Common Reporting Standard (CRS) Explained: The Impact On Expats

Do you feel safe with your money sitting in your bank account? If not, you’re not alone. Asset seizures and bank account freezes have become so common that it’s hard to trust traditional financial institutions. For instance, saying the wrong thing on social media can get you into trouble—just think of what happened to the Canadian truckers and their donors.

Events like these have prompted many high-net-worth and freedom-minded individuals to prioritize privacy like never before. The less information the state has about you, the easier it is to protect yourself and your assets. While many people may believe that simply moving money abroad can protect their financial privacy from prying eyes in their home country, the truth is that it’s not so simple. As long as your new country automatically exchanges information with other countries, your financial privacy is still compromised. That is what the Common Reporting Standard (CRS) does.

It’s important to note that moving money overseas does not relieve you of any tax obligations to your home country. It’s crucial that you work with a trusted tax advisor so that you properly report any taxable funds and fully comply with your home country’s tax laws.

So, what exactly is the CRS, and how can it affect you? Let's dive in.

UNDERSTANDING THE COMMON REPORTING STANDARD (CRS)

Have you noticed that the world is leaning towards more control and less freedom? This is not mere speculation but the raw reality. What we’re witnessing is perhaps nothing but the beginning. Depending on where you live, your bank might automatically report transactions of a certain amount to the local tax authorities. For example, if you live in the U.S. and receive a business cash transaction worth $10,000 USD or more, the IRS requires you to fill out Form 8300. 

Every transfer is scrutinized, and the reporting requirements are quite burdensome. But here’s a different question: how would you feel if you were also chased after abroad? Unfortunately, that’s what the CRS does, but below, you will find exactly what it is and how it works.

WHAT IS CRS?

The last few years have seen a rise in reporting and information exchange requirements between countries. The CRS, in particular, obligates its members to exchange financial information with each other automatically. For example, if you are Canadian and hold accounts in Monaco, the Canadian government can easily know about it.

As of today, over 120 countries are signatories to the CRS, including all the common suspects: Australia, the United Kingdom, Canada, New Zealand, etc. Interestingly enough, the United States has its own CRS, called the Foreign Account Tax Compliance Act (FATCA).

Essentially, the OECD (Organization for Economic Co-operation and Development) and Western countries can easily share banking information to apparently prevent crimes like tax evasion and fraud. Even beacons of banking privacy, like Switzerland and the Cayman Islands, have fallen prey to the CRS.

Local tax authorities compile the received data and share it with tax authorities of other CRS signatory countries in a mutual exchange of information about residents holding foreign accounts

HOW CRS WORKS

If you wonder how the CRS works, in this section, we’ll break down the process to help you understand how countries can easily know the money and assets you may hold outside your residence for tax purposes:

1. COLLECTION OF FINANCIAL INFORMATION

Financial institutions, such as banks, investment entities and even some insurance companies, must collect detailed information about their account holders, including their tax residency. 

2. REPORTING TO LOCAL TAX AUTHORITIES

The collected information is reported to the tax authorities where the financial institution is based. This reporting is done annually and includes all relevant account details.

3. EXCHANGE OF INFORMATION BETWEEN COUNTRIES

The local tax authorities compile the received data and share it with the tax authorities of other CRS signatories. This exchange is mutual, meaning that each country provides and receives information about their residents holding accounts abroad.

4. USE OF SHARED INFORMATION

Tax authorities use this information to verify whether residents are meeting their tax obligations. Data can be cross-checked with tax returns to identify tax evasion and discrepancies. Typical data include:

• Account balance

• Account number

• Address

• Certain payments made into the account

• Controlling Person Type for certain Entity Types (for Controlling Persons)

• Country (or countries) of tax residence

• Date and place of birth (for individuals or Controlling Persons)

• Entity Type (for Entities)

• Name

• Place of registration/incorporation (for Entities)

• Taxpayer Identification Number (TIN)

In addition to the loss of anonymity in various jurisdictions, you will face increased scrutiny from tax authorities, and any discrepancy could trigger audits

IMPLICATIONS OF CRS

The CRS has important implications for individuals and entities with accounts across borders. Some of the key effects are:

1. DECREASED BANKING PRIVACY

This is the first and most obvious consequence of the CRS. Not only are you losing anonymity in multiple jurisdictions across the globe, but you also face increased scrutiny from tax authorities. A single mistake might lead to audits if discrepancies are found. 

2. INCREASED COMPLIANCE COSTS

Financial institutions have to face significant administrative burdens to comply with CRS requirements, often translating to higher fees for account holders. Also, both financial institutions and their clients need tax advisors to make sure they stay compliant, further increasing the costs. 

3. LEGAL AND FINANCIAL RISKS

The reporting requirements are so strict that financial institutions may face hefty fines and penalties. Account holders, on the other hand, may be found guilty much more easily and face legal consequences such as fines and even imprisonment. 

4. IMPACT ON FINANCIAL STRATEGIES

Investors might reconsider whether it is safe to invest in CRS jurisdictions due to the reduced privacy. Therefore, they might opt for non-CRS countries where their assets can be held privately to minimize the risk of data sharing. 

With financial privacy increasingly at risk due to the CRS, factors like political and economic stability are crucial to truly protecting your funds

CONCLUSION

Since financial privacy is increasingly threatened, understanding the CRS and its implications is essential for expats and high-net-worth individuals. The CRS mandates the automatic exchange of financial information between over 120 participating countries, making it difficult to keep your financial activities private even when your funds are held abroad.