With the first international Common Reporting Standard (CRS) exchange of information due to commence this month, private banks should be aware of “incredibly complex” rules published by the Organisation for Economic Co-operation and Development (OECD) which will require greater attention than many would expect, according to a CRS expert.
The OECD published mandatory disclosure rules (MDRs) on 9 March which require professional intermediaries — including private banks — to disclose arrangements that seek to circumvent CRS reporting to the relevant tax authorities.
“Private banks that engage in the promotion of or provide services to a CRS avoidance arrangement via the activities of their relationship managers and/or wealth planners will be required to comply with the MDRs and file necessary disclosure reports. Disclosure reports will include details of the arrangement, the client and users of the arrangement and other intermediaries involved,” Zac Lucas, founder and head of legal at Centenal Legal Technology, told Asian Private Banker.
According to Lucas, reporting in line with MDRs will be more dynamic than existing CRS reporting, as it comprises client and advisor interactions as well as behaviour patterns and outcomes.
Meanwhile, CRS reporting is more predictable and static, focusing solely on tax residency and account balances.
Though MDRs are not yet mandatory, the European Union formally adopted MDRs into law on 25 May, with member states required to apply the provisions by no later than 1 July 2020.
“During the consultation preceding publication of the MDRs, many contributors criticised the OECD for prematurely introducing yet more reporting rules, particularly as the CRS is still relatively new,” he said.
The critics, Lucas explained, feel the OECD should have used feedback from CRS peer reviews to fine-tune the rules rather than hastily publish in response to the Paradise Papers leak.
He also said the MDRs are “incredibly complex” and financial institutions will struggle to implement the requirements.
“If the Asian regulators decide to adopt MDRs, it is very likely that the level of non-compliance will be off the chart because quite a lot of financial professionals are unaware of the rules,” Lucas said.
Further, he added that the rules could potentially clash with existing laws governing the secrecy and privacy of banking data in a number of Asian jurisdictions.
While further education on MDRs is no doubt required, a tax expert recently told Asian Private Banker that private banks and their clients should also be prepared for possible disputes arising over tax residencies during CRS information exchanges.