A comparative study on CRS and FATCA: British Virgin Islands

This article was originally published in China Business Law Journal in February 2017, Click here to access.

The Common Reporting Standard (CRS) is the standard for automatic exchange of financial account information produced by the OECD which provides for exchange of client due diligence (CDD) information between various jurisdictions (the Jurisdictions). CRS is similar to the US Foreign Account Tax Compliance Act (US FATCA). It is a requirement for financial institutions, (Reporting FIs) to report to the local authority – the International Tax Authority (ITA). The ITA will be the repository of all of the reported information and will exchange CDD information under CRS (and US FATCA) with the equivalent authorities in the Jurisdictions. The first reporting under CRS is scheduled for 31 May 2017.^[1]

US FATCA was implemented on 23 October 2014 under the Mutual Legal Assistance (Tax Matters) Order 2014 as subsidiary legislation to the Mutual Legal Assistance (Tax Matters) Act 2003 (the MLAT).^[2] On 4 June 2015, the Mutual Legal Assistance (Tax Matters) Order 2015 (the 2015 Order) was implemented to give effect to identify financial accounts, the reporting obligations of Reporting FIs under US FATCA, appointment of third parties, information on inspection and compliance, the offences for non-compliance and the guidance notes.^[3]

CRS was implemented on 31 December 2015 as the Mutual Legal Assistance (Tax Matters) (Amendment) (No. 2) Act 2015^[4] (the CRS Law). The CRS Law is subsidiary legislation to the MLAT.

Some nuances are below.

• Under CRS only residents of a Reportable Jurisdiction are considered Reportable Jurisdiction Persons, with residence meaning tax residence. While Entities do not have a residence, CRS indicates the place of effective management should be used. The BVI has published a list of Participating Jurisdictions.^[5]The absence of a list of Reportable Jurisdictions makes the process of determining whether to exchange CDD with non-listed jurisdictions challenging. Under US FATCA, a United States (US) citizen is a US Tax resident. US persons include both US citizens and residents. Under CRS, tax residency is key whereas under US FATCA the test is citizenship. Under US FATCA, there is no reference to Participating or Reportable Jurisdictions.
• US FATCA includes Non-Reporting FIs that are excluded from reporting that are not included in CRS, e.g. retirement funds, investment entities wholly owned by exempt beneficial owners, local banks, FIs with a local client base, FIs with only low value accounts (US$50,000 and under), sponsored investment entity and controlled foreign corporation, sponsored closely held investment vehicle investment advisors and managers. More entities will have to report under CRS as compared to US FATCA since the concept of sponsorship is not provided for under CRS^[6].Investment Entity as defined in the IGA, the US regulations and CRS are different. The BVI FATCA Guidance Notes^[7] indicates that since CRS is likely to be the global standard and is substantially similar to the US regulation definition this has also been included in the BVI regulation. As such, an entity may choose which definition to apply when determining whether it is an Investment Entity. The test under the IGA definition is the “managed by” test. When an entity is professionally managed by a third party it will generally be an Investment Entity. “Managed by” should be differentiated from “administering”. Where directors are provided, this on its own will not cause the company to fall within the “managed by” test. Under CRS, an entity is treated as primarily conducting as a business one of the activities described in limb (a) of the definition of Investment Entity, or an Entity’s gross income is primarily attributable to investing, reinvesting or trading in Financial Assets for the purposes of limb (b) of the definition of Investment Entity, if the Entity’s gross income attributable to the relevant activities equals or exceeds 50% of the Entity’s gross income. This test applies to the three years ended 31 December of the year preceding the year in which the determination is made or the period since commencement, if shorter.
• “Controlling Person” under the BVI FATCA Guidance Notes^[8] refers to a natural person who exercises direct or indirect control over an Entity and that term should be interpreted under the Financial Action Task Force Recommendations. If a FI is a Controlling Person of a Passive Non-Financial Foreign Entity (Passive NFFE) then it is not necessary for the Passive NFFE to certify any Controlling person of the FI as Controlling Persons of the Passive NFFE. In relation only to NFFEs, a 25% ownership threshold applies for companies, partnerships, trusts and foundations. For trusts, this would only apply to beneficiaries, settlors when they are also beneficiaries and protectors where they have the power to change the trustee, therefore influencing the distribution of the trust assets. Under CRS regime, there is little guidance on who should be considered as Controlling Persons.^[9] The test under CRS refers to 25% but is left wider, for example the rule provides that if no such person exist, then any natural person that exercises control over the management of the Entity (e.g. the senior managing official of the company) would be a Controlling Person.^[10]
• Under both regimes, any entity that is not an FI will be considered a NFFE. NFFE’s are divided into passive and active NFEs. Under US FATCA the definition is limited to any NFFE that is not (i) an Active NFFE or (ii) withholding foreign partnership or withholding foreign trust pursuant to relevant US Treasury Regulations. However, under CRS, this concept is broader and is defined to include (i) a NFFE that is not active or (ii) an Investment Entity described in limb (b) of the definition of Investment Entity that is not a Participating Jurisdiction FI.
• Under CRS, there is no express penalty provision for failing to comply with any of the reporting obligations to the ITA by FIs. However, since the CRS Law is subsidiary legislation to the MLAT, the MLAT can apply where a breach is found to have taken place. Under the 2015 Order the position is clear and it expressly provides that the general penalty provision in the MLAT applies to the 2015 Order and the IGA. US FATCA imposes a 30% withholding tax on US sourced income and other US payments. There is no withholding tax under CRS.

^[1]http://www.bvi.gov.vg/aeoi-crs, see  “Important Dates” section.

^[2] The 2014 Order implemented the Agreement Between the Government of the United States of America and the Government of the BVI to Improve the Tax Compliance and to Implement FATCA (the IGA): http://www.bvi.gov.vg/sites/default/files/si_no_75_of_2014_-_mutual_legal_assistance_tax_matters_no_4_order_2014_-_us_and_uk_fatca_legislation.pdf.

^[3]http://www.bvi.gov.vg/sites/default/files/no._44_of_2015_-_us_fatca_order_under_section_3a_of_the_mla_2003.pdf. Information on US FATCA guidance notes can be found at: http://www.bvi.gov.vg/sites/default/files/guidance_notes_20-3-15_-_final_2.pdf.

^[4]http://www.bvi.gov.vg/sites/default/files/g00774_act_no_17_of_2015-mutual_legal_assistance_tax_matters_amendment_no_2_act_2015_-_common_reporting_standard.pdf

^[5]http://www.bvi.gov.vg/sites/default/files/bvi_list_of_participating_jurisdictions_for_crs.pdf

^[6] Sponsorship meant that a Sponsoring Entity would register with the US Internal Revenue Service and this entity would be responsible for the reporting to the BVI ITA on any of the entities under its administration.

^[7] Paragraph 2.9 of the BVI FATCA Guidance Notes.

^[8]Paragraph 9.7 of the BVI FATCA Guidance Notes.

^[9] Paragraph 16 on page 17 and paragraph 106 on page 47 of the CRS Implementation Handbook (the CRS Handbook). https://www.oecd.org/tax/exchange-of-tax-information/implementation-handbook-standard-for-automatic-exchange-of-financial-information-in-tax-matters.pdf.

^[10]There is no guidance as to the meaning of “senior managing official” in the CRS Handbook.