Guernsey: Coping With CRS

Last Updated: 15 January 2016
Article by Laila Arstall

Most Popular Article in Guernsey, January 2016

The tax authorities in the Crown Dependencies sent the first set of US FATCA reports, compiled by financial institutions in their respective jurisdictions, to the US Internal Revenue Service on 30 September 2015. Now the Crown Dependencies' financial institutions are preparing to report under the Common Reporting Standard (CRS) due to be introduced for on 1 January 2016.

The tax authorities in the Crown Dependencies sent the first set of US FATCA reports, compiled by financial institutions in their respective jurisdictions, to the US Internal Revenue Service on 30 September 2015. Now the Crown Dependencies' financial institutions are preparing to report under the Common Reporting Standard (CRS) due to be introduced for on 1 January 2016. As an "early adopter" of CRS Guernsey-based Carey Olsen senior associate, Laila Arstall, considers the likely impact of CRS on Guernsey's financial institutions.

The Common Reporting Standard (CRS) is a regime for Automatic Exchange of Information (AEOI) which builds on the intergovernmental agreement to implement US FATCA. It is designed to be broad in scope and takes in three dimensions:

  • The financial information to be reported relates to Reportable Accounts and includes all types of investment income but also account balances and the proceeds of sale of financial assets;
  • The financial institutions that are required to report under the CRS include banks, custodians, brokers, certain collective investment vehicles, trust and corporate services providers;
  • Reportable Accounts include accounts maintained for individuals and entities and there is a requirement to look through passive entities to report on the individuals who are seen as ultimately behind these structures

This summer financial institutions in Guernsey filed their first set of reports with their local tax office (ITO) to comply with US FATCA. The reporting period covered 1 July 2014 - 31 December 2014. That data was then transmitted by the ITO to the US Internal Revenue Service. This is just the start of the long journey of annual AEOI because, in 2016, financial institutions will need to file reports in respect of accounts maintained for UK tax residents under UK FATCA (for 2014 and 2015) as well as under US FATCA (for 2015) and start collecting data in respect of account holders that are resident in jurisdictions that have committed to CRS (for 2016).

At its meeting in Barbados at the end of October 2015, the Overseas Economic Cooperation and Development's (OECD) Global Forum announced that a total of 96 jurisdictions have committed to CRS and Guernsey is one of the early adopters.

Compliance with CRS engages a wide range of expertise

Meeting the challenges of the CRS impacts on many aspects of financial services provision. The burden of collating and reviewing the data required to identify Reportable Accounts primarily falls on the compliance departments of Guernsey-based financial institutions that process and store client due diligence for anti-money laundering (AML)/know your client (KYC) purposes. The more jurisdictions with which Guernsey enters into exchange agreements, the more clients and structures to be reviewed and, potentially, the more reports that have to be filed. The onus of collecting financial data to be included in reports falls on those preparing accounts for the relevant structure. However, in many cases, identifying the extent of interests held in a Reportable Account will require input from those actively involved in the management and administration of the structure to be reviewed. CRS, like US FATCA, requires interests held by settlors, protectors, shareholders and lenders, and those who exercise ultimate effective control over a structure, to be reviewed. This has thrown up substantive issues that require further investigation into the legal nature and roles played by interested parties.

Although there are no notification requirements included as part of domestic law to implement US and UK FATCA in Guernsey, legislation to implement CRS includes the requirement to notify affected individuals that information relating to their accounts will be reported to the ITO. The onus of ensuring timely and appropriately drafted communications with affected account holders will fall on relationship managers and client-facing employees of financial institutions as they deal with an increasing number of enquiries from account holders and their advisers.

All this has placed additional demands on budgets and staffing resources leading to increased costs and pressure on the bottom line. Those financial institutions that have already geared up for US and UK FATCA are well placed to meet these challenges as they leverage up on their experience. Certainly, a financial institution that is part of a multi-jurisdictional structure is able to draw on support from members of its wider group. For independent financial institutions, regular and on-going training seminars provided by advisers in the field, and representative bodies that are keen to maintain Guernsey's reputation as a premier centre for financial services, have contributed to the up-skilling of the island as it faces new challenges ahead. Where necessary, Guernsey-based financial institutions have been reaching out to experts in this fast-evolving area to assist with substantive issues of interpretation, staff training and the preparation of client communications. At the same time service providers already active in the compliance field have been extending their offering to include data collection and preliminary screening to help clients meet their obligations under third-party service agreements.

Impact on Guernsey's Tax Administration

The ITO has actively engaged the finance industry as it develops domestic law and guidance to implement the various AEOI regimes. The most recent consultation on CRS closed on 23 October 2015 and was accompanied by draft legislation to implement CRS with effect from 1 December 2015 so that systems can be put in place from the start of 2016. The cost, in terms of time and man power to process industry's input, draft guidance and liaise with the OECD and other competent tax authorities while participating in the ever-expanding programme of peer reviews conducted by the Global Forum, has undoubtedly had an impact on the cost of tax administration in Guernsey. This is in addition to the costs associated with developing Guernsey's Information Gateway Online Reporting system (IGOR) through which digital reports will be filed. Accordingly, in its 2016 Budget Report, the States of Guernsey have authorised a further £235,000 in additional costs to cover the recruitment staff to implement the different AEOI regimes and support costs associated with domestic ICT systems used generally by the ITO. This is on top of funds previously allocated to cover systems to cope with the introduction of FATCA in 2014.

In the longer term, with the influx of more data from around the world, tax authorities will soon be in a position to learn more about the financial affairs of their residents whose affairs involve assets and structures based in a foreign jurisdiction. Those tax authorities that have an extensive network of Tax Investigation Exchange Agreements (TIEAs) will be able to pursue specific enquiries where appropriate. Consequently Guernsey, along with other CRS participating jurisdictions, may find themselves dealing with an increasing number of TIEA requests which would require local tax offices to use their domestic powers to obtain information or documentation in response to appropriately framed requests. To this end HMRC issued a notice in mid-September this year saying that the information it will be receiving under CRS will be used "immediately and effectively alongside all the other data that HMRC holds to build a more complete picture of UK tax pairs with offshore assets".

By the same token, as Guernsey has entered into reciprocal agreements for the exchange of information in respect of assets held overseas by Guernsey tax residents, ITO will be receiving financial information about its own tax payers; this could, potentially, lead to the recovery of unpaid taxes which would certainly go some way to redressing Guernsey's 2015 budget deficit of £20 million.

The CRS, like other AEOI regimes, presents challenges at various levels of the financial services industry. Many Guernsey financial institutions are well placed to meet these challenges having had the benefit of preparing for FATCA and filing the first returns earlier this year. Both the ITO and local industry have spent time and resources putting in place appropriate procedures and personnel with a view to maximising operational efficiencies while standardised practices still evolve. It is clear that Guernsey is set to meet the challenges that CRS presents with the benefit of the island's collective knowledge, experience and wisdom.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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