HMRC has announced its proposals for the transition from the Crown Dependencies and Overseas Territories (CDOT or "UK FATCA") to the Common Reporting Standard (CRS), which comes into effect from January 2016. With the Isle of Man recently announcing its transition from UK FATCA to CRS, what are some of the effects of transition?

New Account Due Diligence & Pre-existing Account (Remediation)

A major component of CRS is that it is based on tax residence and, unlike FATCA, does not refer to citizenship. Financial Institutions (FIs) must now confirm the tax residence of their clients which is a far greater operational burden than that undertaken in US or UK FATCA. FIs will have the added burden of considering how their clients will react to additional information requests. This in turn, will have an adverse impact on client onboarding, processing of self-certifications and development of controls, as well as updating systems.

Further considerations:

  • Under CRS, new account opening procedures are effective from 1st January 2016;
  • Under UK FATCA, the remediation of pre-existing entities and lower value individual accounts must still be completed by 30th June 2016; and identified reportable accounts will continue to be reportable under CRS from 1st January 2016.

Reporting

Under CRS reporting volume will increase significantly. FIs that have gone through significant IT development for FATCA will now be under pressure to prepare for CRS, which will be an even more complex proposition. FIs will have to take into consideration that CRS does not have any Annex exemptions, no thresholds to apply. The most significant consideration will be monitoring jurisdictions that have not signed up to CRS.

Reporting requirements in such cases will be different. In particular Investment Entities in non-participating CRS jurisdictions will be classified as Passive Non-Financial Entities (Passive NFEs); similar to Passive Non-Financial Foreign Entities (Passive NFFE's) under FATCA. Under CRS, if they are professionally managed, this type of entity will be required to provide further information on its Controlling Persons.

Further considerations: 

  • Reporting under UK FATCA will begin in 2016;
  • Reporting under CRS begins the year after, in 2017.

In the specific case of the Isle of Man, UK reportable accounts for 2014 and 2015 are to be reported in 2016 in the US IRS XML format. UK reportable accounts for 2016 are to be reported in 2017 in the OECDs CRS XML format, along with any other CRS reportable jurisdiction accounts.

Final thoughts

Overall it appears that 2017 will be an overlap year. To avoid duplicate reporting, HMRC also confirms that UK legislation will need to be amended in view of the above considerations. It is further proposed, however, that reportable accounts under UK FATCA, which are not reportable under CRS, will remain reportable in 2017. The transition will be complete from 2018 onwards, when only CRS reporting will be required.

In support of the transition the OECD's Automatic Exchange portal is now open for public use. This hosts a jurisdiction-specific overview of the steps taken and choices made by jurisdictions in the context of implementing the Standard. The portal shows the current state of implementation of all committed G20/OECD member countries in a single table, where you will be able to access jurisdiction-specific information.

The future is CRS:

  • Are you prepared for the transition?
  • Do you have resources and training in place for CRS?
  • Are your IT systems ready to handle the increased volume of reportable information?
  • Have you considered your governance approach paying particular attention to the body of evidence required for tax authority audits?

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.