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Common Reporting Standard (CRS): Why Does It Matter?

The introduction of the CRS in 2014 brought widespread information sharing between tax authorities of a growing number of countries worldwide. It has had far-reaching and significant impacts on individual taxpayers and financial institutions alike. 

In this article, we provide information about what the CRS is, why it was introduced, and its effects. We also discuss what you, as an individual taxpayer, should do in order to ensure you remain compliant with the CRS and avoid penalties.  

Table of Contents:

What Is the Common Reporting Standard (CRS)?

The Common Reporting Standard (CRS) is the agreed global information standard for the Automatic Exchange of Information (AEOI) agreement, which was developed and approved by the Organisation for Economic Co-operation and Development (OECD) in 2014. 

The CRS requires all participating countries to obtain certain information from their financial institutions and automatically exchange that information with other participating countries annually. There are now over 100 countries that have signed up to the CRS. 

The CRS provides details about the type of financial account information that must be exchanged, the various financial institutions that need to report, the types of accounts and individuals who it applies to, and the prescribed due diligence processes that financial institutions must follow in order to remain compliant. 

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Background

The CRS was originally approved by the OECD on 15 July 2014, at which time 47 countries joined the agreement. It was loosely based on FATCA reporting requirements that had been implemented by the U.S. in 2010, but aimed at being more widespread and comprehensive, along with some other key differences which we won’t go into detail about. 

   

 
 
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Purpose

The CRS was introduced with the objective to prevent tax evasion on a global scale, through an Automatic Exchange of Information (AEOI) between all participating countries’ tax authorities, along with Common Reporting Standards to facilitate this sharing of information. 

There are now over 100 participating countries that have agreed to use the CRS for sharing financial information, making it one of the most far-reaching information sharing agreements in the world today. Through this widespread information sharing, the OECD and participating countries hope to greatly reduce the number of individuals using illegal offshore tax evasion schemes, or who wilfully do not declare foreign income and assets to their relevant tax authorities. 

Information Exchange

Under the CRS and the AEOI, participating jurisdictions must share the following information about each reportable foreign account:

  • Name, address, and date and place of birth of the reportable account holder. 
  • Tax Identification Number or National Insurance Number (or the equivalent depending on the jurisdiction).
  • Country of tax residence.
  • Account details (such as account number in the case of a bank account or the equivalent for other financial accounts).
  • The total value of the accounts (plus capital gains such as interest, dividends, etc.) included for reporting at the end of the calendar year. 

Who Does It Apply to?

The CRS and the AEOI applies to any individual who owns financial accounts (be it bank accounts, investment accounts, shares, etc.) in a jurisdiction that is other than their country of tax residence. Such individuals are known as “reportable persons” under the CRS. 

Tax residency is determined by various factors such as where you permanently live or spend most of your time, as well as the type of economic ties you have with a country. Simply put, your tax residency is the country that you report and pay taxes to every year. 

How Will You Know if It Applies to You?

The CRS stipulates that financial institutions situated in countries that are participating in the CRS and AEOI agreements must formally notify their account holders that their personal and financial information will be shared with the relevant authorities. As such, you will know if the CRS applies to you because you should receive a formal notification from the bank or financial institution that you have an account with that your information will be shared. 

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What Are the Implications?

The CRS has put in place rigorous and widespread information sharing standards between over 100 countries. This has significant practical implications. Firstly, it is important for individuals to understand that their personal and financial information can and will be shared with the tax authorities in their home country if they open a financial account in a foreign jurisdiction.

This is a legal requirement that institutions of participating countries must adhere to, and so it cannot be evaded without serious penalties. As such, individual taxpayers should be aware that it is extremely risky to try to evade reporting and paying tax on their foreign financial holdings, and they are likely to face severe penalties if they attempt to do so. These could include criminal prosecution depending on the laws of the jurisdiction in question. 

The CRS also has direct implications for the numerous financial institutions located in participating nations. These financial institutions have had to adapt to these new reporting requirements and ensure that they are fully compliant. The scale of information reporting required has resulted in significant associated costs; however, the penalties for non-compliance are far more severe. 

   

 
 
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How to Ensure You are Compliant

Record and Declare all Taxes

Understanding the scope of the CRS and AEOI should persuade taxpayers of the necessity to ensure that all of their taxes are correctly calculated and declared in their respective tax homes. You should assume that, with the implementation of the CRS, all information about your overseas financial accounts are received by the tax authorities in your home country, and therefore act accordingly.

Wilfully choosing to not declare foreign income or capital gains in the hope that it will go unnoticed is not advisable. It is strongly recommended to, firstly, declare all of your current overseas earnings, as well as to correct any undeclared income in your tax filings from recent years. The penalties are much higher if your tax authorities have to approach you to correct your previous filings than if you voluntarily do so yourself. 

Consult with a Tax Professional 

Tax laws and reporting requirements are confusing as it is for individual taxpayers. With the introduction and expansion of global tax reporting standards and information sharing such as the CRS and AEOI, it is more important than ever for taxpayers to ensure that their tax affairs are in order. It is therefore worthwhile consulting with a qualified tax professional who can help you navigate these complex tax reporting requirements. They can help you prepare your tax filings in such a way as to legally optimise your tax situation whilst maintaining complete compliance with your country’s tax laws and global requirements. 

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***Please Note: If you are a resident of a country that is a signatory of the Common Reporting Standard (CRS) (or a US citizen) your tax reduction possibilities are limited. Due FATCA, CRS, and CFC laws you may not be able to completely eliminate your taxes without moving your residence. While opening an offshore company can increase privacy and asset protection, your tax obligations remans tied to your ownership of overseas entities. Offshore company's are often not taxed in the country where they are incorporated, rather you as the owner are obligated to pay taxes in the country where you reside. Please make sure you know your tax obligations, as we are not tax advisors. Please seek a local tax professional for help regarding your situation. 

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