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November 15, 2017

Check the CRS: How Investment Funds Can Prepare for Common Reporting Standard (article)

CBIZ assists with international tax compliance.Across the world, countries are trying to combat potential tax evasion practices by increasing reporting requirements and tax transparency for cross-border business activities. One of the primary ways the U.S. addresses the tax evasion issue is through the Foreign Account Tax Compliance Act (FATCA). The Organisation for Economic Co-Operation and Development (OECD) has also taken an interest in worldwide tax transparency and used the FATCA as a model for its global tax transparency program, the Common Reporting Standard (CRS). CRS creates an information exchange among participating countries. To date, more than 100 countries have adopted CRS, including the United Kingdom, Italy, Spain, Luxembourg, Portugal, France, and the Cayman Islands.

Although CRS incorporates many of FATCA’s principles, it has some key differences. Compliance with FATCA is not equivalent to compliance with CRS. Many U.S. companies with foreign investments or business interests overseas may find that they face new requirements under the CRS as soon as the end of 2017.

Investment funds in particular should take note of CRS. Many may find they have new reporting requirements under CRS and should perform a review of CRS to evaluate the impact on their reporting processes in preparation for the new standards.

How the Common Reporting Standard Differs from FATCA

FATCA reporting is required for a U.S. citizen or resident individual, partnership or corporation organized in the U.S. but excludes:

  1. A corporation of stock that is publicly traded
  2. Any state of the U.S., any U.S. territory, any political subdivision, or any wholly owned agency or instrumentality
  3. Any organization exempt from taxation under Section 501(a) of the IRC or any individual retirement plan as defined in Section 581 of the IRC
  4. Any Real Estate Investment Trust (REIT) as defined in Section 856 of the IRC
  5. Any Regulated Investment Company as defined in Section 851 of the IRC

FATCA also applies to a Passive Non-Financial Entity (Passive NFE) with substantial U.S. ownership. The information provided on Form W-8BENForm W-8BEN-EForm W-8IMYForm W-8EXP, and Form W-9 is used to determine if the account holder is reportable for FATCA.

By comparison, CRS has different types of account holder classifications when compared with FATCA. As a result, U.S. tax forms do not have the necessary information to determine the CRS classification. Consequently, the CRS jurisdictions have developed Self-Certification forms to be completed by an account holder indicating its classification under CRS, the jurisdiction(s) it is a tax resident of as well as its taxpayer identification number in that jurisdiction(s). The information provided on this Self-Certification form is used to determine if the account holder is reportable for the CRS.

CRS reporting is required for an individual, Active Non-Financial Entity (Active NFE), and Passive Non-Financial Entity (Passive NFE) with Controlling Person(s) but excludes:

  1. Financial institutions including custodial institutions, depository institutions, investment entities and specified insurance companies (except for an investment entity that is not a resident in a CRS jurisdiction and that is managed by another Financial Institution must be treated as a Passive NFE which requires further analysis for Controlling Persons)
  2. A corporation the stock that is regularly traded on one or more established security markets
  3. A government entity
  4. International organization
  5. Central Bank
  6. Retirement plans established to provide retirement, disability, or death benefits to beneficiaries that are current or former employees
  7. Pension funds of a government entity, international organization or Central Bank

The Passive NFE designation under CRS applies to investment funds whose primary responsibilities are investing or managing funds. Investment funds with assets held abroad or LLPs that are managed abroad may be considered Passive NFEs and subject to CRS requirements.

Financial institutions and Passive NFEs with controlling persons within a CRS jurisdiction are required to report their account holders with tax residencies in CRS participating jurisdictions. The reporting must include whether the account holder has multiple tax residencies and the account holder’s CRS legal entity classification (such as financial institution or passive NFE).

What CRS Means for Investment Funds

CRS implementation began in 2016. Investment funds in early-adopter jurisdictions began onboarding new accounts and performing reviews of pre-existing accounts in compliance with CRS standards starting Jan. 1, 2016, and reporting high value individual accounts for 2016 in 2017. They will report information for all accounts for 2017 in 2018. Investment funds in non-early adopter jurisdictions began their process one year later on Jan. 1, 2017. By 2018, all investment funds in participating CRS jurisdictions will be reporting information to participating CRS jurisdictions.

Investment funds should check the OECD’s website for a full list of CRS jurisdictions. They should then perform due diligence to determine whether they will be subject to CRS self-reporting standards. Investment funds will need to modify their new investor onboarding procedures to include questions about whether the investor is a taxpayer in a CRS jurisdiction.

For More Information

For more information about CRS and its impact on investment funds, please contact us.

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Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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