• Marco Zawar MBA/LLM (Tax)

CRS document curing requirements to verify "Change in Circumstances" correctly implemented?

Abstract

  • Financial institutions (“FI’s”) have to establish and to maintain control procedures and communication channels to identify on a daily basis changes in circumstances (“#CiC”) affecting their account holders tax residency status under the OECD Common Reporting Standard (“#CRS”) or the US Taxpayer Status under US Foreign Account Tax Compliance Act (“#FATCA”);

  • The #control procedures and #communication channels include domestic and offshore account holder;

  • Both regimes postulate a 90-day curing period to obtain documentation and to verify the account holders tax residency or US taxpayer status;

  • CRS unlike FATCA regulates, that the 90-day curing period shall not go beyond the reporting period (31 December);

  • FI's not implemented the requirements adequately are at risk to submit incorrect CRS tax returns to the Inland Revenue Department

Starting point

To comply with CRS and the FATCA Model-2 IGA requirements #Hongkong based financial institutions ("FI's") have the obligation to establish and to maintain control procedures and communication channels to identify trigger events (aka Changes in Circumstances (“CiC”)) affecting or otherwise conflicting with their account holders (domestic and offshore) current tax residency (e.g. account holder provides a new address) and reporting status under CRS and/or the US taxpayer status under FATCA.

Both regimes have in common that they provide a curing period of 90 calendar days following the day of the identification of any indicium to obtain adequate documentary evidence from the account holder to verify the tax residency status under CRS or US taxpayer status under FATCA.

For CRS purposes documentary evidence for individual account holder comprise a certificate of residence issued by an authorized government body (including a government, a government agency and a municipality) of the jurisdiction of which the payee claims to be a resident for tax purposes and a valid identification issued by an authorized government body (including a government, a government agency and a municipality) of a jurisdiction that includes the individual’s name and is typically used for identification purposes;" (Schedule 17D Cap. 112 Inland Revenue Ordinance)

Financial institutions that are unable to obtain documentary evidence shall in accordance to the CRS regulations after 90 days classify the account holder as reportable to any additional jurisdiction identified through the CiC.

CRS unlike FATCA regulates that the 90-days curing period shall not go beyond the end of the reporting year.

However, in case of a change in circumstances, a Reporting Financial Institution may choose to treat a person as having the same status that it had prior to the change in circumstances until the later of the last day of the relevant calendar year or other appropriate reporting period or 90 calendar days following the date that the indicium was identified due to the change in circumstances.” (OECD Commentaries on Section III)

A participating FFI may rely on documentation that meets the requirements of §1.1471-3(c) until the earlier of the expiration date of such documentation or the date there is a change in circumstances that affects the account holder or payee’s claim of chapter 4 status. If the participating FFI is unable to obtain the required documentation within 90 days of a change in circumstances, the participating FFI must apply the presumption rules of section 3.04 of this agreement with respect to the account or payee until valid documentation is obtained upon which the FFI is permitted to rely.” (Updated FFI Agreement Rev. Proc. 2017-16)

Risks through inadequate curing procedures

FI’s have not implement procedures to cease the document curing period as requested by the CRS regulations and to reclassify the account holders based on the CiC are at risk to submit incorrect CRS tax returns to the Internal Revenue Department.

Such FI’s may be treated and penalised as CRS non-compliant (Section 80 Cap. 112 Inland Revenue Ordinance).


©2019 by Marco Zawar