What Is Common Reporting Standard?
The Common Reporting Standard (CRS) is an internationally agreed-upon standard for the Automatic Exchange of Information (AEOI) regarding financial account information between tax authorities of participating jurisdictions. Developed by the Organisation for Economic Co-operation and Development (OECD), the CRS falls under the broader financial category of international taxation and aims to enhance global tax transparency and combat cross-border tax evasion.,46 It requires financial institutions in signatory countries to collect and report specific information on account holders who are tax residents of other participating jurisdictions.45,44 This information is then automatically exchanged on an annual basis.,43
History and Origin
The Common Reporting Standard was developed by the OECD in response to a G20 request for a global standard for automatic exchange of information.42 It was heavily influenced by the United States' Foreign Account Tax Compliance Act (FATCA) and sought to create a multilateral framework for sharing financial data to address international tax evasion.,41 In May 2014, forty-seven countries provisionally agreed to the standard, formally known as the Standard for Automatic Exchange of Financial Account Information. The OECD Council approved the CRS on July 15, 2014.40 A significant step in its implementation was the signing of the Multilateral Competent Authority Agreement (MCAA) in October 2014, which operationalizes the automatic exchange of information under the CRS.39,38 Early adopters began exchanging information in 2017 for the 2016 tax year, with many others commencing in 2018.,37
Key Takeaways
- The Common Reporting Standard is a global framework for the automatic exchange of financial account information between tax authorities to combat tax evasion.
- It was developed by the OECD and endorsed by the G20, drawing inspiration from the U.S. FATCA legislation.,36
- Financial institutions in participating jurisdictions are required to perform due diligence and report information on non-resident account holders.35,34
- The information exchanged includes account balances, income details, and identifying information of the account holder.33,32
- Over 100 jurisdictions have committed to implementing the Common Reporting Standard.
Interpreting the Common Reporting Standard
The Common Reporting Standard is interpreted as a comprehensive tool for international tax compliance and transparency. It mandates that financial institutions identify the tax residency of their account holders. If an individual or entity is a tax resident in a jurisdiction different from where the account is held, and both jurisdictions are CRS participants, then the financial information related to that account is reported to the local tax authority.31 This local authority then automatically exchanges the information with the tax authority of the account holder's jurisdiction of tax residency. The standard also includes "look-through" rules for passive investment entities to identify their underlying Controlling Persons.30
Hypothetical Example
Consider Maria, a tax resident of Country A, who opens a savings account (a type of depository accounts) at a bank in Country B. Both Country A and Country B are signatories to the Common Reporting Standard. When Maria opens her account, the bank in Country B will require her to provide self-certification regarding her tax residency. Because Maria indicates she is a tax resident of Country A, the bank in Country B identifies her account as a reportable account under CRS.
At the end of the year, the bank in Country B compiles information on Maria's account, including her name, address, tax identification number, date of birth, account number, the bank's identifying number, and the account balance. This information is sent to Country B's local tax authorities. Subsequently, Country B's tax authority automatically exchanges this data with Country A's tax authority, enabling Country A to be aware of Maria's financial holdings in Country B for tax purposes.
Practical Applications
The Common Reporting Standard has significant practical applications in global finance and regulation. It serves as a cornerstone for international efforts against tax evasion and undisclosed offshore banking.29 Financial institutions worldwide implement robust due diligence procedures to identify and classify account holders based on their tax residency, affecting client onboarding processes and ongoing compliance efforts.28,27 The CRS also impacts how collective investment vehicles and certain insurance companies manage their reporting obligations.26 Its influence extends to national tax legislations, which must incorporate the CRS rules for identifying reportable persons and accounts.25 While the Common Reporting Standard has led to a substantial increase in exchanged financial data, reports suggest that a portion of offshore wealth may still be underreported, highlighting areas for continued improvement in data quality and processing.24
Limitations and Criticisms
Despite its widespread adoption, the Common Reporting Standard faces several limitations and criticisms. One notable critique is the non-participation of the United States. While the U.S. has its own similar legislation (FATCA), its decision not to adopt the CRS means it does not automatically receive information from all CRS participating jurisdictions and, more significantly, is not required to provide reciprocal automatic exchange of information with all CRS countries for accounts held by non-U.S. persons in the U.S.,23 This has led some to label the U.S. as a potential "tax and privacy haven" post-CRS implementation.22
Concerns about data protection and privacy are also frequently raised. Critics argue that the extensive collection and automatic exchange of personal financial data, regardless of any actual suspicion of tax evasion, might be disproportionate and could expose individuals to data security risks if participating jurisdictions have varying standards of data management and transfer procedures.21,20,19 Calls have been made for explicit data security protection standards and for mechanisms to ensure proportionality in information exchange.18 Furthermore, the effectiveness of the CRS relies heavily on the diligent implementation and enforcement by over 100 diverse jurisdictions, some of which may lack the skilled professionals or robust systems to maintain consistently updated security.17
Common Reporting Standard vs. Foreign Account Tax Compliance Act (FATCA)
The Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) are both crucial frameworks designed to combat tax evasion through the automatic exchange of financial information, yet they differ significantly in their scope and approach. FATCA is a U.S. law primarily aimed at ensuring U.S. persons with foreign financial accounts report their income to the Internal Revenue Service (IRS).16,15 It operates largely through bilateral agreements where foreign financial institutions report information on U.S. account holders to the U.S. government.14
In contrast, the Common Reporting Standard is a multilateral international standard developed by the OECD, committing over 100 jurisdictions to automatically exchange financial account information with each other.,13 While FATCA focuses on U.S. citizenship as a basis for reporting, CRS centers on tax residency for any participating jurisdiction.12 CRS generally has a broader scope, encompassing virtually all foreign investments and a greater volume of reporting, with no de minimis reporting thresholds for new accounts, unlike FATCA which has a $50,000 threshold for individuals.11,10 Additionally, CRS mandates reciprocal exchange of data among participating countries, whereas FATCA primarily involves reporting from foreign institutions to the IRS.9
FAQs
Q: What types of accounts are covered by the Common Reporting Standard?
A: The Common Reporting Standard broadly covers various types of financial accounts, including depository accounts (like bank accounts), custodial accounts (like brokerage accounts), certain insurance contracts with cash value, annuity contracts, and equity or debt interests in investment entities.8,7
Q: What information do financial institutions report under CRS?
A: Financial institutions are required to report information such as the account holder's name, address, jurisdiction(s) of tax residency, tax identification number(s), date and place of birth. Additionally, details about the account itself are reported, including the account number, the name and identifying number of the reporting financial institution, and the account balance or value at year-end. Income details like interest and dividends are also exchanged.6,5
Q: Why is the U.S. not a part of the Common Reporting Standard?
A: The United States has not formally adopted the Common Reporting Standard because it has its own existing legislation, the Foreign Account Tax Compliance Act (FATCA), which serves a similar purpose of combating tax evasion by U.S. persons. While FATCA facilitates bilateral information exchange, the U.S. does not participate in the multilateral, reciprocal exchange framework of the CRS.4
Q: Does the Common Reporting Standard apply to cryptocurrency assets?
A: The OECD has developed the Crypto-Asset Reporting Framework (CARF) in 2023, which complements the CRS by providing a specific standard for the automatic exchange of information regarding crypto-assets.,3 This means that investments in cryptocurrency assets, including indirect investments, are generally subject to reporting requirements, often with stricter due diligence and reporting obligations.2,1