In September 2013 the G20 Leaders fully endorsed the OECD (Organisation for Economic Co-operation and Development) proposal of the Common Reporting Standard for a truly global model for automatic exchange of information (AEOI) & invited the OECD to develop such a new standard for the automatic exchange of information.  In July 2014, the Common Reporting Standard was approved by the OECD Council.

The Common Reporting Standard calls on jurisdictions to obtain information from their financial institutions and to automatically exchange that information with other jurisdictions on an annual basis.

The Common Reporting Standard sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Over 100 jurisdictions have  signed up to the Common Reporting Standard (Participating Jurisdictions). Malta is one of the early adopters of the Common Reporting Standard and has pledged to exchange information by September 2017.  

What does the Common Reporting Standard establish?

In order to comply with the CRS, Financial Institutions (defined as a custodial institution, a depository institution, an investment entity, or a specified insurance company in the Common Reporting Standard and therefore including banks, custodians, brokers, certain collective investment vehicles and insurance companies) will need to report Financial Information on the Reportable Accounts of Reportable Persons which are tax resident in Participating Jurisdictions to the Maltese tax authorities. 

The exchange of information involves a systematic and periodic transmission (annual) of bulk taxpayer information by the source country of income to the country of residence of the taxpayer.  The resident tax administration can then verify whether the taxpayer has accurately reported his income.  The information concerns various categories of income as well as information on assets.

Reportable accounts include: accounts held by individuals and accounts held by entities (which includes trusts and foundations), and the Common Reporting Standard includes a requirement to look through passive entities to report on the individuals that ultimately control these entities.  Reportable accounts are financial accounts held by tax residents in the Common Reporting Standard reportable countries.  Tax residence is determined by the law of the country where a person or entity is resident.  Tax residence would be determined on the basis of:

• domicile
• residence
• place of management or
• other similar criterion

What needs to be reported under the Common Reporting Standard

Reportable information under the Common Reporting Standard is: 

• all types of investment income
  • including interest,
  • dividends,
  • income from certain insurance contracts,
  • annuities and
  • other similar types of income
• but also account balances and
• sales proceeds from financial assets.

The accounts to be reported are for both natural persons as well as legal entities.  The beneficial owner of the account must be identified in accordance with the FATF recommendations.  For passive legal entities (entities that do not engage in commercial activities, but manage wealth, e.g., trusts and foundations), the persons controlling the entity must be identified.

Effective due diligence procedures

Reporting Entities and or Financial Institutions (FIs) as classified under the Common Reporting Standard need a due diligence and know your client process to identify Financial Account Holders. FIs need to identify:

• Identity
• Residence of financial account holders (including certain entities and their controlling persons)
• Account Details
• Reporting Entity
• Account Balance/value and income/sale or redemption proceeds
• TIN
• Date and place of Birth

Reportable Account 

A Reportable Account is an account held by one or more Reportable Persons or by a Passive Non-Financial Entity with one or more Controlling Persons that is a Reportable Person.  A Reportable person under the Common Reporting Standard is a person who has a financial account and who is tax resident in another Common Reporting Standard reportable country.  In the case of a trust as an example one must therefore determine whether any Controlling Person is a Reportable Person.  For an organization, residence can be determined by the place of incorporation or an address in a Reportable Jurisdiction.

Controlling Person

The controlling person is natural person who exercises control over an Entity.  If we take the example of a trust this would mean the following persons: 

• the settlor
• the trustees
• the protector (if any),
• the beneficiaries or class of beneficiaries
• and any other natural person exercising ultimate effective control over the trust.

Therefore for discretionary trusts even a class of beneficiaries would be deemed to be controlling persons.Trustees need to identify these reportable persons and must determine whether they are reportable.  

Action to be taken in response to the Common Reporting Standard

In light of the requirements under the Common Reporting Standard, Financial Institutions should closely look at the following in order to make sure that they are compliant:

• Due diligence and know your client procedures at client onboarding stage in order to determine the tax status and residence of both current and new account holders, and associated ongoing reporting obligations always making sure that updated information is being given by the client;
• Periodic reporting systems to capture, store and report all the required information;
• Review and categorisation of pre-existing accounts and updating of information in relation to accounts opened prior 2016.