CRS/AEOI

In June 2014, the US Foreign Account Tax Compliance Act (FATCA) laid the first foundation for a bilateral, structured data exchange between the United States and various countries around the globe. The current Automatic Exchange of Information (AEoI) propagated by the OECD is intended to replace the existing bilateral agreements and to provide a fully comprehensive worldwide directive for a regular automatic data exchange. The core element of the standard, which consists of three parts, is the so-called Common Reporting Standard (CRS). It extends the FATCA Model I Agreement in the areas of financial institutions, products, requirements for due diligence and reporting.

The Automatic Exchange of Information is based on:

1. the Model Competent Authority Agreement (MCAA) which defines the information to be transferred, its transfer modalities as well as the responsibilities of authorities,
    
2. the Common Reporting Standard (CRS) which has to be incorporated into national tax legislation and contains rules for the identification of the reportable persons and the accounts to be conveyed
    
3. the commentaries which guarantee the minimum requirements for secure data transfer.

CRS 2.0

In line with the Common Reporting Standard (CRS), the due diligence procedures require the identification of both individual and Entity customers, as well as their Controlling Persons. The CRS has been amended to include certain electronic money products and Central Bank Digital Currencies. Indirect investments in Crypto-Assets via derivatives and investment vehicles are now covered by the CRS. Additional changes strengthen reporting requirements and provide a carve-out for genuine non-profit organizations. It includes also the expansion of the reporting requirements in respect of Account Holders, Controlling Persons and the Financial Accounts they own. The industry is used to refer to the changes in CRS under the name “CRS 2.0”. 

What are the changes to CRS? 

With the introduction of the Crypto-Asset Reporting Framework (CARF), certain changes have been made to the CRS to ensure an efficient interaction between the two frameworks while maintaining operational flexibility for Reporting Financial Institutions.  

Changes covering new digital financial products 

CRS has expanded its scope to include new digital financial products. These products serve as credible alternatives to traditional accounts subject to CRS reporting. Specifically, CRS now covers Specified Electronic Money Products and Central Bank Digital Currencies. Additionally, changes have been made to the definitions of Financial Asset and Investment Entity to ensure that derivatives referencing Crypto-Assets and held in Custodial Accounts, as well as Investment Entities investing in Crypto-Assets, fall under CRS reporting. CRS now also facilitates efficient interaction with the CARF, minimizing duplicative reporting while maintaining operational flexibility for Reporting Financial Institutions under both frameworks.  

The main changes: 

• Digital money products   
• Coverage of derivatives referencing Crypto-Assets and Investment Entities investing in Crypto-Assets 

Further amendments to improve CRS reporting 

Moreover, the amendments to CRS improve reporting outcomes by introducing detailed requirements, strengthening due diligence procedures, and creating new categories. These changes enhance consistency and transparency in tax information exchange.  

The main changes: 

• Expansion of the reporting requirements in respect of Account Holders, Controlling Persons and the Financial Accounts they own. 
• Reliance on AML/KYC Procedures for determining Controlling Persons. 
• Exceptional due diligence procedure for cases where a valid self-certification was not obtained, in order to ensure reporting with respect to such accounts.  
• Qualification of certain capital contribution accounts as Excluded Accounts.  
• Non-Reporting Financial Institution category for genuine charities. 
• Broadening of the scope of Depository Institution. 
• Notions of customer and business in the context of Investment Entities.  
• Reporting in respect of dual-resident account-holders. 
• Reflecting Government Verification Services within the CRS due diligence procedures.   
• Look-through requirements in respect of Controlling Persons of publicly traded Entities. 
• Integrating Citizenship by Investment / Residence by Investment guidance within the CRS. 

These changes aim to enhance tax transparency and facilitate the automatic exchange of tax-relevant information related to crypto-assets across jurisdictions.  

Sample of change to the CRS: 

1. Inclusion of Electronic Money Products and Central Bank Digital Currencies (CBDCs): 
   • The CRS will cover electronic money products and CBDCs.  
   • Financial institutions will need to report information related to these digital payment methods. Reg Tax will be enhanced to handle those types of digital assets.
2. Enhanced reporting requirements for Controlling Persons: 
   • The CARF expands the reporting requirements related to Controlling Persons. Reg Tax will be enriched to manage those additional data. 
   • Financial institutions and intermediaries will be obligated to report additional data elements concerning Controlling Persons. These data elements include: 
     • Roles of Controlling Persons: Institutions must disclose the roles of Controlling Persons in relation to the entity account holder. The role of Controlling Persons is related to the Entity Account Holder and the role(s) of Equity Interest Holders in an Investment Entity.  
     • Account Type Indicator (preexisting/new): Reporting whether an account is a preexisting account or a new account. whether the account is a Preexisting Account or a New Account and whether a valid self-certification has been obtained.
     • Valid Self-Certification: Indicating whether a valid self-certification has been obtained. 
     • Jointly Held Accounts: Providing data on whether an account is jointly held and specifying the number of joint account holders. The information whether the account is a joint account, as well as the number of joint Account Holders permits tax administrations to take the fact into account that the income and balance on joint accounts may not be attributable in full to each Account Holder, but would rather need to be apportioned, as appropriate, between the Account Holders. 
     • Financial Account Type: Indicating the type of financial account. This distinction between Depository Accounts, Custodial Accounts, Equity and debt Interests and Cash Value Insurance Contracts allows tax administrations to better understand the financial investments held by their taxpayers. 
3. Enhanced Data Quality and plausibility checks: These above changes aim to enhance the data quality and usability of the CRS for the tax administrations. By including electronic money products, Controlling Persons and other relevant information, tax administrations aim to gain better visibility into account ownership and transactions. To achieve this additional data quality and plausibility checks will be added to Reg Tax. 

Who is impacted by CRS 2.0? 

All financial institutions currently reporting under CRS are impacted, including banks, investment firms, insurance companies, and other financial institutions. 

They must comply with CRS reporting requirements, including identifying and reporting financial accounts held by foreign tax residents. 

When is CRS 2.0 starting? 

The implementation of the new CRS regulations will vary across countries, as each country must incorporate these changes into their local laws. The timeline for this transition is anticipated to mirror that of CARF. However, the evolution of CRS can differ significantly from country to country, with some embracing the changes sooner than others. Additionally, certain countries may seize this opportunity to introduce further modifications to align with CRS and meet local requirements more effectively. 

We are working closely with big4 firms to remain at the forefront of regulatory updates and proactively prepare for the integration of new regulations and enhancements into our Tax solution.