Q&A: Specific Issues of Common Reporting Standard (CRS)

When and with which countries will the information exchange begin? Which information will be disclosed?

Roman Moskovskikh


Tax and Legal Practice

Korpus Prava (Russia)

OECD Convention on Mutual Administrative Assistance in Tax Matters, which was ratified by the Russian Federation on November 4, 2014 and came into force from July 1, 2015, contains provisions allowing the parties automatically exchange information, supposedly important for administration and assurance of compliance with the tax law and regulated by the Convention.

However, in accordance with the Convention such automatic exchange requires execution of a separate agreement between competent authorities of the parties. Multilateral Agreement of Competent Authorities on Automatic Financial Information Exchange constitutes such agreement.

Currently, the Ministry of Finance jointly with other official structures carries out adjustment of the Russian law to the innovations.

Provisions of the Convention apply to administrative assistance for tax periods starting from January 1, 2016.

In the performance of obligations under the Convention, accession to the Multilateral Agreement is planned starting from 2018. How-ever, in 2018 information exchange shall be carried out both in respect of 2017 tax period.

It should be noted that provisions of the Convention can be applied in respect of earlier tax periods subject to the corresponding agreement executed between the exchanging countries. In particular, a tax authority informs that it has received from the competent authority of the Cayman Islands an approval of readiness to perform information exchange with the Russian FTS for the tax periods starting from January 1, 2012, both in respect of administrative assistance and tax matters.

Categories of taxes subject to the Convention:

  • Personal income tax, corporate income tax;
  • Corporate property tax;
  • Value added tax;
  • Excise duties;
  • Transport tax;
  • Other taxes.

The Convention is also applied from the moment of their institution to all identical or substantially similar taxes, which are introduced in the Contracting State after the Convention came into force.

What is the difference between CRS and FATCA?

Irina Otrokhova

Chief Compliance Officer

Corporate services

Korpus Prava (Cyprus)

FATCA is the US law on the taxation of foreign accounts (Foreign Ac-count Tax Compliance Act), which came into force in 2014. In accordance with FATCA, all foreign financial institutions regardless of the country of their registration and type of activity undertake to identify among their clients US taxpayers and inform the US Tax Service about them.

CRS (common reporting standard) is a document issued by the OECD within the implementation of the BEPS (Base Erosion and Profit Shifting) plan, which determines general rules of international automatic information exchange. The states, which signed agreements on automatic tax information exchange, will begin the exchange in 2017 and 2018.

It should be noted that FATCA and the CRS have quite a lot of com-mon provisions. CRS authors have adopted most of the used terminology from FATCA. Thus, for example, definition of financial institutions entrusted with the obligation for collection and delivery of tax information is absolutely identical. Definitions of active and passive financial institutions and controlling parties and many other are also duplicated. Definition of passive income under FATCA was borrowed from the US law, and definition of passive income contained in the note to the CRS actually duplicates it. Mechanisms for tax information col-lection and exchange are also similar.

However, the essence of regulation and application consequences differ greatly. FATCA law is aimed only at collection of information about US taxpayers, that is a financial institution, which collected exhaustive information about clients, will submit information only about US taxpayers as this regulation does not apply to other taxpayers. The CRS in its turn contains a requirement on global tax information ex-change. Financial institutions of all states, which signed the CRS, including the Russian Federation, all EU countries and more, undertake to collect information about their clients, including their tax residency jurisdiction, which would be submitted to applicable tax authorities, whereupon tax authorities can inspect transactions of such clients for compliance with the tax law.

Summarizing the above, it may be concluded that regulation provided by the CRS directly affects tax residents of the Russian Federation, while FATCA affects only US taxpayers.

Which party is considered a disclosing party under the CRS? Do brokers, funds and corporate providers disclose information?

Anna Senchenko, LL.M.

Leading Lawyer

Tax and Legal Practice

Korpus Prava (Russia)

The draft law specifies the following list of organizations obliged to disclose information under the CRS:

  • Credit organization;
  • Insurer carrying out activity for voluntary life insurance;
  • Professional participant of the securities market carrying out brokerage and (or) securities management, and (or) depositary activity;
  • Trustee under the property trust agreement;
  • Non-governmental pension fund;
  • Joint stock investment fund;
  • Management company of the investment fund, unit investment fund and non-governmental pension fund;
  • Clearing organization;
  • General partner in the investment partnership;
  • Other organization or structure with no corporate status, which within its activity accepts from its clients monetary funds or other property for keeping, management, investment and (or) performance of other transactions to the benefit of the client or directly or indirectly at the client’s cost.

Thus, brokers and separate types of funds are obliged to disclose information under the CRS, and no such obligation is specified in respect of administrative providers.

Which consequences does information disclosure imply for a taxpayer? What will tax authorities do with this information?

Irina Kocherginskaya

Managing Director

Tax and Legal Practice

Korpus Prava (Russia)

Automatic information exchange suggests automatic transfer of certain information from the disclosing party of a foreign state to Russian authorities. Then the authorities will work with such information in ordinary course using administration measures and methods set forth in the national law of the Russian Federation.

Start of the automatic exchange does not mean that at once tax inspections, additional charges, automatic charge of penalties or collection write-off will begin in respect of all taxpayers, for which information is disclosed. Nothing of the kind is suggested. Amendments in the Tax Code, which would have allowed tax authorities perform such actions, were not introduced. As a result of automatic exchange, con-trolling bodies will have an opportunity to obtain during their regular activity information about accounts opened by Russian taxpayers in foreign banks, and also about foreign companies, which beneficiaries are Russian taxpayers without any additional request, which would allow tax authorities increase collection of taxes on personal income in form of retained profit of controlled foreign companies, and also on other income accumulated on foreign accounts.

Therefore, it is important to understand that for a Russian tax-payer nothing changes in terms of measures and procedures of tax control, tax authorities just have an additional easily accessible source of information. Facing the upcoming information disclosure, it is likely that the first risk group, which may suffer from transfer to the automatic exchange, will include taxpayers, which de-facto have accounts in foreign banks or controlled foreign companies, but failed to notify of them, because it is easy to adjust automatic electronic indication of such disparities in respect of such taxpayers. Close attention is expected to them, first of all. Other taxpayers can wait for inspection in the ordinary mode.

If clients managed to close all accounts and companies by the and of 2016, will it save them from the claims of tax authorities?

Artem Paleev

Managing Partner

Korpus Prava

It is, probably, the most popular question of 2016: if we close all ac-counts prior the start of the automatic exchange, will there be any tax claims against us? Unfortunately, it’s not that simple.

If a taxpayer closed all accounts and foreign companies before January 1, 2017, information about them, obviously, will not get into the automatic exchange, which actually applies to data relevant as of January 1, 2017. But it does not mean that access to information about those accounts or companies existing before 2017 will be closed. In fact, fishing expedition still exists and any information required for authorities may be requested under old and well established procedures approved by tax agreements or agreements on assistance in civil and criminal cases. Of course, for authorities it will be much harder to collect such information in comparison to its receipt through the automatic exchange because there are a lot of different “ifs” arising at sending individual request. But harder does not mean impossible. That is why all taxpayers should understand that by closing accounts and companies before 2017 they have just covered the big brother’s eye, but they haven’t closed it completely. The only thing that can save taxpayers from claims of tax authorities is the expiry of the limitation period, which equals 3 years for tax offences and 2 years for currency offences. Within the limitation period risks remain.

Are there any plans for the extension of the list of disclosed information? Will information on company beneficiaries be disclosed, if a company has no open account?

Yana Karausheva

Ex-Junior Lawyer

Tax and Legal Practice

Korpus Prava (Russia)

For many years Organization for Economic Cooperation and Development have been elaborating methods of reaching tax transparency, and it currently has the Standard on Automatic Exchange of Information (AEOI). The purpose of this Standard is to create intergovermental “network” on multilateral tax information exchange in order to overcome abusive practices of tax evasion. 101 states have already implemented the Standard in the national law, and Russia signed the agreement on the automatic exchange in May last year. The trend for more “transparency” and accessibility of tax information is obvious. There has been no official document specifying certain stages of extension of the list of disclosed information elaborated yet, but such ideas, one can say, “are in the air”.

Of course, if a company has no open account, it is less exposed to risks related to the global disclosure of information. However, if there is a trust agreement executed between a beneficiary owner of the company and its shareholders, in certain circumstances the trust structure may be deemed a financial institution, which should submit statements on controlling parties under the Standard on AEOI. A trust can be recognized as a financial institution in cases, when the source of majority of its income is income from investments or financial assets trading or when a trust is placed under the management of another party recognized as a financial institution. Under the Standard on AEOI financial assets include securities, shares in a joint enterprise, swaps, insurance contracts and a number of other assets. That is why absence of an account opened in a financial institution does not completely protect the company from the perspective of total transparency.

Will information on brokerage accounts and assets on brokerage accounts be disclosed?

Tatiana Frolova

Leading Lawyer

Korpus Prava Private Wealth

Within the automatic information exchange, competent authorities of participating jurisdictions will receive from financial institutions of their country information about accounts of individuals and legal entities — residents of other countries — parties to multilateral agreement of competent authorities.

Accountable financial institutions include any financial institutions, first of all, banks, but also brokers, depositaries, insurance and other companies.

Accordingly, within the automatic information exchange, tax authorities of the Russian Federation will receive data on brokerage accounts of Russian tax residents.

If clients managed to close all accounts by the end of 2016, where should they transfer monetary funds from closed accounts? Which risks they should watch for?

Aleksey Oskin

Deputy Managing Director

Tax and Legal Practice

Korpus Prava (Russia)

Closing of undeclared foreign accounts by the end of 2016 with no doubt significantly decreases the risk of disclosure of information about such accounts within the automatic information exchange in 2018 (since within the exchange, data will be disclosed on accounts open as of 01.01.2017).

However, if there is cash balance on the account, the question arises — where to transfer monetary funds before its closing? If the amount is modest and the bank is ready to give monetary funds out in cash, the question drops. Otherwise, the client, in fact, has the only option: transfer monetary funds to his/her account in the Russian bank (or to duly declared foreign account). But in this case the client should be ready to the occurrence of the following risks (due to the fact that tax authorities will obtain information on the performed transaction and on the undeclared account):

  1. The risk of being held liable for failure to notify of the opening of an account.
  2. The risk of being held liable for failure to submit statement on the cash flow on the account.
  3. The risk of being held liable for unlawful currency transactions on the foreign account.
Irina Kocherginskaya, LL. M.

Managing Director

Tax and Legal Practice

Korpus Prava

Other Articles on Topics
See Also Articles from the Issue
Audit Under Russian and International Rules

Until last December there had been a threat of monopolization of the audit market by creating a single self-regulatory organization controlled by the Ministry of Finance of the Russian Federation. Fortunately, it did not happen. Two self-regulatory organizations retain control over the activities of auditors.

January 20, 2017

New Accounting Standards

On the website of the Ministry of Finance of the Russian Federation there is a program for the elaboration of new accounting standards for 2016-2018. It stipulates both the development of new federal accounting standards and modification of current accounting provisions.

January 20, 2017

Latest Changes in the Legislation of Foreign Countries

In 2006 The International Business Companies Act 2016 (hereinafter – the Act) superseding The International Business Companies Act 1994 was published in the Seychelles. This act has introduced a number of changes, among which there are two main requirements – submission of information about directors and ultimate beneficiary owners – beneficiaries.

January 20, 2017

Complicated Life of the “Simplified” and Other Changes in the Tax Legislation

The year 2016 was full of events in the field of geopolitics, which partly shaded the considerable effort that our legislator applied throughout the year in an effort to create a legal framework that meets today's challenges and trends in Russia. Such efforts can be indeed considered significant, because this year the State Duma set a record: 6 165 bills were considered.

January 20, 2017

Search for the Actual Income Recipient Continues

The supervisory authorities are paying more attention to the practical application of the concept of the actual income recipient. Everyone has heard the recent cases against such companies as "Northern Kuzbass" (A27-7455/2010), "Naryanmarneftegas" (A40-1164/2011), "OriflameCosmetics" (A40-138879/2014), etc.

January 20, 2017

Even If You Sit on the Stream Bottom, You Cannot Be a Fish

On July 5, 2016, the European Commission published a document-proposal with amendments to the Fourth EU Directive on the prevention of the use of the financial system for money laundering or terrorism financing purposes, known as 4AML.

January 20, 2017