The Common Reporting Standard (“CRS”), following along the precedent set by the Foreign Account Tax Compliance Act (“FATCA”), creates the concept of “accountholders” in structures such as trusts, foundations, companies and partnerships when those entities are “managed by” other financial institutions (e.g. professional trustees, corporate service providers, etc.). When such structures are the named entity accountholder at a bank or other financial institution, confusion and chaos often/sometimes ensues.
Confusion most commonly arises for the beneficial owners who have always considered the entity as the traditional “accountholder”. They are correct in their understanding, but the confusion arises due to their lack of awareness of the new terminology.
Chaos can arise for the beneficial owners, the trustee/directors AND the bank due to the added “twist” of look-through requirements for such structures treated as Financial Institutions (“FI”). Where there is no exchange agreement in place, the bank will need to disregard the reporting status of the entity and itself do reporting. This reliance on whether an exchange agreement is in place, or deemed to be in place, between the CRS residence jurisdiction of the structure and the CRS residence jurisdiction of the bank to determine whether the reporting status of the structure will be respected or disregarded leads to the following negative outcomes;
- Duplicate Reporting – where no agreement is in place, or deemed to be in place, both the bank and the structure may report duplicative information. This can mislead the home tax authority of the individual accountholders to inflate the actual worth/income that is due to be reported and/or subject to taxation.
- Inaccurate Information – as the definitions of controlling persons do not exactly align with those of accountholders, bank level reports can be grossly inaccurate. For example, a bank could report a beneficiary who received a $5,000 distribution as a controlling person of a $10 million account. Not only does this potentially complicate the life of the beneficiary if he or she is audited and asked to explain the discrepancy, it may also expose trust financial data to beneficiaries in situations the settlor or trustee did not authorize.
- Reputational Risk – most importantly, the reliance on whether exchange agreements are in place falsely assumes that all jurisdictions will sign exchange agreements with commensurate countries. Experience in the first few years of CRS has shown this to be a false assumption. Banks and fiduciary service providers are currently NOT looking through entity account situations based on exchange agreements in place which results in a lack of proper reporting. Clients are shopping around for such “information arbitrage” opportunities and the recently published OECD Mandatory Disclosure template rules attempt to address this situation.
We call these problems resulting from a lack of cohesive rules in the three relevant jurisdictions (CRS residence of the individuals, CRS residence of the structure and CRS residence of the bank) the “Triangulation Problem”. Even one of the above outcomes can dramatically affect the planning intentions associated with such structures, and it is quite common for two or all three to apply due to the multi-jurisdictional spread of many such structures today. A careful review and proper entity classification designations can avoid these negative outcomes and give data security and financial peace of mind to the beneficial owners as well as regulatory compliance certainty to the responsible fiduciary provider. A conversation with an information exchange expert is well worth consideration and can prove quite valuable.