Preparation for the global Common Reporting Standard, a huge task in itself, is hampered by “FATCA fatigue,” according to the world's big accountancy firms.

As the hubbub around the benefits and drawbacks of the American Foreign Account Tax Compliance Act 2010 simmers down somewhat, another acronym is hot on the financial service industry's radar: the CRS or Common Reporting Standard, which is informally known as 'GATCA' or the 'global FATCA.'

Well over half (61%) of respondents to a global survey of financial executives believe the CRS will affect more of their accounts than the provisions of FATCA. However, although 55% of those operating outside the US anticipate that full compliance with the new standard will require vastly more resources than FATCA, only 30% said that their organisations had taken “significant steps” toward implementing the CRS. Indeed, 13% were “just beginning to focus on it right now.” Indeed, 4-6% of them from both the US and outside ticked a box saying: “we believe that the CRS will be fundamentally changed, so we are not addressing it at this time.”

Meanwhile, 61% of respondents, evenly distributed worldwide, have committees at their firms to look into CRS compliance, with a further 61% of the American contingent saying that they are “working to develop a plan,” as opposed to just 39% of respondents from elsewhere. Only 22% of American firms have an impact assessment underway, while 41% of their counterparts have. Between one-third and a half of all firms have not yet decided on the final budget for the project.

One-way traffic

This universal standard-to-be, originally conceived by the Organization for Economic Co-operation and Development, aims to tackle offshore tax evasion by creating a globally co-ordinated and consistent approach to the disclosure of financial accounts held by non-residents and the automatic exchange of that information by governments. It builds on FATCA, which came into force last year and requires foreign financial institutions to provide the US government with information on accounts held by US taxpayers. Anecdotal evidence suggests that although information has started to flow from America's cowed allies into the hands of the Internal Revenue Service, nothing is flowing the other way so far.

Nearly 100 jurisdictions have now promised to implement the CRS by 1 January 2017, while 58 jurisdictional “early adopters” say that they will begin on 1 January next year. CRS is focused on tax residency as opposed to identifying specified US persons. Finally, CRS does not have a withholding tax associated with it, but will be using a peer review and audits as a way of enforcing. It is modelled after the inter-governmental agreements or IGAs negotiated as a result of FATCA and is indeed a reaction to it.

Flimsy excuses for one-way traffic?

Denise Hintzke of Deloitte Tax recently spoke to Family Wealth Report, our sister publication, hinting that some organisations have a misconception that any financial institution that is complying with FATCA must also be complying with the CRS, and also predicted its effect on the private wealth sector. Hintzkewent on to say that the US was supportive of CRS but would not participate in it, at least in the short-term, on the rather lame pretext that “participation would require an Act of Congress and significant changes in the way that financial institutions document accounts and report information.” She added enigmatically: “The US believes that it should get special consideration due to the fact that it will be sharing certain information via certain IGAs but it is unlikely that the request will be granted.” It is to be hoped that the US Government, for the sake of its own credibility, is not mouthing such phrases as these aloud in the international arena.

Predictions for the near future

When asked how GATCA/CRS might affect the private wealth management sector in the US, she said: “All entities must determine what their CRS classification is and what country they are resident in for CRS purposes. For example, a US trust with a UK trustee would be treated as resident in the UK. Trusts and funds will be classified as Type II investment entities. If the trust or fund is resident in a non-participating jurisdiction then it will need to provide information regarding its controlling persons to financial institutions in participating jurisdictions.

“For a trust, controlling persons include grantors, beneficiaries and trustees. As an example, if you had a US-resident trust with a Mexican grantor and a Colombian beneficiary that was holding assets in the UK, it would need to provide the information and documentation for the Mexican grantor and Columbian beneficiary to the UK custodian who would then share that information with Mexico and Columbia. This type of complexity would create a lot of work for private wealth managers.

“There is a very tight time frame here, so private wealth organizations need to react pretty quickly to determine their classification and the impact that the rules will have on them and their clients. An entity classification exercise is the first key step with focus on determining where the entity is resident for CRS purposes and how it will be classified.

“Although all US entities must determine what their classification is, the biggest impact will be on entities which are Type II investment entities, such as trusts and funds, due to the fact that the US is likely to be a non-participating jurisdiction.”

A monumental task

Michael Plowgian, a principal at KPMG, said: “Even for financial institutions that have a good handle on their FATCA obligations, complying with the CRS model will be a monumental task because of a greater volume of data that needs to be reported. Most financial institutions will need to make significant changes to their client onboarding, due diligence and reporting procedures and systems.”

In other survey highlights, 44% of respondents said their ability to meet onboarding objectives by their target date will depend on guidance they receive beforehand, while some 71% believed that their CRS obligations would (or at least might) conflict with the privacy laws of the various countries in which they were operating.

Frank Lavadera, another KPMG principal, added: “The survey results make it clear that financial institutions recognise the need to devote a significant effort to comply with CRS, but their lag in taking significant steps to get efforts underway may be due to the need for implementing legislation from adopting jurisdictions, as well as a level of fatigue related to FATCA.”

KPMG’s findings are based on answers from 138 tax and compliance specialists at banks, asset management firms and insurance carriers.