decide if the Self-Certification and Documentary Evidence is incomplete or unreasonable.
The Reporting FI has therefore 90 days to investigate the true tax residences of teh Account Holder. Besides the suggested compliance questions the bank must determine the Account Holder's centre of vital interest, including proof of travel(passport stamps). The Relationship Manager will likely know the genuine circumstances.
It is wrong to opine the OECD announcement only applies to new accounts opened after 22.10.2018
Reporting FIs must not be complict and accept the client's lying that he is solely resident in a tax haven. It is the Reporting FIs responsibility to determine true tax residency jut as serious as determining source of assets. FIs seem to think residence is a minor issue of lesser importance in AML. They are wrong.
FIs and especially Relationship Managers may be afraid to lose their client if true tax residence is revealed. No longer is residence in a high-risk jurisdiction a minor game that may be glossed over.
Be aware, a clientthat ha sgone to the trouble and expense of estalish a fake residence through expensive investment, will likely continue to lie on the Self-Certification without a second thought.It is now the Reporting FI's responsibility to investigate the other tax residences of client, e.g. stamps in passport, where are kids educated, where is doctor, where is insurance, etc.

Website updated 29 October 2018

OECD removes 4 black listed jurisdictions from high-risk RbI / CbI list because they have committed to automatic exchange of applicants with applicant's source country. I. see no reason to remove these countries because the exchange of such info does not mitigate the abuse of RbI to avoid CRS one iota. We await explanation from OECD on their reasoning.

FIs have 90 days to determine genuine tax residency of any pre-existing account that presented tax residency of one of the 20 high-risk RbI / CbI jurisdictions. CRS Commentary page 115 par (13) states "If a Reporting Financial Institution has relied on the residence address test described in subparagraph B(1) and there is a change in circumstances (e.g. OECD update) that causes the Reporting Financial Institution to know or have reason to know that the original Documentary Evidence is incorrect or unreliable, the Reporting Financial Institution must, by the later of the last day of the relevant calendar year, or 90 calendar days following the notice or discovery of such change in circumstances, obtain a self-certification and new Documentary Evidence to establish the residence(s) for tax purposes of the Account Holder. The OECD clampdown on RbI state steh use of a high risk jurisdiction is reason enough that the self certifivatiuon or documentary evidence cannot be relied upon. There is no need to wait for this to be translated into local CRS legislation.

OECD clamps down on residence by investment schmemes. OECD publishes initiative against 21 blacklisted jurisdictions providing residence and investment by investment schemes.

HK repeals non reporting FI status for ORSOs. In December 2017, the OECD conducted an assessment on Hong Kong’s inclusion of Mandatory Provident Fund schemes, ORSO registered schemes, ORSO pooling agreements and approved pooled investment funds as jurisdiction-specific low-risk non-reporting financial institutions and concluded that these entities should not be considered as NRFIs. To meet the international requirements, the Government will commence a legislative amendment exercise to remove these entities from the list of NRFIs under the Inland Revenue Ordinance.

Gibraltar pension plans next on the chopping block: Gibraltar trustee based pension segergated saving shams have not yet adopted the OECD updated CRS FAQ in June 2018, that compartmentalised savings accounts do not qualify as being equivalent to Broad Participation Retirement Plans, and hence do not qualify as non reporting FIs, which Gibraltar trustees promote in their marketing material.

Non cash value insurance policies loopholes closed: Life insurance Asian subsidiaries of insurers based in Switzerland and UK overseas territory, Bahamas insurers have exploited the non cash value insurance policy. These insurers ensured the policyholders signed a confidential rider that they could no longer access the policy assets. In effect, converting the policies to irrevocable non cash value policies, which were out of scope of the CRS. The June 2018 OECD CRS FAQ update mandates that if no-one can access the policy assets, then the reportable person will be the policy owner. It will be interesting to see how these policyholders pay taxes on the previously undeclared insurance policy assets as the policy is irrevocable.

OECD reviewing the recent practise of listing private investment companies on small stock exchanges such as Malta and Dutch Caribbean exchange,, without any trading occuring, to exploit the FATF AML rules that FIs do not have to identify beneficial owners of listed entities. CRS can override this by requiring FIs to identify significant shareholders owning more than 5% by obtaining this info directly from stock exchange.

OECD reviewing jurisdiction CRS guidance which wrongly opine that cash is not a financial asset, merely because it was omitte dfrom the CRS list of financial assets. This affects teh categorisation of Active NFE type A and investment entities.

Latest Questions Sent by web visitors for issues to be covered in CRS TIMES newsletters
1.	Investment Entity failing income test: If a collective investment has not earned anything since inception, will the fund qualify as an Investment Entity or is it a Passive NFE becauyse it fails the income test?
2.	Interest as Active Income: Is interest earned by a microfinance business passive income or active income.
3.	Ignoring OECD closure of loopholes via FAQ: OECD closes a CRS loophole via FAQ updates, e.g. segregated savings plans, irrevocable insurance. Can domestic law non reporting FI ignore this if the jurisdiction where FI is based does not refer to the FAQ and Implementation Handbook as being legislation to follow.
4.	Holding FIs as Active NFE: As corporate trustee, can we categorize our trust as an Active NFEs if the trust holds subsidiaries engaged in business.
5.	Entity with dual tax residency: How do we treat entity account holders which have dual residencies due to place of incorporation and different place of effective management. Where is such entity located as an investment entity.
6.	Fake residency: How will OECD oblige FIs to determine genuine tax residence of individuals, to address their concerns on abuse of residence by investment (RbI) by black listed jurisdiction such as UAE, Malta, St. Kitts, etc. Will utility bills from RbI black-listed jurisdictions no longer be used for due diligence.
7.	Intangible assets in balance sheet:, can an NFE load their balance sheet with intangible assets, such as IP, to pass the asset test as an Active NFE type [A] business, assuming they earn non-financial income such as commissions.
8.	Halt look-through of nominee: Can a non-participating nominee change its-self into a non reportable custodial institution
9.	Halt reporting on controlling persons: Is it possible to not report on reportable controlling persons of a Passive NFE by simple restructuring
10.	Listing: Is a public company on Malta exchange an Active NFE or a non-reportable person or both

OECD Publications on CRS
Common Reporting Standard and Commentary	Second edition of Implementation Handbook provides new guidance related to effective implementation.	CRS-related Frequently Asked Questions	List of jurisdictions committing to CRS by 2020, including developing members of Global Transparency Forum but not yet set the date for automatic exchange.
List of signatories of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and intended Information Exchange Date.	Pascal Saint Amans quoted that the Model Disclosure Rules will be submitted to the G7 presidency and are part of a wider strategy of the OECD to monitor and act upon tendencies in the market that try to avoid CRS reporting and hide assets offshore.	Mandatory Disclosure Rules on avoidance of CRS	List of members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.
List by jurisdiction of specific the steps taken and choices made in the context of implementing the Standard.	Definition of tax residency rules for individuals and entities by jurisdiction. Breakdown of updates by country	CRS Guidance by Jurisdictionas per OECD AEoI Exchange Portal. Not yet updated by OECD	Tax Identification Number rules and formats by Jurisdiction as per OECD AEoI Exchange Portal.
List of jurisdictions participating in the Convention of Mutual Administrative Asssitance in tax matters.	List of high risk residence and citizenship schemes by jurisdiction	EU list of tax havens to be black or grey listed.	CRS Status Message XML Schema

Newsworthy Updates

29 October 2018 * Ecuador signs the Multilateral Competant Authority Agreement, bringing the total number to 104.
26 October 2018 * Kazahkstan commits to exchange CRS information in 2020
22 October 2018 * OECD removes 3 more black-listed jurisdictions (Columbia, Montserrat and Mauritius) from high-risk RbI / CbI list because they have committed to automatic exchange of applicants with applicant's source country.
17 October 2018 * OECD removes Monaco from Residence by investment black list because Monaco exchanges info with the jurisdiction where investor came from
16 October 2018 * OECD OECD publishes initiative against 21 blacklisted jurisdictions providing residence and investment by investment schemes used to circumvent CRS.
9 October 2018 * OECD updates list of 107 jurisdictions committed to CRS by 2020 and 42 Global Forum Members but not yet set date to implement automatic exchange of Financial Account Information
2 October 2018 * EU removes Peru and Liechtenstein off grey list of tax havens. Paulo moves from blacklist to grey list
24 September 2018 * 125 Jurisdictions participating in the CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS
18 September 2018 * Hong Kong revokes non reporting FI status for providers of ORSO pension plans
15 September 2018 * Update 153 members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes
14 September 2018 * Update format of Tax Identification Numbers by jurisdiction
31 August 2018 * IRS publishes Revenue Procedure 2018-36 list of jurisdictions to reciprocate interest data to countries deemed safe, ignoring FATCA limited reciprocal data promises.
7 August 2018 * Update 103 signatories of the Multilateral Competent Authority Agreement
5 July 2018 * EU votes for a resolution for EU Members to suspend FATCA due to non reciprocity
4 June 2018 CRS FAQ update closes loopholes concerning Hong Kong ORSO, Gibraltar QNUPS and other trust-based retirement funds, as well as irrevocable insurance.
31 May 2018 * EU Commission Director General Taxation warns USA will be blacklisted in 2019 if it does not adopt CRS. Three out of seven blacklisted nations are US territories
25 May 2018 * EU Council updates uncooperative tax havens list - blacklists 7 and greylists 65 jurisdictions
6 April 2018 * 2nd OECD CRS Implementation Handbook
3 April 2018 * US Supreme Court declines to listen to case from 6th circuit court of appeals court unsuccesful effort to repeal FATCA
13 March 2018 * EU Council amends Mutual Assistance and Cooperation Directive (DAC) to include OECD MDR for addressing CRS avoidance arrangements and offshore structures (see pg. 38).
10 March 2018 * OECD releases final Mandatory Disclosure Rules
9 March 2018 * OECD FAQ on Mandatory Disclosure Rules.