The Common Reporting Standard (CRS) is a form of Automatic Exchange of Information (AEOI), which was approved by the OECD in 2014 and came into effect on 1 January 2016,
The CRS requires jurisdictions to obtain information from financial institutions operating in that jurisdiction and automatically exchange that information with other jurisdictions on an annual basis.
The CRS sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions
CRS is aimed at ensuring that taxpayers properly report their financial assets and income, thereby reducing opportunities for tax evasion. As of October 2022, there are over 4900 bilateral exchange relationships activated with respect to more than 110 jurisdictions committed to the CRS
The CRS draws extensively on the Foreign Account Tax Compliance Act (FATCA), with some modifications to remove U.S. specificities and take into account the multilateral context of the CRS.
CRS requires financial institutions to identify accounts that are held directly or indirectly by persons who are resident for tax purposes in countries or territories other than the jurisdiction in which their financial account(s) is located.
These financial institutions must then report certain financial account information to their local tax authorities, who automatically exchange that information with tax authorities in other jurisdictions on an annual basis
Implementation of CRS involves multiple steps, including translating the reporting and due diligence requirements into domestic law, selecting a legal basis for exchange of information, putting administrative and IT infrastructure into place, and ensuring the data is safeguarded and confidentiality is ensured.
Some key objectives of CRS include:
– Transparency – increasing transparency in the global financial system through the automatic exchange of information, helping tax authorities identify discrepancies;
– Prevention of tax evasion – CRS makes it more difficult for individuals to evade tax by hiding income and assets offshore;
– Globalisation of tax administration cooperation – the international nature of CRS increases cooperation among tax authorities at a global level, enabling them to work together to combat tax evasion;
– Neutralise mismatches in domestic tax systems – jurisdictions can work together to identify and rectify loopholes or mismatches in their tax systems, thereby reducing the effectiveness of offshore tax evasion strategies;
– Taxpayer compliance – the knowledge that financial information will be exchanged between countries may act as a deterrent for taxpayers to engage in tax evading activities, as the risk of detection (and penalties) is increased;
– Global reach – widespread adoption of CRS increases its effectiveness as a tool to combat international tax evasion, contributing to the equitable distribution of the tax burden;
– Anti-abuse provisions. A vast majority of jurisdictions participating in CRS have put in place anti-abuse rules via secondary legislation and/or published guidance, with further limits the ability for taxpayers to circumvent the reporting requirements (OECD, Automatic Exchange Portal, AEOI Standard’s Implementation by Jurisdiction, 2023).
– Ongoing review and adaptation. In 2022 the OECD published amendments to CRS, demonstrating the ongoing monitoring of the standard and the ability for it to be adapted as required. Firstly, new digital financial products (such as digital currencies) are now included in the scope of the CRS. In addition, light of the development of the crypto asset reporting framework (CARF), changes are also made to the definitions of Financial Asset and Investment Entity. There are also new provisions to ensure efficient interaction between CRS and CARF to limit instances of duplicative reporting where each standard may ask for similar information (OECD, Crypto- Asset Reporting Framework and Amendments to the Common Reporting Standard, 2022)
– Reliance on FATCA. By building on the automated and standardised nature of FATCA, jurisdictions were able to implement CRS quickly and easily, and taxpayers were also able to adapt to the requirements easier, which benefits the tax transparency created by CRS (OECD, Standard for Automatic Exchange of Financial Information in Tax Matters – Implementation Handbook – Second Edition, 2018).
– Automatic Exchange of Information. Tax authorities receive information about their residents’ offshore financial accounts and activities automatically, without having to make specific requests, which can reduce delays and assist tax administration with furthering the tax transparency agenda domestically.
– Enhanced cross-referencing capabilities. The information exchanged under CRS allows tax authorities to cross-check the data reported by taxpayers with the information received from other jurisdictions, which may enhance the detection of discrepancies and facilitate more effective enforcement of tax laws.
Disadvantage-weakness
– Lack of participation by all jurisdictions. CRS can only be considered a success if as many countries as possible adopt the standard, and while there has been significant participation, it could be argued that it still falls short.
– Lack of participation by the US. The absence of the US as an adopter of CRS means in practice the US receives substantial information under FATCA but does not provide equivalent information to other jurisdictions. The United States appears to have used its strong position to unilaterally shape the obligations of other states without reciprocity (Matras, 2023).
– Increased responsibility placed on financial institutions. The onus to verify customers and aggregate and transmit relevant data to national tax administrations falls on the financial institutions. This has required changes to IT infrastructure, increased workload for staff, increased due diligence, and in some cases the employment of specialists, resulting in both a time and financial burden.
– Use of data by tax administrations. The practical use of data received by individual countries is uncertain (Matras, 2023). Although the automatic exchange of CRS information means millions of pieces of information are being transmitted each year, there is a requirement for the tax administrations to connect such data with the relevant taxpayer and to analyse that data to identify fraudulent taxpayers. However, in practice, tax administrations are under-resourced, and it is not yet clear whether the data that is being exchanged is actually being used effectively, or at all, as we are yet to see significant analysis of the collective impact of CRS data on tax revenues for specific jurisdictions. Given the requirement for taxpayer confidentiality we may never be able to adequately bifurcate the impact of CRS data versus other sources of data available to tax administrations.
– Limiting bank secrecy. Bank secrecy is a fundamental element of banking which allows taxpayers to have confidence that their financial data is being treated confidentially but this is somewhat challenged by the data required to be reported under CRS, which historically would’ve been considered confidential and not appropriate for automatic exchange. While the vast majority of individuals with offshore bank accounts do not engage in tax evasion, CRS places a burden of disclosure on all foreign tax residents, which may lead to increased levels of distrust between state and taxpayer. (Matras, 2023).
– Overly narrow scope. Different jurisdictions have different views as to the successes and failures of CRS, and some such criticism of CRS relates to the scope, which may be viewed by some jurisdictions as overly narrow and thereby leaving open the possibility of tax evasion as a result of some of its more ambiguous provisions. One such criticism relates to the manner of reporting account balances, which does not allow tracking of international financial flows carried out over a specific time period and allows fraudulent taxpayers to manipulate funds to reduce the account balance before the reporting date (Matras, 2023).
– Data quality. The CRS does not enforce any specific controls on financial institutions in order to ensure the quality of the data provided to national tax administrations. Financial institutions are free to collate the data however they see fit, and are not specifically required to audit its contents, which may impact the usefulness of the data for identifying fraudulent taxpayers.
Potential further areas of work
CRS is not a perfect standard and further work could be undertaken to improve its usefulness. Some areas of work could include:
– Reviewing the effectiveness of CRS – while work is undertaken by the OECD and the Global Forum in assessing the financial impact of CRS, further work could be done to better understand the effectiveness of CRS in practice and the benefits achieved by jurisdictions.
– Capacity building for developing economies – work could be undertaken with jurisdictions where the barriers to entry for implementing CRS are high. In addition, for those developing economies where CRS is in force, capacity building activities should be undertaken to train tax officials in how to properly analyse the data they are receiving on exchange.
– Ensuring participation of the US – in order to achieve the objectives of, convergence and reciprocity with FATCA needs to be achieved.
Conclusion
CRS has had wide (although potentially not wide enough) adoption and has a scope of exchange that is significantly broader than anything that has come before it, such as FATCA (US specific) or indeed just sharing such information on request (versus automatically). In 2020, the OECD announced in a press release that in 2019, participating countries automatically exchanged information on 84 million financial accounts worldwide, covering total assets of EUR 10 trillion and EUR 107 billion in additional tax revenue has been identified through voluntary disclosure programmes, offshore tax investigations and related measures since 2009 (OECD, International Community Reaches Important Milestone in Fight Against Tax Evasion, 2020). As CRS standardises and therefore simplifies the exchange of financial information, this has resulted in more efficient adoption, such that newer jurisdictions committing to CRS can be supported better by those who have already implemented CRS. Furthermore, CRS could be described as having a deterring effect on tax evasion, in that bank secrecy no longer exists to the same extent as it did previously, since information is now exchanged automatically (and not just on request), and the scope of CRS is much broader than FATCA. As such, it could be said that CRS has been useful in promoting global tax transparency and combating offshore tax evasion.
Notwithstanding the positive role played by CRS, it cannot be denied that CRS has a few failings, most importantly the vast amount of data which is now sent to tax administrations automatically, and where requirements significant investment in training and resourcing in order to ensure tax administrations are utilising the information they are receiving through exchange to combat fraudulent activity. Further work (e.g. those listed in the “potential areas for further work” outlined above) will no doubt be required to ensure CRS reaches its full potential. Notwithstanding the scope for improvement, CRS arguably provides a strong starting point from which to continue its work in promoting global tax transparency and combating offshore tax evasion.