The Common Reporting Standard (CRS) works by requiring financial institutions to identify their customers' tax residency and then report information about financial accounts held by foreign tax residents to their local tax authorities. These authorities then automatically exchange this information with the tax authorities in the tax resident's country.
Here's a breakdown of the key steps involved in how CRS works:
1. Legislation and Agreements:
- Participating jurisdictions enact laws and agreements to implement the CRS. This includes defining the scope of financial institutions and reportable accounts, as well as establishing data exchange protocols. These jurisdictions have committed to exchanging financial account information automatically with other participating jurisdictions.
2. Identification of Tax Residency:
- Financial institutions (banks, investment firms, etc.) must establish the tax residency of their customers. This is usually done when a new account is opened and periodically verified.
- They collect self-certification forms (like the W-8BEN form for U.S. tax residency, although other forms exist for CRS purposes) from customers, which declare their country (or countries) of tax residence. They also review existing information and documentation (e.g., address, place of incorporation) to identify potential tax residencies.
- Institutions must apply due diligence procedures to confirm the reasonableness of the self-certification.
3. Reporting Requirements:
- Financial institutions report information about "reportable accounts" to their local tax authorities.
- "Reportable accounts" are generally those held by individuals or entities that are tax residents of a CRS participating jurisdiction other than the jurisdiction where the financial institution is located.
- The information reported typically includes:
- Account holder's name, address, and tax identification number(s)
- Account number
- Name and identifying number of the reporting financial institution
- Account balance or value
- Gross interest, dividends, and other income earned on the account
4. Automatic Exchange of Information:
- The local tax authority in the country where the financial institution is located then transmits the reported information to the tax authority in the country where the account holder is a tax resident. This exchange is automatic and usually occurs annually.
5. Use of Information by Tax Authorities:
- Tax authorities use the exchanged information to ensure that taxpayers are correctly reporting their income and paying the appropriate taxes in their country of tax residence. It helps combat tax evasion and improve tax compliance.
Example:
Suppose John, a resident of Germany, has a bank account in Singapore. The Singaporean bank, after identifying John's German tax residency through self-certification, will report information about his account to the Inland Revenue Authority of Singapore (IRAS). IRAS will then automatically exchange that information with the German tax authorities (Bundeszentralamt für Steuern). The German tax authorities can then use this information to verify that John is correctly reporting his income from the Singaporean bank account and paying the appropriate German taxes.
Key Differences from FATCA (Foreign Account Tax Compliance Act):
While both CRS and FATCA aim to combat tax evasion, they differ in their scope:
| Feature | FATCA | CRS |
|---|---|---|
| Origin | United States | OECD (Organisation for Economic Co-operation and Development) |
| Reporting to | IRS (Internal Revenue Service of the US) | Local Tax Authority |
| Reportable Persons | U.S. Persons (citizens and residents) | Tax Residents of Participating Jurisdictions |
| Scope | Focuses on U.S. taxpayers overseas | Global standard, broader scope |
In summary, CRS facilitates the automatic exchange of financial account information between participating countries, enabling tax authorities to track down and prevent tax evasion by individuals and entities holding assets offshore. This promotes greater transparency and fairness in the global tax system.
