MinterEllisonRuddWatts' Andrew Ryan points out a whole range of financial institutions have new responsibilities under the OECD's AEOI tax initiative, but nothing to gain from it

By Andrew Ryan*

With the Common Reporting Standard (CRS) due to take effect in New Zealand on 1 July 2017, it is now impossible to ignore the impact this reporting regime will have on financial institutions. 

The CRS provides the technical detail to the OECD’s automatic exchange of information (AEOI) initiative; essentially, a global framework under which financial information will be collected and exchanged by governments for use in enforcing local tax rules. 

Passing the (tax collection) burden 

AEOI requires the identity and tax residency of account holders to be determined (or, in some cases, the identity and tax residency of the controlling persons of the account holder). If the account is found to be controlled by a non-New Zealand tax resident, then information about the account will need to be collected and provided to the account holder’s country of tax residence. 

Carrying out this process for all financial accounts maintained in a country is no easy feat – we would challenge whether it could even be achieved by a tax authority singlehandedly.

To overcome this, AEOI imports the same genius seen in the US’ FATCA regime and places the bulk of the responsibility for account identification and information collection (and the headache that comes with it) onto those best placed to deal with it – financial institutions. 

Incorporating the CRS into domestic law means that a financial institution is faced with an unsavoury choice: dutifully comply with their new role as an information collection agent, or be in breach of the law.

But this is a banking problem, right?

Wrong. The AEOI concept of financial institution extends far beyond banks and what most people would typically think of as a financial institution. 

For example, non-bank depositor takers, DIMS, unit trusts, private equity funds, nominee entities and trusts (including private trusts) may all be caught. 

Every entity will need to carefully review whether it is a financial institution under the CRS or not. A failure to do so may prove costly.  

So what should financial institutions be thinking about? 

The CRS is made up of three broad categories of rules covering due diligence, information collection and reporting. These rules will give rise to a number of practical considerations for financial institutions.  

1. Account opening processes

From 1 July 2017, New Zealand financial institutions need to begin classifying their accounts for the purposes of the CRS. The key question to be answered: is the account holder tax resident somewhere other than New Zealand (or, in some instances, are any of the controlling persons of the account holder tax resident somewhere other than New Zealand)? This will generally involve obtaining a self-certification from a customer when opening an account and confirming the “reasonableness” of this document. 

2. Due diligence for existing accounts

For accounts opened prior to 1 July 2017, financial institutions will need to determine the CRS classification of each account based on information already held. Depending on the number of existing accounts maintained, this may be a significant undertaking for some financial institutions. Where the account is held by an individual and has a balance or value of more than $1,000,000 as at 30 June 2017, this due diligence task must be completed before 30 June 2018. In respect of all other pre-existing accounts, financial institutions will have until 30 June 2019 to complete their due diligence.  

3. Ongoing monitoring of accounts

Completing due diligence is not the end of the story. Financial institutions have ongoing obligations to monitor the accounts they maintain for any “change in circumstance” (being an event or circumstance that indicates a change to the account’s previous classification or that provides “reason to know” that the account documentation is unreliable). 

4. Reporting to Inland Revenue

The CRS will also create a new annual reporting obligation for financial institutions. In New Zealand, the CRS reporting period will be aligned with the income tax year and FATCA reporting period (i.e. 1 April – 31 March). Financial institutions will have until 30 June of each year to collate and report their CRS information to Inland Revenue. 

For many financial institutions, tackling these practical hurdles will involve a significant investment of time and resources. Existing systems will need to be upgraded; technological changes may be required; employees will need to educated and implementation decisions will need to be made. 

This is all so despite the fact that financial institutions have nothing to gain from their new role.

*Andrew Ryan is a tax partner at law firm MinterEllisonRuddWatts.