In recent years, governments and financial institutions have become much more aware of the large amounts of undisclosed wealth held through offshore accounts. The tax evasion is the main reason for developing of a new mechanism of disclosure the income, earned by individuals and organizations among different jurisdictions. Cyprus as an early adopter has signed the Multilateral Competent Authority Agreement (MCAA) for CRS which came into effect as of 1st January 2016.
It is important to note that CRS applies to all banks and financial institutions in Cyprus and it sets out a) the financial information to be exchanged among governments, b) the financial institutions required to report, c) the different types of accounts and taxpayers caught by it, and d) common due diligence procedures, that all Cyprus financial institutions should follow.
In addition, the CRS contains extensive details regarding the reporting and due diligence standards that underpin the automatic exchange of financial information. In this respect, the Cyprus system must impose such rules, which will require Cyprus financial institutions to report information consistent with the scope of reporting and to follow due diligence procedures under Section I and Section II through VII of CRS accordingly. The new reporting regime combines three dimensions: financial institutions required to report as analysed above, financial information, and account holders subject to reporting.
Financial information to be reported with respect to reportable accounts includes interest, dividends, account balance or value, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the reportable account or payments made with respect to the reportable account.
Reportable accounts are distinguished between individual accounts and entity accounts. There is also a distinction between pre-existing accounts (opened before and on 31 December 2015) and new accounts (opened on 1 January 2016). It is worth to be noted that it’s more difficult and costly for financial institutions to obtain information from existing account holders rather than new accounts.
Based on the information they collect under CRS, Cyprus financial institutions are required to identify reportable accounts and report them to the Cyprus Tax Authority. In turn, the Cyprus Tax Authority must exchange the information with the Tax Authorities of reportable jurisdictions (countries signed MCAA for CRS).
The specific classes of accounts that are excluded from being treated as financial accounts for due diligence and reporting purposes are:
- Certain retirement or pension accounts;
- Certain tax favored savings accounts;
- Certain life insurance contracts;
- Estate accounts;
- Other accounts that present a low risk of being used to evade tax;
- The pre- existing accounts (i.e accounts which were in existence on 31 December 2015) below $250.000 US dollars (or local currency equivalent).
The due diligence procedures are crucial, as they ensure the quality of the information that is reported and exchanged. Another important aspect of an effective automatic exchange model is the feedback by the receiving jurisdiction to the sending jurisdiction, regarding any errors in the information received.
Financial institutions have an obligation to monitor the changes in any circumstances that affect the status of account holders. For instance, the change of address of an account holder within the same country is not indicated as a change of circumstances. If there is a change of circumstances, the financial institution should verify the status of the account holder in time to allow it to report the account, if required in the next reportable period. If an account holder fails to respond to a request for documentation to verify his/her status, then the financial institution will treat the account as reportable until it is given the necessary information to correctly verify the status.
Another crucial issue of the exchange of information between different jurisdictions is the confidentiality. A Guide on Confidentiality, released by Organisation for Economic Co-Operation and Development (OECD), sets out the practices related to confidentiality and provides practical guidance on how to ensure an adequate level of protection. It is essential that the receiving jurisdiction has the legal framework and administrative capacity and process in place to ensure the confidentiality of the information.
In conclusion, CRS is a big step for facing the tax evasion through disclosure financial information globally and therefore it will radically affect the world of international tax planning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances. For further information, please contact Theodoulos Antoniou.