This blog is co-authored by Jay Chandrakant Joshi (firstname.lastname@example.org)
Introduction to CRS
By now, most non-US financial institutions have put in place a framework for FATCA implementation, and, as per the implementation schedule, are well on their way to meeting reporting requirements for the first reporting period. At the same time, a new regulation called Common Reporting Standard (CRS) looms large on the horizon.
While a group of early adopter countries have already endorsed their commitment to CRS (a joint statement can be found here), for most developed and developing nations, their participation in CRS is more a question of 'when' rather than 'if'. Countries like Australia, though not present in the group of early adopters, have already declared their intention to participate in CRS and, by 2018, most countries are expected to participate in CRS.
CRS vs. FATCA
Common Reporting Standard, also popularly known as Global Account Tax Compliance Act (GATCA), is aimed at preventing global tax evasion. It aims to counter the beast of black money and tax evasion at a much larger scale than individual countries trying to fight their own battles. As a result, CRS promises to have a much wider appeal and bigger incentive for participation than FATCA. While FATCA focuses solely on identifying US tax residence, CRS takes a more global perspective and, as a result, the requirements become more complex.
Broadly outlined, the requirements for CRS are:
- Identify all customers who are residents of any foreign country for tax purposes (as opposed to identifying only US customers for FATCA)
- Obtain relevant reporting information from customers (for instance, obtaining the date of birth for all individual customers and tax identification number for each country of tax residence)
- Report data to respective tax authorities (as opposed to just the American IRS)
Early analysis of FATCA-reportable client volumes in many financial institutions raises questions about the extent of technology investments and the choice between an automated or a manual approach. Based on minimal FATCA reporting volumes, many financial institutions have opted for a manual approach, treating FATCA as a standalone obligation without integrating it with existing processes. Many financial institutions have opted for a full-fledged automated FATCA solution that integrates completely with current on-boarding and customer contact management processes. The debate about the merits of implementing a strategic solution as opposed to a tactical solution for FATCA will likely linger on for a while.
However, for CRS, this volume is expected to shoot up drastically. A comprehensive change will be required across the board, from on-boarding processes to backend processes.
In order to build a sustainable framework for CRS, the first step should be impact assessment. A high-level analysis of citizenships or addresses of customers will provide an early indication of projected volumes of CRS customers. It will also provide an indication of the maximum number of reporting countries a customer is likely to have. This information is vital in designing customer on-boarding forms as well as back-end IT infrastructure. Although there can be any number of reporting countries for a customer, it may prove to be practically unfeasible to populate the number of reporting countries dynamically. It may thus be a good idea to fix the maximum number of reportable countries based on early data assessment in consultation with the legal department.
Once the impact assessment is done, the focus should then be on leveraging the existing FATCA and AML framework. For instance, the existing FATCA framework for the US can be extended to include other countries and the AML framework can be extended to identify 'Beneficial Owners' and 'Date of Birth'. Wherever possible, the current FATCA rules should be extended for CRS and, all the while, the focus should be on building a flexible, scalable solution so that the financial institution is well placed to tackle any such future regulation. Financial institutions can chose to train existing operations teams to handle additional responsibilities for CRS or build a separate team to handle CRS and FATCA. Such decisions can be taken after conducting impact assessment studies.
However, with increasing global focus on data reporting, the CRS implementation opportunity should definitely be used to strengthen existing data capture/reporting capabilities and upgrade legacy systems. This will place the financial institution in pole position to cater to all existing reporting obligations (like AML and CRS) and enable it to report data to multiple regulatory authorities while ensuring readiness in facing future obligations.