22 March 2019 - Article
Some time ago we wrote about the impact on UK charities of the Foreign Account Tax Compliance Act (FATCA). UK charities with US investments became obliged under FATCA to certify their status to banks and investment managers, but in essence, this was 'just another form to complete'. A new international transparency regime will now affect many more UK charities and seems likely to represent an onerous new reporting burden for some.
What is the Common Reporting Standard?
The Common Reporting Standard (CRS) is, like FATCA before it, an information exchange regime aimed at international tax transparency. Whereas FATCA dealt with the exchange of information with the US, however, CRS requires multi-party information exchange on an international basis.
The Organisation for Economic Co-operation and Development (OECD) is responsible for this global regime, which has been implemented at the EU level in a Directive on Administrative Cooperation (DAC) in the field of taxation. In the UK, the International Tax Compliance Regulations 2015 have been brought in to implement the CRS principles as contained in the DAC.
The CRS came into force in January 2016. Over 40 countries have signed up as early adopters of CRS, including the UK, and they will start to collect information this year for filing in 2017. Over 70 countries have pledged to introduce this by 2017.
What is the likely impact on charities?
CRS is a global regime and applies broadly – any person or entity that maintains any sort of account with a financial institution within a participating jurisdiction is likely to be asked to complete a CRS self-classification form. Indeed many charities have received these forms already from their banks.
Those charities who have successfully completed FATCA self-certification in the past should not be complacent, however. The CRS has many similarities to FATCA, but does differ in important ways. Perhaps most significantly, there is no provision in CRS for recognised charities to be 'deemed compliant'. In addition, interpretation contained in relevant guidance and OECD Commentary is unhelpful on several points affecting charities.
So it seems that CRS may be more than 'just another form to complete', at least for some charities. In the absence of any exemption for charities of the sort contained in FATCA, some charities may be classified as 'Financial Institutions' required to report on their non-UK grantees as if they were 'account holders' of a bank or investment house. For instance, a charity may be a reporting financial institution if its income is predominantly from financial assets and at least some investments are managed externally under discretionary authority.
It is difficult to gauge how many charities this may affect but as there is no de minimis threshold, it certainly could affect many. This regime could have a chilling effect on choice of grantees, with affected charities opting to fund exclusively domestic grantees in order to avoid onerous reporting.
The sector has been lobbying for charity-specific HMRC guidance and it is hoped that this will clarify the position further. Without clear guidance on how the CRS will be implemented in the UK, at least on some readings, it would appear that a charitable trust that is a financial institution may be required to report on non-UK grantees where a charitable company may not. This would be an arbitrary distinction and would potentially allow trustees concerned with onerous trust reporting to avoid non-UK grantee reporting by incorporating – an odd outcome indeed.
What should charity trustees be doing?
Many trustees will be encouraged to engage with CRS by self-certification forms from banks and investment managers. Those who are not should proactively consider their charity's CRS status and should not simply ignore the regime. Bank forms, where received, should be completed fully and on time but trustees should also monitor progress of sector efforts to lobby HMRC for helpful charity-specific guidance on CRS. Whilst some banks and investment managers may provide high level guidance, they are likely to steer clear of giving advice, and charities of all sizes may find that professional advice is needed to navigate the highly specialised terminology of CRS.
Charities cannot avoid the CRS entirely, but with clear guidance, and in some cases advice, they can relegate it to 'just another form to complete'.