From Walkers

What Financial Institutions need to know

9 December 2015

Introduction to the CRS

On 29 October 2014, the Cayman Islands was among 50 other jurisdictions which signed a Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the “MCAA”) demonstrating its commitment to implement the “CRS” or Common Reporting Standard, an international regime developed by the OECD to facilitate and standardise the exchange of information on residents’ assets and income, primarily for taxation purposes.1

The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015 (the “Regulations”) were enacted in the Cayman Islands on 16 October 2015 and must be complied with by Cayman Islands Reporting Financial Institutions (“Reporting FIs”) from
1 January 2016.

Whilst completely separate regimes, the CRS imposes similar reporting and other obligations as are required under the US Foreign Account Tax Compliance Act or “FATCA” regime. However, a key difference is that reporting under the CRS relates to tax residency, not citizenship. The scope of a Reporting FI’s reporting obligations to the Department of International Tax Cooperation of the Cayman Islands (the “DITC”) will significantly increase in 2017, as will the level of account information disseminated by the DITC to global tax authorities.

Compliance with the CRS

Many of the classification, notification, due diligence and reporting exercises required by the CRS closely mirror equivalent obligations imposed under FATCA.

CRS Classification
Entities classified as Reporting FIs (which, as with FATCA, encompasses Custodial Institutions, Depositary Institutions, Investment Entities and Specified Insurance Companies) are required to meet the obligations under the Regulations. The CRS is intended to apply more broadly than FATCA, with the scope of exemptions available under the CRS being much narrower. Financial Institutions that are not currently reporting under FATCA, may be classed as Reporting FIs for the purposes of the CRS and will therefore need to implement a suitable compliance programme.

There is no sponsoring entity regime under the CRS and as a result, entities which are classified as Sponsored Investment Entities for the purposes of FATCA will likely be classified as Reporting FIs for the CRS.

Exemptions which are available, as detailed further in the Regulations, are as follows:

(a) a governmental entity, international organisation or central bank, other than in certain limited circumstances connected to their commercial financial activities;
(b) certain retirement funds, pension funds of an entity listed in (a) and qualified credit card issuers;

(c) entities that present a low risk of being used to evade tax, which have substantially similar characteristics to entities listed in (a) and (b) above and are specifically identified under Cayman Islands law as ‘Non-Reporting Financial Institutions’. Currently this includes limited life debt investment entities in existence on or before 17 January 2013 (however, this exemption will expire on 31 December 2018);
(d) an exempt collective investment vehicle; or

(e) a trust where the trustee is a Reporting FI and will report in respect of the trust.

Notification to the Department of International Tax Cooperation
The DITC’s Automatic Exchange of Information (AEOI) Portal is being updated to facilitate reporting by Reporting FIs for CRS purposes. It is expected that Reporting FIs who have already completed the notification process for FATCA will need to “refresh” their notifications. Reporting FIs that have been newly captured under the CRS will need to undertake the full notification process in order to register with the DITC in preparation for the commencement of reporting.
Reporting FIs should access the AEOI Portal, once it is fully operational, at https://caymanaeoiportal.gov.ky to complete the notification process. As part of this process, Reporting FIs must appoint a “Point of Contact” (the “PoC”) to act as the principal liaison with the DITC. In many cases,
the PoC will likely be the same individual who acts as the PoC or “Responsible Officer” for FATCA purposes, but must be a natural person and will
typically be a compliance officer, director or equivalent within the relevant organisation or group.

There is no requirement for Reporting FIs to obtain a GIIN for the purposes of CRS compliance.

Due diligence and Client on-boarding
With effect from 1 January 2016, Reporting FIs will need to have updated on-boarding procedures in place to identify and perform prescribed due diligence on ‘Reportable Accounts’. Reportable Accounts consist of custodial/bank accounts (for Custodial Institutions or Depositary Institutions), equity or debt interests (for Investment Entities), insurance policies for Specified Insurance Companies, in each case held by or controlled by any person or entity which is resident for tax purposes in any jurisdiction contained in the list of participating jurisdictions2 (each country on the list, is a “Participating Jurisdiction”).

In addition Reporting FIs will also need to commence classification of pre-existing account holders with a phased in timetable to allow remediation of accounts opened prior to 1 January 2016.

To assist with collecting due diligence, the DITC has released updated self-certification forms (one for individuals and one for entities) which are designed to be used by Reporting FIs to collect the necessary due diligence information from account holders for both FATCA and CRS reporting purposes. Copies of the self-certification forms are available at http://www.tia.gov.ky/pdf/CRS_Legislation.pdf.

Reporting
Reporting FIs will need to report annually to the DITC for the purposes of the CRS. The first reports to the DITC are due by 31 May 2017 in respect of new accounts opened during the 2016 calendar year. There is no obligation to file nil reports, but Reporting FIs may do so on a voluntary basis.

Essentially the same information which must be included in a FATCA report should be included in a report for the CRS in respect of individuals, corporations, partnerships, trusts, foundations or similar legal arrangements which are resident in any Participating Jurisdiction that is included on a list of reportable jurisdictions that will be issued by the DITC in due course.

Reports should be filed with the DITC via the AEOI Portal and will be exchanged between the DITC and partnering tax authorities in Participating
Jurisdictions.

Key Dates and Deadlines

31 December 2015 Accounts opened on or prior to this date will be deemed to be preexisting accounts.

1 January 2016 Accounts opened on or after this date will be classed as new accounts. Due diligence information should be collated as part of the account opening process and in any event, no later than 90 days after the account has been opened, to determine whether it is a Reportable Account.

31 December 2016 Reporting FIs to complete due diligence on high value (i.e. balance of $1,000,000+) preexisting accounts held by individuals to determine if they are Reportable Accounts.

30 April 2017 Reporting FIs that have reporting obligations for the 2016 calendar year to complete notification to the DITC.

31 May 2017 Reporting FIs to make first report to the DITC.

31 December 2017 Reporting FIs to complete due diligence on lower value preexisting accounts held by individuals to determine if they are
Reportable Accounts (note: there is no de minimis balance exclusion for individual accounts).

Reporting FIs to complete due diligence on all preexisting accounts held by entities with a balance in excess of $250,000 as at 31 December 2015 (or any preexisting accounts held by entities who subsequently had a balance in excess of
$250,000 as at 31 December 2016) to determine if they are Reportable Accounts.

Action to be taken
Documentation updates for investment funds
Investment funds may need to update offering documents to include additional disclosures specifically around the CRS. Subscription documents should also be updated to include revised self-certification forms and to ensure that they contain an express waiver of any statutory confidentiality obligations which may apply in an investor’s jurisdiction of domicile which would prevent the disclosure of investor information by the fund to the DITC or onward reporting by the DITC to a Participating Jurisdiction.

Where an investment fund utilises the services of a third party administrator, the administrator should be involved in any subscription document updates to ensure that information collated for the CRS as part of the subscription package is completed in a manner which makes it easy for the administrator to transpose data onto the administrator’s systems.

Administration agreements for investment funds may need to be updated to extend the services provided to cover CRS requirements.

CRS Materials Available

Copies of the individual and entity self-certification forms can be found at:
http://www.tia.gov.ky/pdf/CRS_Legislation.pdf

Financial Institutions should familiarise themselves with the CRS Commentaries and Implementation Handbook which have been released by the
OECD and which have been adopted by the DITC as the principal guidance for CRS purposes.

A copy of the Commentaries can be found at:
http://www.oecd-ilibrary.org/docserver/download/2314131ec007.pdf

A copy of the Implementation Handbook can be accessed at:
http://www.oecd.org/ctp/exchange-of-tax-information/implementation-handbook-standard-for-automatic-exchange-of-financial-information-in- tax-matters.pdf.

A copy of the MCAA and the Regulations can be found at:
http://www.tia.gov.ky/pdf/CRS_Legislation.pdf

Future Developments

New regulations covering the offences and penalties which will be imposed for breach of the CRS are expected to be enacted during Q1 2016. Whilst details of the proposed offences and penalties have not yet been published, these are expected to be broadly similar to those under FATCA i.e. financial penalties for operators and entities that do not comply with their obligations under the CRS and/or potential imprisonment for operators and senior managers.

CRS Guidance Notes are also expected to be published in Q1 2016 although these will be limited to practical aspects relating to implementation of the CRS that are specific to the Cayman Islands.

The Cayman Islands Ministry of Financial Services has confirmed that ‘UK FATCA’, the reporting regime introduced pursuant to The Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations published in July 2014, will be phased out by 2017 as the UK transitions to the CRS for reporting purposes. As both UK FATCA and the CRS will be operational during 2016, reporting financial institutions will need to file returns under the CRS, with supplementary information on preexisting low-value individual accounts and preexisting entity accounts to satisfy UK FATCA. Note that the US is not a Participating Jurisdiction and US FATCA will continue to operate as normal.

Contacts
For further information please speak with your usual Walkers contact or one of the following:

Dawn Howe
Partner – Cayman Islands
T: +1 345 914 6321
E: [email protected]

Derek Stenson
Associate – Cayman Islands
T: +1 345 914 4221
E: [email protected]

Daniel Wood
Partner – Dubai
T: +971 4 363 7912
E: [email protected]

Hughie Wong
Partner – London
T: +44 (0)20 7220 4982
E: [email protected]

Michael Padarin
Partner – Cayman Islands
T: +1 345 914 4284
E: [email protected]

Steven Manning
Director, Fiduciary Services – Cayman Islands
T: +1 345 814 7612
E: [email protected]

Denise Wong Partner – Hong Kong T: +852 2596 3303
E: [email protected]

Thomas Granger Partner – Singapore T: +65 6603 1694
E: [email protected]

96 countries have since agreed to implement the CRS. A list of all other participating jurisdictions can be found at:
http://www.tia.gov.ky/pdf/CRS_Legislation.pdf.

The original document can be downloaded at: http://www.walkersglobal.com/Lists/News/Attachments/771/Walkers%20-%20Cayman%20Islands%20and%20the%20CRS%20-%20Dec2015.pdf