AEOI – Just an anacroyn or an actual responsibility?

AEOI – Just an anacroyn or an actual responsibility?

February 17, 2021

Is AEOI just an acronym that you’ve seen in the business news or is it something that you’ve spent time considering to understand whether you have a personal responsibility?

 

AEOI or ‘Automatic Exchange of Information’ represents the exchange of information under the US’ Foreign Account Tax Compliance Act (“FATCA”) and the OECD’s Common Reporting Standard (“CRS”) which seek to combat tax evasion.  The terms of FATCA and the CRS from one jurisdiction to another are effectively common.

 

Tracing its origins as far back as the European Savings Tax Directive in the early 2000’s, FATCA first appeared on the radar in 2008 and eventually, after wrangling with how compliance with it could actually be achieved by countries around the world; information began to be exchanged under it in 2014.  The willingness of countries to exchange information under FATCA, spurred on of course by the punitive measures which might be imposed for non-compliance, gave the OECD the ability to build on the FATCA principles and to introduce the CRS; reporting under which began in 2017.

 

For the avoidance of doubt, FATCA applies to US citizens wherever they are resident.  CRS applies to residents of the countries which are signatories.  The US is not a signatory to the OECD’s Multilateral Competent Authority Agreementregarding CRS and so parallel reporting regimes have to be operated by those entities which have reporting obligations.  The UK is a signatory to both FATCA and CRS and so compliance with the reporting framework is mandatory if there is an obligation to report.

 

Whether there is an obligation to report has been the subject of much debate amongst those who provide trust services and has led, in our experience, to conclusions being reached that the obligation doesn’t apply or that the decision as to whether it does apply lies elsewhere.  Trustees of trusts do, however, have direct responsibilities to understand whether the trust meets the criteria of a financial institution and, if so, who will take responsibility for the reporting.

 

There is also the risk of the need for reporting being overlooked because the arrangement isn’t viewed as a trust.  For example, holding shares as nominee, is equally a service where consideration needs to be given to reporting obligations.

 

The term ‘financial institution’ is broad ranging within both FATCA and the CRS.  Within the definition, which is the same for both, there is the class of ‘investment entity’ which will place a trust in the category of a ‘financial institution’ if it earns more than a certain percentage of its income from investment sources over a given period of time.

 

 

The first responsibility, therefore, for a trustee is to understand whether the trust for which they are acting meets the “investment entity test”.  If it does, there could be reporting obligations under both regimes (FATCA and CRS) in respect of the parties connected to the trust which encompasses the trustees themselves, the settlor, the protector and certain classes of beneficiaries.  The responsibility for this reporting lies with the trust and as a trust is not a separate legal entity it creates an obligation on the trustees to undertake this reporting on behalf of the trust; using the relevant portals that are available from various tax authorities to exchange the correct information in the correct format.

 

Where a professional adviser, such as an accountant or lawyer acts as trustee of a trust (even if this is in a personal capacity but is invoiced through the firm), it is imperative that they understand how the trust has been classified and why, what impact the classification has on the need to report and what documentation there is in place to support the classification and any reporting that might be required.  This documentation extends to internal documentation to evidence the reasons for the classification, the receipt of self-certifications from the parties to the trust to evidence residence and citizenship as well as potentially the completion of documents for banks or investment houses which could also (usually) have reporting obligations in respect of the trust.  It is important for trustees to also be aware that due to the time period used for classification purposes, the classification has to be revisited on an annual basis so that any change in classification can be reflected into reporting and internal documentation.  In addition, any change of residence for the parties to the trust needs to be treated as a ‘trigger event’ in order that any impact on reporting can be taken into account.

 

With this myriad of responsibilities and the criminal and financial penalties for non-compliance, we often see trustees wanting to ensure that any reporting [their] obligations are looked after by a regulated trust service provider.  The ability to do this is provided for in both FATCA and CRS although the trust service provider itself needs to meet certain criteria in order to be able to accept responsibility for classification and reporting.

 

What is clear is that AEOI shouldn’t just be an acronym for anyone who is acting as the trustee of a trust.  To treat it as such would be foolish.  Instead, each trustee should know and understand their responsibilities and how those are being met including whether the services of a regulated trust service provider would assist in meeting those responsibilities.

 

Documenting compliance is vital in ensuring that evidence can be produced in the event of enquiries from local and overseas tax authorities which have escalated as a result of AEOI and which have doubtlessly been helped along by data leaks such as Panama and Paradise Papers.  This combination of data in the public domain and data which may be exchanged on the activities of a trust, for example by a bank at which the trust has an account, puts the spotlight firmly on trustees to ensure that they are wholly compliant with the various requirements.

 

DQ provides advice and support in relation to FATCA and CRS compliance including training, the provision of classification templates and the provision of procedures should these be required.

 

 


Article by Sinead O’Connor

Head of Regulatory & Compliance Services

DQ Advocates

April 2019

Email: sinead@dq.im

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