CRS obligations of a Reporting Financial Institution (FI), when establishing the tax residency of its customers in relation to the New Account procedures
We have often been asked what the obligations under the CRS Standard (CRS) of a Reporting Financial Institution (FI) to establish the tax residency of its customers in relation to the New Account procedures are. In the outline below attention is given to OECD’s FAQ (June 2016) Section II - VII, Due Diligence Requirements, i.e. we are focussing on questions concerning “natural persons”.
As indicated in the CRS, the FI may rely on a self-certification (SC) made by the customer for new accounts unless it knows or has reason to know that the SC is incorrect or unreliable, (“reasonableness test”). This test is based on the information obtained in connection with the opening of the account, including any documentation obtained pursuant to AML/KYC procedures. The CRS provides examples of the application of the reasonableness tests (CRS Section IV, A, and the associated Commentary). This means that an FI is not required to provide customers with tax advice or to perform a legal analysis to determine the reasonableness of SC (CRS page 133, Note 23).
The CRS also states that Participating Jurisdictions are expected to help taxpayers to determine their tax residency, and to provide them with information with respect to their residence(s) for tax purposes (CRS Paragraph 6 of the Commentary to Section IV and Paragraph 9 of the Commentary on Section VI). The OECD facilitates this process through a centralised dissemination of the information (on the Automatic Exchange Portal). FIs could also direct customers to this information (OECD’s FAQ Number 5).
Validation of TINs
An FI may not rely on SC or Documentary Evidence if the FI knows or has reasons to know that the SC or Documentary Evidence is incorrect or unreliable (CRS Section VII Paragraph A, and the associated Commentary). This includes, among other information provided on the SC, the TIN in relation to a Reportable Jurisdiction. Jurisdictions and territories are obliged to provide information on the OECD AEiO Portal concerning their TINs for individuals and entities. This information is used by the FIs in particular to check the plausibility of a SC (*AIA Chapter 5.8). The CRS does not require an FI to confirm the format and other specifications of a TIN with the information provided on the AEoI Portal. However, FIs may still wish to do so in order to enhance the quality of information collected as well as minimizing the administration burden associated with any follow up concerning reporting of incorrect TIN (OECD’s FAQ Number 6).
Procedure to be followed where SC is “incorrect”
The FI must confirm the reasonableness of an SC, based on information obtained in connection with the opening of the account (reasonableness test). Essentially, the FI does not need to know that the SC is incorrect or unreliable. If the SC fails the reasonableness test, a new valid SC must be obtained in the course of the account opening procedures (see Handbook page 67, Note 170).
An SC is “otherwise positively affirmed” if the persons making the SC provide the FI with an unambiguous acknowledgement confirming that they agree with the representations made through the SC. In all cases, the positive affirmation must be registered by the FI so it can credibly demonstrate that the SC was positively affirmed (e.g. voice recording, digital footprint, etc.). The approach taken by the FI when obtaining the SC must be in line with the procedures followed by the FI for the opening of an account. In addition to the SC, the FI is required to keep a record of this process for audit purposes (OECD’s FAQ Number 7).
“Validity” of Documentary Evidence (CRS Commentary on Section VIII, Note 155 to 159)
Documentary Evidence that contains an expiration date may be treated as valid until the indicated expiration date, or within the next 5th calendar year following the year in which the Documentary Evidence is provided to the FI. However, there is Documentary Evidence, which is considered valid indefinitely (see Note 155). The Documentary Evidence must be obtained on an account-by-account basis (see Note 159 and the associated Commentary set forth in Paragraph A of Section VII).
Period of validity of the SC (AIA Chapter 188.8.131.52)
An SC is valid until there is a change of circumstance (see AIA Chapter 6.6.1), which results in the FI knowing, or having reasons to believe that the SC is not correct or implausible (see Art. 11 Abs. 1 AIAG). Note: Any change in circumstances, which affects (and may terminate) the validity of an existing SC, must concern the tax residency (AIA Chapter 6.6.1 and the associated Commentary).
AIA Swiss Guidelines
The Swiss Guidelines of the Federal Act on the automatic exchange of information in tax matters (AIA) contain detailed provisions for Swiss reporting FIs. If an FI wants to obtain information on an SC from the client, the FI may rely on the data provided by the client in an SC, unless it is known to the FI or if it has reasons to believe that the Documentary Evidence or an SC is incorrect or untrustworthy (AIA Chapter 6.1). These obligations are divided into “Pre-existing Individual Accounts” (AIA Chapter 6.2) and “New Individual Accounts” (AIA Chapter 6.3) and “Pre-existing Entity Accounts” (AIA Chapter 6.4) and “New Entity Accounts” (AIA Chapter 6.5). While the implementation of the due diligence obligations for “pre-existing” accounts is based mainly on existing information, FIs are obliged to obtain further information concerning the account holder when opening “new” accounts (AIA Chapter 6.3.1). A “new” account is a financial account held by an FI, which is opened on the effective date of the automatic exchange of information with a Partner Jurisdiction or later, e.g. 01.01.2017 (see Art. 2 Abs 1 lit j AIAG). The plausibility of an SC must be confirmed, based on information obtained when opening the account, including the documents recorded as determined by the AML procedures (AIA Chapter 6.3.1). Note: If there is an equity interest for the beneficiary of a trust (AIA Chapter 3.5) or a trust-like structure (i.e. a beneficiary may obtain a directly or indirectly discretionary distribution), the SC from previous years can be relied on, provided there have not been any changes of circumstances. This rule also applicable when, there have not been any equity interest due to lack of distributions (AIA Chapter 6.3.1).