2. Global Banking and Financial Policy Review
66
Structured Finance: FATCA and the
OECD Common Reporting Standard
By Scott Macdonald, Maples and Calder
M
ore than 90 jurisdictions, including all 34 member countries
of the Organisation for Economic Co-operation and Devel-
opment (“OECD”) and the G20 members, have committed
to implement the Common Reporting Standard for automatic exchange
of tax information (“CRS”). Building on the model created by FATCA,
the CRS creates a global standard for the annual automatic exchange of
financial account information between the relevant tax authorities.
The major structured product issuer jurisdictions, including the
British Virgin Islands, Cayman Islands, Ireland, Luxembourg and the
Netherlands, are among a group of over 50 jurisdictions known as the
“Early Adopters Group” that have committed to the implementation of
the CRS by the end of 2015 and the first exchanges of information in
2017. In terms of the number of potential reporting financial institutions
under CRS, the membership of the Early Adopters Group is significant
(e.g. financial institutions in the Cayman Islands and Ireland together
account for approximately 30% of those entities registered with the IRS
for US FATCA). All EU members, with the exception of Austria, are
also members of the Early Adopters Group.
The OECD released the full version of the CRS on 21 July 2014.
The full version includes commentaries and guidance for
implementation by governments and financial institutions, a model
Competent Authority Agreement, standards for harmonised technical
and information technology modalities (including a standard reporting
format) and requirements for secure transmission of data. Each
participating jurisdiction will be required to enact domestic legislation
or rules to provide for the implementation of the CRS. The Cayman
Islands government has indicated that specific regulations will be issued
in October 2015 in relation to implementing the CRS in the Cayman
Islands. Ireland is also expected to pass relevant regulations later this
year. The United States has, so far, not joined the CRS initiative given
the extensive network of intergovernmental agreements it has already
signed up with respect to FATCA.
CRS COMPLIANCE – FATCA PLUS
Without doubt, the introduction of the CRS will represent an increased
compliance burden for financial institutions. With the existing FATCA
compliance burden in mind, and with the aim of maximising efficiency
and reducing costs for financial institutions, the CRS is closely modelled
on the existing FATCA intergovernmental regime. The significant
overlap between CRS and FATCA should permit recently introduced
FATCA due diligence and reporting procedures to be leveraged.
However, the universe of reportable accounts caught by the CRS will
be significantly larger than that required to comply with US FATCA (see
“Reporting Financial Institutions” below). There are also key differences
between FATCA and the CRS that are likely to require additional
procedures to ensure compliance (see “Due Diligence and Reporting”
below).
In general, the differences between CRS and FATCA reflect the
multilateral nature of the CRS and the US specific attributes of FATCA.
The standardised approach of the CRS is intended to allow countries to
use the exchange system without having to negotiate a separate annex
with each counterpart country. The CRS is more closely aligned to ‘UK
FATCA’ than US FATCA in terms of account due diligence and related
reporting requirements. The principle differences between US FATCA
and CRS are:
(a) Registration – there is no requirement to register with any
foreign tax authority or to obtain any global identification number (such
as a GIIN).
(b) Withholding – while domestic laws may impose penalties for
non-compliance (generally in the form of administrative fines, although
some can impose prison sentences), CRS does not impose a punitive
withholding tax regime.
(c) Client Classification – classification is based on tax residency
rather than nationality or citizenship, with a residence address test built
on the EU Savings Directive. This has the potential to create some
complexity as a client may be taxable in several countries in the relevant
reporting period or their identification may contain indicia relating to
multiple tax jurisdictions. However, CRS does permit reliance on client
self-certification (see “new individual accounts” below).
CRS differs from US FATCA in a number of other ways that will
likely increase the number of reportable accounts and change the
classification of certain investors. Firstly, CRS does not provide a de
C A Y M A N I S L A N D S
3. Global Banking and Financial Policy Review
67
minimis threshold for individuals in connection with the required due
diligence procedures. Following FATCA, such procedures distinguish
between individual accounts and entity accounts as well as provide for
a distinction between pre-existing and new accounts. While pre-existing
individual accounts must be reviewed regardless of the account balance,
there is a distinction between a “Higher Value Account” (a pre-existing
individual account with an aggregate balance or value that exceeds
US$1m) and a “Lower Value Account” (a pre-existing individual
account with an aggregate balance or value that does not exceed
US$1m).
For Lower Value Accounts, a permanent residence address test
based on documentary evidence or residence determination based on
an indicia search is required (conflicting indicia would need to be
resolved by self-certification and/or documentary evidence). For High
Value Accounts, enhanced due diligence procedures will apply,
including a paper record search and an actual knowledge test of the
relationship manager for the account. For new individual accounts, the
financial institution is required to obtain a self-certification to determine
the account holder’s tax residence and must then confirm the
reasonableness of such self-certification based on account opening
documents (including AML/KYC documents).
For pre-existing entity accounts, the financial institution must
determine whether the entity itself is a “Reportable Person”: essentially
an individual or an entity that is resident in a reportable jurisdiction
under the tax laws of that jurisdiction (other than those entity types that
are similarly exempt under FATCA, such as government entities and
financial institutions). It must also be determined whether the entity is
a passive non-financial entity (NFE) and, if so, the residency of the
controlling person(s) must also be ascertained. Where existing
AML/KYC information is insufficient to make this determination, the
entity must provide a self-certification to establish whether the entity
is a Reportable Person. Importantly, each participating jurisdiction may
opt to allow financial institutions to apply a threshold to make pre-
existing entity accounts below US$250,000 (or local currency
equivalent) exempt from review. New entity accounts are subject to the
same due diligence requirements as pre-existing entity accounts.
However, the option for the US$250,000 (or local currency equivalent)
threshold does not apply as it is less complicated to obtain self-
certifications for such new accounts.
REPORTING FINANCIAL INSTITUTIONS
The financial institutions covered by the CRS are broadly the same as
FATCA and include custodial institutions, depository institutions,
investment entities and specified insurance companies. However, the
categories of financial institutions that are excluded from reporting
(“Non-Reporting Financial Institution”) are not as broad as those
provided for under US FATCA. Non-Reporting Financial Institutions
include:
(a) government entities, international organisations or central
banks;
(b) broad participation retirement funds, narrow participation
retirement funds, pension funds of a governmental entity, international
organisation or central bank, or a qualified credit card issuer;
(c) entities that:
(i) present a low risk of being used to evade tax;
(ii) have substantially similar characteristics to any of the entities
described in (a) and (b) above; and
(iii) are defined in domestic law as a Non-Reporting Financial
Institution, provided that the status of such an entity as a Non-Reporting
Financial Institution does not frustrate the purposes of the CRS;
(d) exempt collective investment vehicles; or
(e) trusts, if the trustee is a reporting financial institution and
reports all necessary information.
The list above does not include certain of the “Exempt Beneficial
Owners” and “Deemed Compliant Financial Institutions” identified by
US FATCA as being low risk entities and, therefore, exempt from GIIN
registration and reporting. Of particular note to practitioners in the
structured finance market, is the lack of any equivalent to the limited
life debt investment entity (“LLDIE”) exemption provided under the
US regulations.
The LLDIE exemption was available to structured finance issuers
that issued one or more classes of debt or equity interests to investors
pursuant to a trust indenture, trust deed or similar agreement, where
all such interests were issued on or before 17 January 2013. The relevant
financial institution also had to satisfy five other tests, including the
requirement that substantially all of the assets of the financial institution
consist of debt instruments or interests therein.
The LLDIE exemption was specifically crafted with CDO and
CLO vehicles in mind, with the intention that the significant number
of ‘old and cold’ CDO and CLO vehicles in existence would be excluded
from the requirement to register for a GIIN and report under US
FATCA (in practice these entities which are low risk from a tax evasion
perspective would be unable to report due to the structured nature of
their transaction documents).
At first glance, it is difficult to see how an LLDIE could satisfy all
of the requirements of a “low risk” entity as detailed in (c) above. For
LLDIEs which have issued all of their securities into the clearing
systems, this should not prove too much of an issue as it is generally
C A Y M A N I S L A N D S
4. Global Banking and Financial Policy Review
68
expected that clearing systems will be financial institutions in their own
right and so will not be reportable persons. However for those LLDIEs
which have issued securities in certificated form, it will be interesting
to see how the art of achieving the impossible can be managed in
practice.
DUE DILIGENCE AND REPORTING
It is important to note that the CRS represents a minimum set of
requirements and that it is open to each jurisdiction to implement a
wider approach (for example, to extend due diligence requirements to
cover local residents). This wider approach is intended to permit
financial institutions to obtain due diligence from and maintain records
in respect of accounts of residents of jurisdictions that have committed
to implement the CRS, but have not yet done so. The perceived
advantage of this wider approach being reduced cost for the financial
institution as it would not be required to perform additional due
diligence on existing accounts each time a new jurisdiction joins the
CRS.
The CRS reporting XML schema is based on the FATCA schema
(i.e. Form 8966 and the XML schema), but also contains elements of
the OECD standard transmission format that are not essential for CRS
reporting. Following a declaration from the IRS that the FATCA schema
would be revised in 2016 to align it with the CRS schema, several
member jurisdictions declared an intention to enhance the reporting
schema with certain local data requirements. If these local
enhancements are implemented, the CRS schema may become less
“standard” than originally planned.
IMPLEMENTATION TIMELINE
For structured product vehicles based in Early Adopter jurisdictions,
the following dates will apply:
1 January 2016 – implement due diligence procedures to determine
the tax residency of all account holders. Pre-existing accounts will be
those maintained on 31 December 2015 and new accounts would be
those opened from 1 January 2016.
31 December 2016 – due diligence for identifying High Value pre-
existing individual accounts to be completed.
March 2017 – initial reporting to local Competent Authority
expected to begin.
30 September 2017 – initial exchange of information between
Competent Authorities.
31 December 2017 – due diligence for identifying Low Value pre-
existing individual accounts and entity accounts to be completed.
C A Y M A N I S L A N D S
About the author
Scott Macdonald is a partner in the Cayman Islands office of Maples and
Calder. He specialises in structured finance transactions, including CLOs,
repackagings, structured funds and fund derivative products. Scott also
has extensive experience in the establishment of managed account and
fund platforms, including segregated portfolio companies. He also advises
on fund financing, and debt and equity listing on the CSX.
Scott Macdonald
Partner
Maples and Calder
T: +1 345 814 5317
E: scott.macdonald@maplesandcalder.com
W: www.maplesandcalder.com
5. Maples and Calder is a
leading international law firm
advising financial, institutional,
business and private clients
around the world on the laws
of the Cayman Islands, Ireland
and the British Virgin Islands.
Our worldwide offices offer multinational clients and
international law firms local access to our global
services. With a strategic global presence, and as
experts in structuring and implementing complex
financial transactions, our pragmatic commercial
approach and technical expertise ensures that we can
help our clients achieve their objectives in any
jurisdiction.
Our Cayman Islands finance team, has consistently
maintained its position as the largest and most
successful Cayman Islands firm, holding top rankings
across the leading legal directories and consistently
featuring as the leading counsel to issuers in global
league tables for CDO/CLOs and repackaging
issuances. We also provide specialist fiduciary services
through our affiliate, MaplesFS.
For expert advice on all types of finance structures and
transactions, contact one of our highly qualified
specialists.
They are the gold standard of offshore
law firms."
IFLR | 2014
The go-to Cayman practice by default, with
an exemplary record; they are exceptionally
good lawyers who act for high-quality clients.
Chambers | 2014
