"It should be noted that the US has not committed to CRS reporting and, thus, there will be no transition from FATCA reporting to CRS reporting for US tax payers."

Common Reporting Standard ("CRS") and the Impact on Private Equity Investment Structures

20 Feb 2017

CRS is the result of the drive by G20 nations to develop a global standard for the automatic exchange of financial account information. This follows the approach taken to implement United States ("US") FATCA. A Financial Institution ("FI") in a participating jurisdiction will be required to report certain financial information on reportable clients to its local tax authority, who in turn may exchange that information with any jurisdiction where the client or Controlling Persons are known to be tax resident. 

At present 101 countries will implement CRS. United Kingdom, Luxembourg, Guernsey, Cayman Islands and Jersey are all early adopters of CRS with first reporting to be completed in 2017 for the year ending 31 December 2016. This covers reportable accounts in participating jurisdictions. Reportable accounts for late adopting jurisdictions will be reported in 2018. A full list of jurisdictions is available from the OECD website, please click here to review the current list.

It should be noted that the US has not committed to CRS reporting and, thus, there will be no transition from FATCA reporting to CRS reporting for US tax payers. Therefore, early adopting jurisdictions in which Ocorian has a presence will be required to comply with both US FATCA and CRS.

Whilst there are similarities between each regime and they follow the same processes, there are technical differences that affect certain structures. For this briefing, we focus on the significant differences for Private Equity structures.

Where an entity that is professionally managed by another entity and receives more than 50% of its income from Financial Assets, the entity will be classified as a Financial Institution ("FI"). Under US FATCA, in accordance with paragraph 4.2.1 of the Jersey FATCA guidance notes, an entity which is an FI can be Sponsored by another entity, which itself is an FI.

For this arrangement, the Sponsored Entity would not be required to register with the IRS to obtain a Global Intermediary Identification Number ("GIIN") and instead, the Sponsoring Entity would register to obtain a Sponsoring GIIN.

For CRS, the Sponsored Investment Entity exemption is not available. As such all entities that meet the classification of an FI will be responsible to meet their own compliance and reporting obligations.

Under US FATCA, in accordance with paragraph 4.3.5 of the Jersey FATCA guidance notes, an FI established or resident in Jersey can apply the Certified Deemed Compliant exemption, where it 'renders investment advice to, manages portfolios for, and acts on behalf of a customer for the purposes of investing, managing or administering funds.'(for the full version of 4.3.5 please click here)

This type of entity will not be required to register with the IRS to obtain a GIIN or undertake reporting. This classification has been widely adopted by general partners of limited partnerships. However, it is only applicable to general partner entities that do not hold an interest in the respective limited partnership.

Under CRS, this exemption is not available and instead these types of entities will be classified as an FI and will therefore have compliance and reporting obligations.

Where Ocorian have been appointed to assist with compliance obligations on behalf of a client entity, we are proposing for entities to consider removing Sponsoring Investment Entity classifications for US FATCA and adopting a unified approach of being an FI for both US FATCA and CRS regulatory purposes.

The key benefits to this approach are:

  • Consistent approach for dealing with banks and intermediaries;
  • All existing entities pre-2017 will have the same US FATCA approach and status of those established post 2017;
  • Streamlining documentation, having one US FATCA and CRS agreement in place to cover all entities.

When US FATCA was introduced, Ocorian anticipated CRS requirements and designed processes that could be followed when implementing CRS.

The OECD has issued an implementation handbook to guide in-scope jurisdictions and participating organisations within these jurisdictions. Ocorian has undertaken an in-depth review of the handbook and refined procedures in consultation with our appointed advisors (one of the "big four" accounting firms).
Ocorian has deployed bespoke software to generate reports in the specialist required XML format and we also have significant reporting experience, having undertaken reporting for over 7,500 FATCA Reportable Accounts for 2015.

All entities that are in a participating jurisdiction are required to apply a CRS classification in accordance with the regulations. This is to ascertain what compliance obligations the entity may have to meet. The reporting period for entities in an early adopting jurisdiction for CRS was 1 January 2016 to 31 December 2016 and an FI is required to file a report by 30 June 2017.

CRS is a wide reaching regulation and Ocorian recommends that advice is sought from a recognised professional tax adviser in relation to the position of any entities that may be in scope of the regulation.

Entities can outsource their compliance and reporting requirements to Ocorian.  

In order to understand which investors are within the scope of reporting, Ocorian can help by contacting investors to request a self-certification, collate the information and then determine whether the investor is reportable or not.  

If preferred, this exercise can be undertaken by our clients or an external provider. If the decision to outsource is taken and Ocorian provide directors to the in-scope entity, we will still need to review the details collated to ensure the structure is compliant.

If you would like to discuss the details of this briefing, we would be happy to arrange a meeting with your usual Ocorian point of contact and our Head of Tax Compliance and Reporting, who is responsible for ensuring Ocorian, our clients and structures remain compliant with both US FATCA and CRS.