This guide was updated in August 2018
CRS has been developed by the Organisation for Economic Cooperation and Development (OECD). It provides a framework for countries to obtain information from their Financial Institutions (FIs) and automatically exchange that information with other countries. So far over 100 jurisdictions have signed up to exchanging information under CRS. The OECD website has a useful list of jurisdictions which have committed to CRS.
CRS has been incorporated into EU law by the European Directive on Administrative Cooperation (DAC) and into UK law by the International Tax Compliance Regulations 2015.
The UK is one of 49 countries that signed up to be 'Early Adopters' of CRS, whereby information was provided in September 2017 about financial accounts in existence from 1 January 2016.
Over 100 countries have agreed to exchange information by 30 September 2018 about accounts in existence from 1 January 2017. This will see information being provided about accounts held in major offshore financial centres such as Switzerland, Singapore and the UAE.
The US has not signed up to CRS. This is because the US Foreign Account Tax Compliance Act (FATCA) already exists as a mechanism for identifying assets held offshore by US citizens and US tax resident individuals. For our guide to FATCA read here.
Under CRS an entity which is an FI needs to carry out due diligence on its 'Account Holders', which on a basic level are the persons who have debt or equity interests in that FI. A wide variety of entities can constitute FIs (and therefore be subject to the obligations), including not only banks but also companies and even trusts.
In order to obtain the information required for CRS reporting, FIs must usually obtain the information when the customer opens their account. Individuals will need to self-certify their residence status. Other entities may have to go through a more complicated self-certification process to establish their status for CRS purposes.
FIs then report the collected information to the tax authority in their home jurisdiction. If any of those reported 'Account Holders' are tax resident in another jurisdiction, which has signed up to the CRS, then their information will be forwarded to that jurisdiction nine months after the end of the calendar year on which the report is made.
Therefore, the CRS creates several stages of compliance requirements. First, companies need to determine what type of entity they constitute under the CRS – the classification stage. Then, subject to that classification, each entity must conduct due diligence– the due diligence stage and if necessary entities must then report and/or self-certify – the reporting/self-certification stage.
There is an obligation on FIs to advise account holders that their data will be shared with HMRC and may be forwarded to other jurisdictions.
Individuals who are either tax resident in a CRS jurisdiction, or hold assets in jurisdictions outside their own tax residency will need to consider the implications of tax authorities questioning their tax planning arrangements, irrespective of the legitimacy of such arrangements.
CRS and FATCA
CRS was modelled on, and closely follows the US tax reporting regime known as FATCA. Following the introduction of FATCA, the UK entered into a similar tax information reporting regime with its Crown Dependencies and Overseas Territories (CDOTs) (known as 'UK FATCA'). UK FATCA has now been effectively replaced by CRS.
Given that the US has not committed to exchanging information under CRS, FATCA agreements between the US and other jurisdictions (known as inter-governmental agreements (IGAs)) will remain in place. US FATCA and CRS currenlty run parallel to each other; with FATCA remaining in place for US citizens (including green card holders) and US tax residents and CRS applying for many other jurisdictions.
Although the rationale for CRS and FATCA is broadly similar (increased tax transparency and the prevention of offshore tax evasion), there are a number of important differences between the two regimes.
When the US introduced FATCA, akin to the practice for implementing international tax treaties, it entered into bilateral agreements with each country that agreed to implement FATCA. This resulted in the protracted process of the US having to negotiate numerous bilateral agreements with individual countries. In contrast, since CRS is a single reporting procedure through which a pre-agreed set of information is exchanged by all participating countries, separate bilateral agreements do need to be negotiated between participating countries. New countries can sign up to CRS by signing a declaration, whereby they agree to implement the CRS into national law and to exchange specified information with all other CRS signatory countries.
Penalties for FIs
Enforcement of CRS is implemented by way of a penalty system. Different jurisdictions may operate different penalty systems for non-compliance with CRS.
In the UK, there are a series of penalties that may apply to non-compliant FIs. There is an automatic penalty of £300 for failing to comply with CRS, as well as an additional £60 daily rate penalty if the failure to comply continues after a warning is received from HMRC. There is also an additional flat rate penalty of £3,000 if HMRC determines that there are errors on CRS return itself.
Implications for UK taxpayers
UK taxpayers who do not declare or pay sufficient tax in relation to offshore income are subject to enhanced penalties, which depend upon the tax transparency of the jurisdiction involved. In the most serious of cases an asset-based penalty could also apply. This is chargeable at the lower of 10% of the value of the asset that gave rise to the income or gains evaded and ten times the potential lost revenue.
There is also a penalty of 300% of the tax for moving assets to try to avoid CRS.
Criminal prosecution is an increasing risk for those who deliberately fail to pay tax on offshore income and gains. A new offence for offshore tax evasion has been introduced in relation to tax liabilities for the 2017-18 tax year onwards relating to non-CRS countries. It should make prosecutions for offshore tax evasion easier as prosecutors will just need to prove that the liability was not declared and there will no longer be any need to prove that the individual's actions were dishonest.
UK taxpayers who have underpaid income tax, capital gains tax or inheritance tax involving offshore matters must correct past non-compliance before 30 September 2018 or face penalties which could be as much as two or three times the unpaid tax. This 'requirement to correct' covers non compliance which occurred before 6 April 2017. For more details see our guide on the Requirement to Correct.
From 1 January 2017 a person or company can penalised if they 'enable' offshore UK tax evasion or non-compliance by others.
In addition from 30 September 2017 it is a criminal offence in the UK if a business fails to prevent its employees or any person associated with it from facilitating tax evasion by third parties.