Common Reporting Standard Juristconsult Webcast

Juristconsult Chambers is pleased to launch its first Tax webcast on the OECD’s Common Reporting Standard (“CRS”).

Initially part of the “Early Adopters Group”, Mauritius has since postponed the effective implementation date of CRS to 1 January 2017. This decision has been widely approved by the financial services industry: it will give time to stakeholders to understand and comment on the draft MRA guidance and ensure that they have the proper systems and controls in place to implement CRS correctly. The new date also puts Mauritius at par with other competing financial services hubs such as Singapore and Switzerland.

The aim of this webcast is to give a broad overview of the framework of CRS and to address some issues particularly relevant in the Mauritius context, such as its implications for management companies and resident and non-resident Mauritian nationals.

The webcast also includes exclusive interviews with the Chairman of the International Fiscal Association – Mauritius branch, a Manager from the Policy section of the Financial Services Commission and the CEO of a reputable management company.

Click here to access the webcast.

INTRODUCTION

Hello and thank you for tuning in. I’m Johanne Hague, head of the Tax practice at Juristconsult Chambers. We are pleased to launch our first Tax webcast today. The topic we have chosen for this webcast is the infamous CRS. The Common Reporting Standard for Automatic Exchange of Information. The grandchild of FATCA, if you will. Over the past couple of months, we have received a great number of queries on the application and implementation of CRS. I think it’s fair to say that the initial announcement by the MRA that the effective implementation date would be 1 January 2016 sent a wave of panic across the industry. Many financial institutions argued that the industry was simply not ready to comply with CRS for a number of reasons.

First, while it is very similar to FATCA, it is broader both in its technical and in its geographical scope. FATCA was based on citizenship and targeted US citizens. CRS is based on residency and affects many countries. Second, the CRS rules put forward by the OECD contains some limited flexibility for the participating countries. The draft MRA guidance was only issued at the end of November, leaving people with very little time to comment on the guidance, digest the information and implement the procedures in time for 1 January 2016. Finally, many financial institutions had not had the need to put sophisticated systems in place for FATCA because they just did not have US clients; in other words, the legislation was not relevant to them. When it comes to CRS, it affects everyone and one has no choice but to comply, but with very little time to do it.

The decision by the Ministry of Finance to postpone the effective implementation date to 1 January 2018 was therefore a much welcome one. This will give time for stakeholders to be consulted and comment on the guidance and time for all parties affected to understand the rules and implement them correctly. This postponement will also put Mauritius at par with other competing financial services hubs such as Singapore and Switzerland, and in my view, will prevent panic redemptions and exits from Mauritius. Having said this, we must not rest on our laurels. The postponement has merely bought us some time and it is our responsibility to use that time wisely.

At the end of the day, CRS is here to stay and it is therefore crucial to have a good working knowledge of what it entails.
So today’s webcast is broadly divided into three sections. First, my colleague Arvin Halkhoree will outline the core framework of the CRS rules. How it operates and who it affects. Next, I will be discussing some of the interesting issues raised by CRS, with particular focus on the Mauritius context. And finally, we have exclusive interviews with a number of players in the market. So sit back and enjoy.

********

THE CORE FRAMEWORK OF CRS

As Johanne stated, I will look at the core framework of CRS.

A central part in the operation of the CRS is for a reporting FI to collect and report relevant information.

So the first question we would ask ourselves is: Who is a reporting FI?

This is a 4-steps test.

To answer the question: who is a reporting FI, we would need to answer 4 sub questions

Firstly, is it an Entity? If the answer is No, no reporting is required. The reporting obligations under CRS applies only to entities, irrespective of the form they take, for instance, it applies to corporations, partnerships, trusts and foundations.

The second question out of the 4 questions is whether the Entity is in a Participating Jurisdiction? The general rule is that entities resident in a jurisdiction and branches located in that jurisdiction are covered by the CRS. Similarly, entities in non-participating jurisdictions but with branches in participating jurisdictions are covered by CRS. To determine the residence of an entity, if it is tax resident in a participating country, the answer is straight forward. If the entity is not tax resident, then we would need to look at its place of incorporation, or where the control and management of that entity is or where is the financial supervision of that entity carried out.

As regards trusts, a separate test to determine residency has been provided, namely the trust is resident where one or more trustees are resident.

The 3rd question is whether the entity is a FI. As Johanne stated, FI is very widely defined. It includes

  1. depository institutions, which are saving banks, commercial banks, credit unions
  2. custodial institutions, which include banks, brokers and central depository for securities
  3. investment entities, which include investing, reinvesting, or trading in financial instruments, portfolio management or entities which administer or manage financial assets.
  4. Specified insurance companies like life insurance companies

The next question is whether the Entity is a non-reporting FI?

It should be noted that there are a few FI which are considered as non-reporting likeGovt entities

  1. Central banks
  2. Qualified credit card issuers
  3. And generally low-risk FI

After these 4 questions, we now know who is a reporting FI. So, reporting FI are required to review the Financial Accounts they maintain to identify whether any of them need to be reported to the MRA. So here, the reporting FI would need to identify Financial Accounts.

What is a financial account? It is an account maintained by a FI. The CRS goes on to provide those specific categories of accounts like depository accounts, custodian accounts, equity and debt interest in certain investment entities, cash value insurance contracts and annuity contracts.

There are certain accounts which are considered as excluded accounts in view of the low risk of them being used to evade taxes, like retirement and pensions accounts, escrow accounts, and term life insurance contracts.

Each jurisdiction may have its specific rules regarding the classification and maintaining of accounts having regard to their legal, admin and operative frameworks.

So now that the Reporting FI has identified the Financial Accounts, they are required to review these accounts to identify whether they are reportable Accounts. And if they are found to be reportable, information in relation to these accounts would need to be reported to the MRA.

What is a Reportable Account?

The test is a 2 tier test.

We should first ask ourselves if the account holder is a reportable person/ if yes, the account is reported.

A reportable person is an individual or an entity resident in a reportable jurisdiction for tax purposes. In other words, Is the person resident in a jurisdiction which is also implementing CRS.

Under the draft MRA Guidelines, all jurisdictions are deemed to be reportable to avoid FIs having to repeat the due diligence each time a new country is added to the CRS List.

If no, we then ask if the account holder is a passive Non-Financial Entity which has one or more controlling persons as a Reportable Person. If yes, the account should be reported.
You may be asking yourselves what a passive Non-Financial Entity is. Well, it is an entity which receives passive income or primarily hold assets that produce passive income (like dividends and rent).

Now to ascertain if an entity has one or more controlling persons, we must look through the entity and identify the controlling persons. Controlling persons include beneficial owners, persons exercising control over the entity or with a controlling ownership interest in the entity.

For a trust, a controlling person would be the settlor, the trustees, the protector, the beneficiaries and any other natural persons exercising ultimate effective control over the trust.

So once we have a reportable institution with a reportable account, the account should be reported. There are detailed rules of due diligence which would apply to identify which information would need to be reported. This would depend whether we are dealing with a pre-existing account or a new account.

********

MANAGEMENT COMPANIES

The first issue I will discuss concerns management companies. And the question is: what are the reporting obligations of a management company under CRS? Now for the purposes of this question, I am not dealing with management companies in their capacity as trustee of trusts. Different rules apply for these. Is a management company an FI for CRS purposes? The answer is not straight forward, and ultimately it does depend on the scope of services that the management company provides. They might not all be the same. Ideally the MRA guidance would address this question, but to date, it does not. But let’s look at a typical management company who would incorporate and administer GBCs, funds, trusts and foundations. There are basically four types of FIs. The first category is a depository institution. This category is aimed essentially at banks and other deposit taking institutions. A management company would not typically fall in this category. The second type is a custodial institution. This category concerns custodians, in other words entities which holds assets on behalf of other persons. A management company – unless it also holds another licence, would not typically fall under this head. The third type basically concerns insurers. Again, an MC would not be concerned by this.

Now let’s look at the fourth category: an investment entity. This is very widely defined. I think it’s worth spending a few minutes looking at the definition in detail. The term “Investment Entity” includes two types of entities:

  1. entities that primarily conduct as a business investment activities or operations on behalf of other persons, and
  2. entities that are managed by those Entities or other FIs.

It is the first paragraph that would be relevant to MCs. So what are those “investment activities”? This is widely defined. So what do we have?

  1. Trading;
  2. Individual and collective portfolio management; and
  3. Otherwise investing, administering, or managing Financial Assets or money on behalf of other persons.

I repeat the third paragraph again. “Otherwise investing, administering or managing financial assets or money on behalf of other persons”. This is not just talking about managing. The word “administer” is also used. This is a really wide term. I believe the better view is that a management company would fall under this third section, and therefore be an FI. The next million dollar question then is, what reporting obligations would MCs have under CRS? The next step is for the FI (i.e the management company) to review its financial accounts and determine whether it maintains any reportable accounts. So there must be financial accounts in the first place. This is a crucial step and will determine whether or not a MC will actually have to report anything in practice. There are essentially four types of financial accounts. Whether or not a MC maintains any of these accounts will depend on how their business is structured and run. If a MC determines that it does not maintain any financial accounts, then it has no reporting obligations. The MRA guidance helpfully clarifies that FIs who have no reporting obligations do not have to file nil returns. This will lighten the administrative burden for a lot of FIs out there.

MAURITIANS AND CRS

As I alluded at the start of the webcast, one key difference between FATCA and CRS is that CRS is based on residency, not citizenship. Its main aim is to combat tax evasion and catch people who shirk from their tax responsibilities in their country of residence and hide their money offshore. But let’s look at how it affects Mauritians. If someone is a Mauritian and resident in Mauritius, how does CRS affect him or her? If that person has bank accounts or assets in another jurisdiction (for example France), the French tax authorities will report on him to the MRA. The MRA will then verify whether the Mauritian resident has accounted for all his income and paid his taxes accordingly.

Now, if someone is Mauritian and is not resident in Mauritius, how does CRS affect him? If he or she has assets or bank accounts in Mauritius, the Mauritian bank will need to report to the MRA who will in turn report to the tax authorities of the jurisdiction where that Mauritian is resident. To continue with the example of France, Mauritians who are resident in France but have accounts and assets in Mauritius will need to show that they have paid their taxes on their assets in Mauritius. This is obviously the general rule. There are exceptions and exemptions that apply, depending on the particular fact pattern.

The concept of passive NFFEs

The concept of passive NFFEs is a very important one. The basic idea underpinning CRS is for FIs to report on their non-resident account holders. But what if the account holder is an entity? That’s where the concept of Passive NFFE comes into play. It effectively requires the FI to look through to the ultimate natural controlling person of the entity, typically the person who holds more than 20% of the entity. So for instance a bank would be required to enquire on the tax residence of the controlling person of a GBC1 which is an investment holding company. NFFEs are not just corporate entities. They can also be trusts and foundations. The application of DD rules are even broader for such entities. For example, in the case of a trust, the controlling person would be the settlor, the trustee, any beneficiary. It will therefore now be much more difficult, if not impossible, for people to hide behind complex trust structures. Again, there are certain exceptions and exemptions, depending on the facts and circumstances.

Consequences of non-compliance

Another key difference between CRS and FATCA is that FATCA imposed a FATCA withholding tax of 30% on non-compliant entities. There are no withholding taxes applicable for CRS. However, CRS is law in Mauritius by virtue of an amendment recently made to the Income Tax Act. Failure by the FI to comply with this will therefore constitute an offence under the Income Tax Act. The sanctions are a fine not exceeding 5,000 rupees and to imprisonment for a term not exceeding 6 months. This still leaves the question open as to the sanction for the account holder who is required to, but fails to provide the information requested or provides incomplete information. The law does not provide any sanction for the account holder itself but if a FI consistently reports what is termed as an “undocumented account” then the MRA may conduct a full audit of the FI’s due diligence procedures to assess whether the FI has implemented CRS correctly.

CONCLUSION

This is it for today’s webcast. If you would like to know more about CRS, please don’t hesitate to get in touch with us. I should mention that we also do bespoke in-house training on CRS and FATCA.

It’s clear that CRS is quite a complex piece of legislation. It is as yet unchartered territory: everything is not set in stone and things will evolve as boundaries are pushed and challenges are raised. Time will tell what the end product will look like.

We hope you have enjoyed today’s webcast. Please stay tuned for our webcasts on BEPS later in the year.

*********
Ms Leena Brett-Doman, who is manager of Policy at the Mauritius Financial Services Commission; Mr Rajesh Ramloll, who is the Chairman of the Mauritius branch of the IFA and Mrs Nishi Kichenin, who is the CEO of management company JurisTax also contributed to this webcast.

For more information on CRS (including information on our bespoke in-house training packages and upcoming seminars), please contact:
Johanne Hague,
Head of Tax
(Tel: 403 0020/Email: [email protected])