At the beginning of 2018 a number of banks, who had not already done so in the second half of last year, hurried to send out the Common Reporting Standard (CRS) forms to companies – particularly foreign ones – holding accounts with them. To be precise, the form was a data sheet in which the representative of the company „provides assistance” to the bank, on a self-assessment basis, in satisfying the CRS requirements. By comparing the information on teh data sheets with the data already held on their own files, the banks decide which person, or people, they will send a report, or reports, on, in connection with a given company.

I should point out here that I am not a tax expert or consultant, so what I am writing here should not be considered as tax advice. At the same time, I would like to share my thoughts with interested readers, as I do in the columns of the LAVECO Newsletter every 3 months. I can conclude from the feedback that the majority of readers are happy to hear my views. I, on the other hand, am only too happy to be able to be of service to you.

First of all, it is extremely important to adhere to the deadlines. The banks state when they expect to receive the data sheets. If they do not receive them by the given deadline, they have the right to classify a company or bank account on the basis of the information and documentation which they have on their files. And they will do just that. I have come across bank forms with deadlines for return of January 31st, giving the customer just one month to make their declaration for 2016. This tight deadline is completely unfair, if we consider that in the case of a normal, real company the financial statement and accompanying auditor’s report for the 2017 calendar year will not be completed by January 31st 2018.

I found it outrageous that they quoted the anti-money laundering regulations in the text explaining the form. The CRS is an opportunity to make an administrative declaration, not an obligation, as the bank will categorise a company and make a report, if it considers it necessary, even if it does not receive the form, as they are required to do so. But what right do they have to mention money laundering here and use it to frighten customers? In my opinion, that is of no relevance here. This is something completely different.

My views here refer primarily to company accounts, as the situation is much simpler in the case of personal accounts. The structure of a company, or other legal entity, with or without personality, is more complex, maybe involving several countries, while in the case of individuals it is more homogenous. With the company bank account, the country of registration is important, and a report will be sent here almost by default. At the same time, the company’s place of effective management and the location of controlling persons are also important from the point of view of reporting, and reports may also be sent to these countries, depending on the case.

But above all, it is worth looking at the company’s or organisation’ status. Here, the data sheets differentiate between Financial Institutions (FIs) and Non-Financial Entities (NFEs). There is no point in dealing with Fis here, as in our practice it is very rare to come across a bank making a declaration to another bank. In the case of NFEs, customers are required to make declarations regarding the company’s nationality, where it is resident for tax purposes, or rather whether or not it has a tax identification number, and if it doesn’t have one, why it doesn’t have one! The questions of tax residency and tax numbers are taking on greater relevance in the financial world. In all probability, from 2019 companies which do not have a tax number will not be able to open or operate bank accounts at all. The OECD gudielines list having a tax number as one of the requirements for a company to open or operate a bank account. Today, there are still numerous countries where some of the companies registered there do not have tax numbers at all. Typically, these are offshore companies registered in the International Business Company (IBC) format. The situation with these companies is continuously becoming more and more impossible, and it is worth planning in advance now.

The place of effective management is a critical question, being closely related to the examination of tax residency and nationality. The legal consequences of this vary from country to country. It is very important to look very closely, with qualified tax experts from the country concerned, at the legal consequences, for example, if somebody manages a foreign company from their own country. Following the sending of CRS reports, this information could also be made available to the authorities in the individual’s home country.

One of the most important viewpoints is whether the company is involved in active or passive activities. The explanations accompanying the forms set down in detail what is considered active or passive. In my opinion, this is the most critical point in the whole report. Accepting the guidelines, according to which the banks will only send reports to their tax authorities on companies with passive activities, it is very important to define the company’s activities and operations very clearly in the form. This is where, to me, what the banks currently request, or require, from their customers is not logical: they are asking people who do not have the full picture and are not financial experts to make declarations on financial information. What do I mean by that? Who is in a position to make a declaration here? Naturally, it is the accountant who documents th ecompany’s financial position and the auditor who approves the company’s annual financial statement. In reality, the auditor would be the person most qualified to make an accurate declaration in this question.
To prove my point, let’s look at the explanation given by one of the banks regarding the classification of Active non-Financial Entities (ANFEs). An ANFE is a company in which

less than 50% of the total income during the financial year or reporting period is derived from passive activities, and
less than 50% of the assets are used for the acquisition of income derived from passive activities during the financial year or reporting period
Well, show me a businessman who, instantly and off the top of his head, could say with any numerical accuracy what is what. Let’s supppose there is a construction company which receives orders for the construction of apartments. It owns its own machinery, which it uses in its daily business. Its income generally comes from construction contracts. The company manages a bank account in the country in whichit is registered, but also deposits its savings in a Swiss bank account, where the 1 million Swiss francs invested in Swiss government bonds yield an annual profit of 1%. This results in a profit of 10 000 Swiss francs in the company’s accounts. By contrast, the company owns machinery worth 1.5 million Swiss francs, which gives the comapny an income of 2 million Swiss francs in the given financial year. Let me simplify my thought pattern: if the Swiss bank classifies this company as being passive, then it is making a mistake, as the figures clearly show that the company is active. However, this will only be credibly revealed, if the auditor’s report includes an analysis of the company’s income and asset structures. In my opinion, this will all be unavoidable in the future, assuming, that is, that the banks want to apply the CRS accurately.

Finally, a declaration based on the auditor’s report would also be beneficial in that it would remove responsibility from the banker and the customer. The customer would not make false declarations, and the banker would not make mistakes when categorising companies. Reducing the number of errors would be in the interest of all parties.

The forms define precisely the individuals to be considered as exercising control over the account (controlling persons). The nationality and tax residency fields, on the other hand, are not so straightforward, as a given individual may be resident in a number of countries, and, what’s more, may have tax numbers in several countries. The question is where is that person both resident and tax resident, as, in theory at least, that is what the form is asking. What does make a difference though is the documentation required as proof. In this regard, the principle of „so many countries, so many customs” applies. I have come across a bank which did not accept the official United Arab Emirates personal identification document and proof of address of an individual who was actually resident and tax resident in Dubai, as proof of resident and tax resident status. The bank’s argument was that according to the laws of the United Arab Emirates it is enough for a person to enter the country twice a year – once every six months – to show that they live there.

This financial world, which tends to consider people/customers guilty rather than innocent, is somehow illogical. The attitude of the bank I have just described was just like that. Unfortunately this is not an isolated incident. It is completely outrageous that the banks consider the very customers who provide them with a living to be guilty. But for me the most tragicomic statement of all came from the banker I was having lunch with who admitted, after two glasses of wine, that if he had to fill in these fantastic forms, he would definitely be in trouble. More precisely, he could not say with any certainty that his bank would satisfy the OECD requirements. That’s too much for even me to comment on 🙂