In recent years, the global fight against tax evasion has intensified, as governments around the world have introduced new reporting requirements. To date, the Common Reporting Standard (CRS) is by far the most far-reaching regulation in this space. It raises many questions about the technology that financial firms use for their regulatory reporting.
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CRS is a project of the Organisation for Economic Cooperation and Development (OECD). The plan is to get as many countries as possible to agree to exchange a common set of data with one another about offshore account holders. The regulation really gained momentum at the end of October, when 51 countries agreed to participate.
Many others have also indicated they intend to sign up.
CRS is often compared to the Foreign Account Tax Compliance (FATCA). Both regulations involve countries automatically sharing data with one another, rather than waiting for a specific request for a disclosure. However, there are also important differences between CRS and FATCA, particularly in terms of the volume of data that must be reported.
As part of FATCA, financial firms around the world must send reports on their US account holders to the Internal Revenue Service (IRS). This has proved challenging for many firms. However, the number of account holders in scope for CRS is much greater.
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By GlobalDataThis is because financial institutions will need to report on individuals and entities that have tax residency in any of the countries that have signed the CRS agreement. The indications so far are that this could mean reporting on individuals and entities that are tax resident in one of more than 100 different countries.
In order to report on all of these account holders for CRS, financial institutions will need to adopt and maintain a large number of reporting schemas, along with their associated validation rules. This is due to the fact that, although a common reporting schema is being developed for CRS, authorities in individual countries are likely to amend the schema to meet their local needs.
A further challenge presented by CRS is its aggressive implementation schedule, as 32 of the countries that signed up to CRS in October have committed to beginning reporting in 2017. This means they must start collecting all of the necessary data in 2016.
The requirements that are being introduced by CRS, and the speed with which they will come into force, can appear overwhelming. However, by making smart decisions about their technology, market participants can stay on top of this new regulation.
Despite the differences between CRS and FATCA, the processes involved in complying with both regulations are largely the same. As a result, market participants that choose a flexible, scalable platform for FATCA will also be able to use it for CRS.
As well as scalability, financial firms need to consider the usability of their technology. At some firms, it may be possible for individuals to manually sign off on their FATCA reports. However, as reporting volumes increase massively under CRS, this will only be possible if users have the benefit of sophisticated dashboards and management information (MI) functionality.
The number of schemas and validation rules needed for CRS is a major concern for many financial firms. There is no doubt that it would be extremely challenging for most firms to keep all of these up to date, amending them as regulators issue changes.
However, firms can avoid this overhead by partnering with a vendor that monitors changes to the schemas and validation rules, and provides updates to its clients.
CRS marks a significant extension of the regulatory fight against tax evasion. By carefully considering their reporting technology, market participants can ensure they keep pace with the changes and always remain compliant.
Bahar Sezer is a business analyst, policy and strategy, EMEA, AxiomSL
