Countries across the globe are signing up for OECD initiative that requires tax authorities of participating countries to automatically exchange tax-related information on financial assets held in foreign countries.
The initiative is dubbed Common Reporting Standards (CRS).
Accessibility of such tax information is a valuable tool that authorities around the world are using to curb cross-border tax evasion.
Countries across the globe are signing up for The Organisation for Economic Co-operation and Development (OECD) initiative that requires tax authorities of participating countries to automatically exchange tax-related information on financial assets held in foreign countries. The initiative is dubbed Common Reporting Standards (CRS).
Accessibility of such tax information is a valuable tool that authorities around the world are using to curb cross-border tax evasion.
Kenya has not been left behind. The passage of 2021 Finance Act saw Kenya bring forth a raft of initiatives aimed at launching tax information exchange with other CRS participating jurisdictions.
This will help the Kenya Revenue Authority in curbing revenue leakages. This measure is in line with the current global drive to increase transparency for purposes of combatting tax evasion among other crimes.
The Act introduced a mandatory requirement for the financial institutions to conduct due diligence for purposes of identifying foreign accounts. The identified accounts will be reported to the Kenya Revenue Authority (KRA).
Subsequently, KRA will exchange this information with the tax authorities of the participating jurisdictions.
Co-operation between agencies and authorities is critical in the fight against tax evasion.
KRA will benefit from this initiative since certain bank accounts of Kenyan individuals and entities held in foreign participating countries will be availed. Currently, 109 countries have signed up for Common Reporting Standards.
Some of those countries include the UK, Canada, France, Germany, Australia, Panama, the Cayman Islands, Mauritius, South Africa, Nigeria amongst others.
Kenya’s National Treasury is in the process of publishing the Common Reporting Standards Regulations that will guide financial institutions on how to identify reportable accounts and other reporting requirements.
Impact on financial institutions
Most of the financial institutions that are privy to information that is of value in regard to tax compliance will be impacted. They include depository institutions like banks, custodial institutions, investment entities and specified insurance companies.
All these entities will be needed to comply with due diligence procedures and record keeping requirements as stipulated in the Common Reporting Standards regulations.
On due diligence, the financial institutions will be required to identify the tax residence of their customers using indicators such as current mailing address, or residence address and telephone numbers.
The financial institutions will be required to report to KRA the account balance as at the end of the year. Some incomes and payments that have been credited in the account during the year will be reported as well.
These will include interests, dividends and proceeds from the sale of financial assets like stocks/shares.
The account holder’s identification information that will be required will include the name, address, residence, Personal Identification Number (PIN) and date and place of birth. In case of an entity, the controlling person’s identification information will be reported to KRA.
Compliance with CRS may not be a difficult task and especially for the financial institutions that have in place strong anti-money laundering and know your client (AML/KYC) Procedures.
The regulations have allowed financial institutions to utilise the due diligence information that has been collected pursuant to AML/KYC Procedures.
Financial institutions in Kenya can also leverage on the compliance structures that they have put in place to comply with a similar mandatory US anti-tax evasion law, the Foreign Account Tax Compliance Act (FATCA), which was introduced by the US tax authority to fight tax evasion by US citizens.
FATCA regulations requires foreign financial institutions and certain other non-financial foreign entities to report financial assets held by the US persons to the US tax authority, Internal Revenue Services (IRS).
Some Kenyan financial institutions have been identifying the US account holders and subsequently submitting their information to the IRS.
The biggest difference between CRS and FATCA is that under the FATCA, it’s only US persons financial information that is submitted directly to the US tax authority.
Under CRS, the financial institutions will be submitting financial information of the foreign account holders to the KRA for subsequent submission to the participating jurisdictions. It is worth noting that the US is not a signatory to the CRS.
KRA may want to know FATCA compliance status of the financial institutions in Kenya.
The level of FATCA compliance may be an indication of how prepared the financial institutions are regarding adopting requirements under CRS.
Financial institutions may consider investing in technologies that will enhance their due diligence and data quality management capabilities that will result in quality, effective and efficient CRS reporting
For financial institutions account holders, one of their obligations will be to ensure they provide their financial institution(s) with the relevant identification information to ensure their tax residencies are correctly identified.
This is especially important for those customers who have touchpoints, do business or have residence in more than one country.
Mr Kiragu is a financial services regulatory compliance professional based in Canada
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