British Virgin Islands: BVI Financial Account Reporting — Preparing For The CRS

The Common Reporting Standard (CRS) is the standard for automatic exchange of financial account information produced by the Organisation for Economic Cooperation and Development (OECD) which provides for systematic and periodic automatic exchange of information between signatory jurisdictions. At its heart is a requirement for financial institutions, including British Virgin Islands (BVI) investment funds, (Reporting FIs, which bears a resemblance to the scope of Reporting FIs under FATCA) based in such jurisdictions to report to the national competent authority.

As at the date of this alert, more than 90 countries and territories (click here for the list) have committed to implementation of CRS. The BVI is a part of the “Early Adopters Group” which has pledged to commence implementation of CRS from 1 January 2016. The Early Adopters Group contains numerous countries and territories, comprising many of the world’s pre-eminent financial centres and fund domiciles (click here for the list).

Although the BVI government has yet to unveil the necessary implementing legislation for CRS it is expected that, in order to comply with CRS, BVI based Reporting FIs will need to report information on the holders of ‘Reportable Accounts’ which are tax resident in ‘Reportable Jurisdictions’ to the BVI International Tax Authority (the ITA) and that information in turn will be reported by the ITA to the home tax jurisdiction of the account holders under the procedures agreed between signatories to CRS and related OECD measures.

CRS relies on the exchange of information between signatory jurisdictions and to further this cause the OECD produced, in early 2014, the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the CAA). On 29 October 2014, the Government of the BVI, together with 50 other jurisdictions, signed the CAA. The signing of the CAA represents the latest step in the BVI’s commitment to facilitate exchange of information procedures with other CRS participants.

What should BVI Reporting FIs be doing right now to comply with CRS?

BVI Reporting FIs should be adding compliance with CRS to their existing systems and controls for FATCA and UK CDOT1 (BVI FATCA). In the context of existing and new BVI investment funds, this will include looking at subscription documentation to ensure that the account opening procedures for new investors allow the fund to request and obtain the necessary information to identify subscribers, tax residency and report to the ITA on an ongoing basis. Other BVI Reporting FIs will need to take appropriate steps to review KYC information they hold on file in accordance with their standard client take-on procedures and to ensure that any gaps in information are appropriately filled.

BVI Reporting FIs should register with the ITA on the online portal (the AEOI Portal).

During the course of 2016 and 2017, following the introduction of the applicable legislation, procedures will need to be further refined and expanded to facilitate information gathering processes and due diligence on preexisting entity accounts and pre-existing individual accounts.

What are the rules for Pre-Existing Accounts?

Pre-existing accounts are those that are open as of 31 December 2015 and new accounts are those that are opened from 1 January 2016. For investment funds, this means that, generally speaking, if an investor is invested in the fund on 31 December 2015 and remains invested on 1 January 2016, that account is a preexisting account.

New account opening procedures to record tax residency will need to be in place from 1 January 2016.

For investment funds, the limited de minimis threshold will not apply to pre-existing individual accounts and they must all be reviewed. There is, however, a financial minimum threshold for pre-existing entity accounts (US$250,000) which means that accounts under that value need not be reviewed at all unless they later become higher value accounts. However, Reporting FIs can elect to voluntarily dispense with this threshold, and adopting a risk-based approach review, all accounts.

The importance of designating accounts as pre-existing or new accounts is that Reporting FIs have a grace period within which they are able to carry out the due diligence on pre-existing accounts. The relevant timelines are set out at the end of this alert.

The first exchange of information in relation to new accounts and pre-existing individual high value accounts will take place by end of September 2017.

What about new accounts?

Any account opened on or after 1 January 2016 will be, for CRS purposes, a new account. In practice, this means that any new subscriber to a BVI investment fund will be a new account. There are no safe-harbours for new accounts for Reporting FIs that are investment funds and as such, due diligence information on all new investors should be obtained on subscription.

CRS is similar to BVI FATCA in that the Reporting FI must obtain self-certification forms regarding tax residence from the account holder at or around the time that the account is opened and confirm the reasonableness of the self-certification based on a review of the documentation provided by the investor or client (as applicable), including any due diligence documentation collected as part of anti-money laundering procedures.

For new accounts, the Reporting FI must collate the following due diligence information:

a. the name, address, tax information numbers (TIN) and date and place of birth (in the case of an individual) of each Reportable Person that is an Account Holder of the account and, in the case of any Entity that is an Account Holder and that, after application of due diligence procedures consistent with the CRS, is identified as having one or more Controlling Persons that is a Reportable Person, the name, address, and TIN(s) of the Entity and
b. the name, address, TIN(s) and date and place of birth of each Reportable Person;

c. the account number (or functional equivalent in the absence of an account number);

d. the account balance or value (including, in the case of a Cash Vale Insurance Contract or Annuity Contract, the Cash Value or surrender value) as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year or period, the closure of the account;

in the case of any Custodial Account:
i. the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, I each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and

ii. the total gross proceeds from the sale or redemption of Financial Assets paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Reporting FI acted as a custodian, broker, nominee, or otherwise as an agent for the Account Holder;

e. in the case of any Depositary Account, the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period; and

f. in the case of any account not described in (d) or (e), the total gross amount paid or credited to the Account Holder with respect to the account during the calendar year or other appropriate reporting period with respect to which the Reporting FI is the obligor or debtor, including the aggregate amount of any redemption payments made to the Account Holder during the calendar year or other appropriate reporting period.

Once the information, as outlined above is obtained, the Reporting FI must conduct the following analysis:

• determine the residence of the Account Holder for tax purposes;
• if the Account Holder is an entity, determine if it is a passive non-financial entity (NFE); and
• determine the tax residence of any Controlling Person of a passive NFE.

In order to be able to classify new accounts appropriately, investment managers and funds should now be updating subscription packages to make sure that in addition to any W8-BEN or W-9 form that may already have been requested from the subscriber, the subscription package also contains a self-certification form which covers BVI FATCA, and CRS.

The BVI Guidance notes on BVI FATCA can be found here. Until such time as these Guidance Notes are updated, the industry should be guided by all official related publications by the OECD which can be found here.

What if a pre-existing account is closed before the due diligence and reporting is complete?

Assuming the BVI adopts implementing legislation for CRS which is consistent with BVI FATCA, if a pre-existing reportable account is closed before the due diligence work has been completed, it must be included in any filing with the ITA.

What if the FI has no Reportable Accounts?

Assuming the BVI adopts implementing legislation for CRS which is consistent with BVI FATCA, the Reporting FI would not be required to make a return to the ITA (in other words, no ‘nil reporting’ applies in the BVI).

When do the filings with the ITA need to be made for CRS?

2016 is the first reporting year for the CRS and subject to the due diligence deadlines as set out above, reports will need to be submitted by Reporting FIs to the ITA well before September 2017. We anticipate the first reporting date could be on or around 31 May 2017.

Are there any material differences between FATCA, CDOT and the CRS?

FATCA, CDOT and the CRS regimes operate in a broadly similar manner. One of the differences between FATCA and the CRS is that the test used to identify tax payers under the CRS is based on tax residency rather than citizenship (contrary to FATCA). The CRS also does not apply any form of withholding tax (although the widespread adoption of Intergovernmental Agreements under FATCA has negated the risk of a withholding tax being applied by the US).

Footnote

1 “UK CDOT” is the commonly used term to refer to a reporting regime materially equivalent to FATCA that is in place between the UK and the 10 Crown Dependencies (CDs) and Overseas Territories (OTs). The ten jurisdictions in which UK CDOT applies are Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat, and the Turks and Caicos Islands.