Shipleys LLP

Chartered Accountants and Professional Business Advisers

Automatic Exchange of Information (AEOI) inc Common Reporting Standards (CRS) and FATCA

We are regularly being asked questions regarding AEOI, in particular Common Reporting Standards and FATCA. Most clients will have now received a letter from their bank requesting their classification under each of the regimes. We therefore have put together the below summary of some of the issues to be aware of and the steps to ensure you are compliant.

Be aware however, that the legislation is very long and detailed and therefore this cannot cover every eventuality. It is likely that all entities will be affected in some way or another so please feel free to get in touch if you have any queries.

What is the Automatic Exchange of Information?

Automatic exchange of information (AEOI) is the standard created by the OECD as an international initiative directed at increasing tax transparency and covers over 90 countries. The standard involves automatically exchanging the details of financial accounts between the countries’ tax authorities.

There are currently three different regimes that affect UK financial institutions. These are:

  • United States Foreign Account Tax Compliance Act (FATCA) - The agreement between the UK and USA requires UK financial institutions to report to HMRC on US customers that hold accounts with them.
  • Crown Dependencies and Overseas Territories - The agreement between the UK and its Crown Dependencies and UK Overseas Territories to report on those who are tax residents in one territory and hold accounts in the other.
  • The Common Reporting Standard (CRS) - This is the standard for all automatic exchange of information and via an EU directive is incorporated throughout the EU.

For UK entities (including banks, companies, trusts and charities) the reporting deadline is 31 May each year and the information reported on is the account calendar year preceding the report deadline, i.e. for 31 May 2017 the calendar year ending 31 December 2016.

FATCA has been law since 2015 and as such reports on American account holders should have been made by 31 May 2015 and 31 May 2016 already, however the IRS have said they will be lenient if there are any late reports made.

There are 50 early adopters for CRS and reports for account holders from any of these 50 countries must be reported on by 31 May 2017. There are an additional 50 countries that will be reported on from 31 May 2018.

The countries can be found here: https://www.gov.uk/hmrc-internal-manuals/international-exchange-of-information/ieim402340. However, for simplicity it is most European countries, the major economies of South America, India, Korea and South Africa. Also all Crown Dependencies have signed up to CRS and there is still FATCA reporting for American account holders.

Steps to take

So, now we understand that it is all encompassing and could result in yet more compliance what needs to be done? The following steps should help explain, the steps are specifically for CRS however, the process is very similar to FATCA with only minor differences (as CRS was based on FATCA).

For further detail please use the glossary of terms at the end to help guide you.

  1. Identify your entities classification

There are three main classifications for UK entities under CRS. There can potentially be more (especially under FATCA) but most entities will be classified as one of the following:

  1. Financial Institution
  2. Passive Non-Financial Entity (NFE)
  3. Active Non-Financial Entity (NFE)

Financial Institution

All UK Financial institutions are obliged to collect and maintain information about the residence, and in the case of the USA the citizenship as well, of individuals and entities for whom they maintain financial accounts. Financial Institutions are required to keep the information for a period of six years and report it to HMRC if it is reportable under the agreements detailed above.

There are four categories of Financial Institution under each of the agreements detailed above:

  • Custodial Institution - A Custodial Institution is an entity that holds, as a substantial portion of its business, financial assets for the account of others (at least 20% of the entity’s gross income).
  • Depository Institution - A Depository Institution is an entity that accepts deposits in the ordinary course of banking or another similar business.
  • Specified Insurance Company - A Specified Insurance Company is an entity that is an insurance company, including a holding company in an insurance group that writes products classified as Cash Value Insurance Contracts or Annuity Contracts or makes payments with respect to such contracts.
  • Investment Entity - An entity will be an Investment Entity if it meets either one of the following two sets of criteria:
  1. Activity Based Investment Entity – this is where the entity primarily, as a business, invests on behalf of a customer. This includes most investment related activities and an entity is classed as primarily investing on behalf of clients if its gross income from investing is at least 50% of its total income during the shorter of three years up to and including the end of the reportable period or the period the entity has been in existence.
  2. Managed Investment Entity – this is where the entity is managed by a Financial Institution on a discretionary basis. Managed by a Financial Institution also covers investment companies where the investment portfolio is managed by a stockbroker who has discretion to invest. Again, the test to check if an entity is caught is the same 50% check as above.

It is worth noting there are many different connotations of Investment Entities and there are slightly different rules for different entities, in particular Trusts, Charities and Partnerships, however the above rules should be used as a starting point in each case.

Non-Financial Entities (NFE)

A Non-Financial Entity or NFE (Non-Financial Foreign Entity or NFFE for FATCA) is any entity that is not a Financial Institution.

NFE are then divided into two categories, Active NFE and Passive NFE. The Passive NFE category is effectively a default category, any NFE that does not meet the criteria to be an Active NFE will be a Passive NFE.

A NFE can be an Active NFE if it meets any of the following criteria:

  • It is active by reason of income and assets. This requires less than 50% of its gross income for the preceding calendar year or other appropriate reporting period to be passive income and less than 50% of its assets held in the same period to be assets that produce or are held for the production of passive income;
  • Its stock is regularly traded on an established securities market or it is a Related Entity  of such an entity;
  • It is a Government Entity, International Organisation, Central Bank or a wholly owned subsidiary of such an entity;
  • It is holding company for NFEs that are members of a non-financial group. It will not qualify as an Active NFE where these holdings are part of a business as an investment fund or vehicle whose purpose is to acquire or fund companies and then hold interests as capital assets for investment purposes.
  • It is a start-up NFE which is not yet operating a business and has no prior operating history, but is investing capital into assets with the intention of operating a business other than that of a Financial Institution. This category only applies during the first 24 months after the date that the NFE was first formed.
  • It is a NFE that has not been a Financial Institution in the last 5 years and which is in the process of liquidating its assets or is reorganising with a view to continuing or recommencing business operations other than as a Financial Institution.
  • It is a treasury centre of a non-financial group engaging in financing and hedging transactions with or for Related Entities.
  • It is a not for profit organisation set up for religious, charitable, scientific, artistic, cultural, athletic or educational purposes; or it is established and operated as a professional organisation, business league, chamber of commerce, labour organisation, agricultural or horticultural organisation, civic league or an organisation operated for the promotion of social welfare. In all cases the organisation must be exempt from income tax and its income and assets cannot be applied other than for the express purposes for which the organisation is established.
  1. Due Diligence Requirements

The next step is to identify all “account holders”. All Financial Institutions need to identify account holders whereas for Passive NFEs only have to identify controlling persons. Active NFEs have no particular due diligence requirement.

The definition of an account holder differs depending on the entity, for some it should be relatively obvious, eg. They hold an account with the entity. However, for investment entities it is also important to look at who has an equity or debt interest in the entity, this is unfortunately not very clearly defined in the legislation so will have to be taken on a case by case basis. However an example is a partner in a partnership that has a capital sharing partnership agreement or a settlor of a Trust.

  1. Reporting

Once all accounts and account holders have been identified, it is then important to review the accounts to check if any are a Reportable Account. A Reportable Account is any account held by either a US Citizen or resident individual, a partnership or corporation organised in or under the laws of the United States and Trusts that fall within the jurisdiction of the US courts (FATCA) or an individual or entity that is resident in one of the specified jurisdictions (CRS).

In both cases there are some exclusions, one that affects both is that any accounts held by companies that are listed on recognised securities markets are excluded and don’t require reporting on. Also, for FATCA (but not necessarily for CRS) certain brokers and dealers in securities, commodities or derivative financial instruments are exempt.

Other excluded accounts include retirement and pension accounts, tax favoured accounts i.e. ISAs, Estate accounts and Escrow Accounts.

Once reportable accounts have been identified then the report must be made by 31 May following the calendar year end. In most cases it is the account balance at 31 December that is reported but there are some exceptions to this, in particular beneficiaries of Discretionary Trusts only have the amount they receive reported.

The legislation also states that the account holder should be informed that a report will be made.

Each entity is treated as a single financial institution and you are responsible for submitting your yearly return. One member of the group is able to register and report for other financial institutions within their group. Collective investment schemes, such as unit trusts, may report at umbrella or sub-fund level.

You can only report about accounts held in the UK to HMRC. UK branches of overseas financial institutions report on the accounts they hold.

Shipleys have the capability to file reports on behalf of clients and have set up an excel spreadsheet that is a copy of the online reporting process so you can fill this out and send it to us.

As initially explained this is not an exhaustive document and every case can be different so please feel free to get in touch with our Director Jay Thurston (thurstonj@shipleys.com) with any queries you may have.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.

Need more help? Please contact us at advice@shipleys.com or +44 (0)20 7312 0000