The financial institutions such as investment entities are not required to perform review procedures of financial accounts including depository/custodial accounts that were closed before June 30, 2017 under Organization for Economic Cooperation and Development (OECD) global conventions for Automatic Exchange of Information (AEOI).
Sources said that the Federal Bard of Revenue (FBR) has implemented a comprehensive guidance note on common reporting standards for the automatic exchange of information with respect to financial accounts. The financial institutions are following the reporting standards under AEOI.
The CRS Rules, inter alia, required Reporting Financial Institutions to start due diligence of customers from July 1, 2017. Banks/DFIs/MFBs and other financial institutions were advised to ensure the compliance of the Rules for reporting under the CRS and take all necessary steps to put in place requisite systems/mechanism in timely manner, the FBR said.
In an effort to control offshore tax evasion and other forms of non-compliance, global implementation of Automatic Exchange of Information (AEOI) has long been in place. The Organization for Economic Cooperation and Development (OECD) has facilitated this automatic exchange through the development of legal framework and technical standards and providing guidance and training, seeking to improve automatic exchange at a practical level. The aim of establishing such exchange mechanism was to promote international cooperation and to encourage the sharing of high quality, predictable information between the revenue authorities, the FBR said.
The FBR said that the OECD has developed the Multilateral Convention for Mutual Administrative Assistance in Tax Matters (MAC) and its ancillary Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) and a global model of Common Reporting Standard (CRS) for the automatic exchange of information with respect to financial accounts.
The FBR said that the Reporting Financial Institutions are required to review the financial accounts maintained by them to identify reportable accounts. Where a financial account is held by any reportable person(s), such account becomes a reportable account to the FBR. The term "Financial Account" generally includes Depository Account, Custodial Account, Equity and Debt Interest in certain Investment Entity, Cash Value Insurance Contracts and Annuity Contracts.
A financial institution is not required to perform review procedures on accounts that were closed before 30th June, 2017. Provided certain conditions are met, a financial institution is also not required to perform review procedures on cash value insurance contracts and annuity contracts, the FBR said.
The FBR said that the Common Reporting Standard allows various categories of Financial Accounts to be excluded from being reportable accounts. Certain financial accounts are excluded because they have been identified as carrying a low-risk of being used to evade tax. Such Excluded Accounts are not subject to the CRS due diligence procedures that apply for purposes of identifying reportable accounts among financial accounts (such as obtaining a self-certification). The excluded accounts included Retirement and Pension accounts; non-Retirement tax favoured accounts; Term Life insurance accounts; Estate accounts; escrow accounts; depository due to non-returned overpayments and certain low risk excluded accounts.
The FBR said that preexisting individual accounts are accounts maintained by Reporting Financial Institutions as on or before 30 June, 2017 that are held by one or more individuals. Preexisting individual accounts are classified in the following three categories: Cash value insurance contracts and annuity contracts effectively prevented from being sold to non-residents, which are not required to be reviewed, identified or reported; lower value accounts and high value accounts.
A Reporting Financial Institution must review AML/KYC information and other information held on the client confirming the reasonableness of a self-certification for a new individual account or a New Entity Account; and determining whether the holder or the Controlling Person(s) of the holder, of a preexisting entity account may be a Reportable Person.
The FBR said that the General Requirements CRS due diligence procedures are the procedures a Reporting Financial Institution (RFI) is required to undertake to determine whether there are any reportable accounts among the financial accounts it maintains. The details of due diligence requirements depend on whether an account is preexisting or a new account. The required due diligence further depends on whether an account holder is an individual or an entity. For preexisting accounts held by individuals, there are further distinctions in procedures for Lower Value Accounts and High Value Accounts.
A standardized due diligence approach is required to ensure quality of information to be reported and exchanged amongst the jurisdictions. This approach utilizes the information available under the existing processes of entities such as those for Anti-Money Laundering (AML) and Know Your Customer (KYC) purposes. This is particularly the case for Preexisting Accounts where it is more challenging and costly for financial institutions to obtain new information from the account holder.
Reporting Financial Institutions should record the date of identification of account (as reportable account) which may be used for future reference purposes. Due diligence procedures are also dependent on the balance/value of the financial account. On the basis of balance/value, preexisting accounts are also classified as either lower value or high value accounts based on their aggregate or individual account balance, the FBR added.
All financial institutions were required to be enrolled with FBR through their respective regulators. Initially, Reporting Financial Institutions have been enrolled manually by providing information under clause (c) of sub-rule (1) of Rule 78C of the CRS Rules. However, the Reporting Financial Institutions shall be electronically registered/enrolled when the CRS Compliant software is in place. Each Reporting Financial Institution shall report the required information with respect to each Reportable Account of such Reporting Financial Institution to the FBR.