Common Reporting Standard (CRS): Development and Limitations

Sihang Zhang, Vol. 37 Associate Editor

In recent years, the ease of establishing accounts at foreign financial institutions, combined with financial advisors who routinely establish foreign structures to hide income, create a unique risk of tax evasion for governmental authority, especially in a self-assessed tax system, where taxpayers may choose not to comply with their domestic tax reporting obligations. Indeed, the increasingly globalized and borderless world of finance makes it a lot more “tempting” for wealthy people to hide their money abroad. Against the backdrop of rising public anger about tax avoidance and evasion, the G20 finance ministers endorsed automatic exchange as the new tax transparency standard on April 19, 2013.[i] Two years later, on October 29, 2014, 51 jurisdictions (39 were represented at ministerial level), signed a multilateral competent authority agreement to automatically exchange information based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.[ii] More than 65 jurisdictions publicly committed to implementation. The Common Reporting Standard (CRS) is a big step towards a globally coordinated attempt between governments to disclose and exchange financial information of income earned by individuals and organizations. Countries have a shared interest in exchanging information to combat against tax evasion and to reduce the cost of enforcement by standardizing the information exchange system. The CRS sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.[iii] Deploying an automatic report mechanism as opposed to traditional report-on-request model, the CRS builds upon FATCA (the US Foreign Account Tax Compliance Act), which was the first global automatic exchange of information program[iv]. Another similarity between FATCA and the CRS is that both legislations recognize the significant role that financial intermediaries play in the ability to access information with regard to the owners of assets and the recipients of payments.[v] As with any other global agreement, one key question in evaluating the CRS’s effectiveness is inquiring into its implementation in domestic level.  The CRS approach consists of two elements: the Model Competent Authority Agreement (CAA), which contains the detailed rules on the exchange of information between governments, and the CRS, which sets out the reporting and due diligence procedures to be applied by financial institutions to financial account information. The implementation of CRS itself will require translation of the requirements into domestic law (each participating country is expected to enact its own laws and issues its own rules, regulations, and guidance), while the CAAs can be built on the existing bilateral approach of the Global Forum on Transparency and Exchange of Information for Tax Purposes[vi]. The exchange of information could also be implemented through multilateral agreements. However, in order to enter into automatic exchange of information agreements, the receiving country must ensure that it has the legal framework and administrative capability to maintain the confidentiality of the information received and restrict the use of the information to the specified purposes. Given that the implementation of the CRS is expected by 31 December 2015 by early adopting countries, it is only two months away to see how participating counties carry its duty and how financial institutions respond to new requirements for sharing financial information with foreign governments. While international society generally embraces the adoption and impact of the CRS that would have on detecting and combating against tax evasion, several concerns and limitation remain. First, from the perspective of financial institutions, the implementation of CRS will likely drive up their compliance cost and raise potential legal consequence for failure to comply. In 2014, fearing the legal consequences of not meeting the FATCA requirements to the letter, many banks and other financial institutions have simply stopped providing services to US clients.[vii] The same concern applies to whether financial institutions will refuse to do business with foreign clients if the administrative and legal costs of doing so are too high. In addition, another problem with the CRS is that it lacks the threat of tax withholding. In the absence of such withholding, the CRS seeks to identify tax evaders both through a global scheme requiring financial intermediaries to identify the residency of direct and indirect owners and also by encouraging taxpayers to comply given the requirement of financial institutions to report on such persons, which can potentially create more problems and steps for government. Furthermore, there is always a risk that there could be tax-evades can choose a jurisdiction that does not participate in the CRS. Notably, the United States is not a CRS participant. It is hard to predict the timeline for a change. The truth is the U.S.’s nonparticipation in CRS creates itself trouble too: it imposes particular and difficult requirements on many U.S. entities.[viii] Last but not the least, given the timeline of implementation of the CRS, the OECD itself admits that the current timetable is “ambitious” because many countries, especially in the developing world, do not currently have the technical mechanisms or administrative experience in place to meet the standard. Therefore, with the assistance of the rich countries, it will probably take several more years before the CRS is a truly global information exchange network.

[i] O.E.C.D., Standard for Automatic Exchange of Financial Account Information, [ii] Id. [iii] Editorial, The Common Reporting Standard: Automatic Information Exchange Goes Global, Tax News Global Tax News (Sept. 25, 2015), [hereinafter Reporting Standard]. [iv] Id. [v] Expat Briefing Editorial Team, The Great US Expat Banking Lock-Out, Expat Briefing (Oct. 13, 2014), [vi] Robert Bridson, The Common Reporting Standard: Effective Global Tax Information Exchange?, Int’l Journal, Oct. 9, 2015, [vii] Reporting Standard, supra note 3. [viii] Denise Hintzke, The World is About to Become More Financially Transparent, Whether or Not the U.S. Participates, Forbes, (Oct. 15, 2015),