Chapter 5 - Other legislative issues or options

• Part A – Consultation questions and submissions on other legislative issues
• Part B – Background context to the consultation questions

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Part A – Consultation questions and submissions on other legislative issues

5.1 In addition to the legislative issues previously covered in this paper, the CRS provides a number of options for participating jurisdictions to consider whether to incorporate into their domestic laws.[36] These options relate to CRS due diligence and reporting and can be placed into two categories:

• Where the participating jurisdiction has an option to decide on a particular point that will apply to all reporting financial institutions (for example, whether to require place of birth information[37] for reportable accounts); and
• Where the participating jurisdiction has the option of permitting reporting financial institutions to adopt an alternative CRS due diligence procedure at the institution’s discretion (for example, whether a reporting financial institution should have the option being able to use third party service providers to fulfil their due diligence and reporting obligations). As a general rule, we intend to adopt the approach of allowing reporting financial institutions to adopt such “discretionary” options as a way of managing compliance costs.

5.2 Part A of this chapter outlines various consultation questions related to these options, which we would appreciate your submissions on. For more information on each of the questions, please refer to Part B of this chapter.

Part B – Background context to the consultation questions

Defining the CRS “reporting period”

5.23 The information that reporting financial institutions need to report annually under the CRS must be as of the end of the relevant calendar year, or other “appropriate reporting period”, depending on the meaning of that the term under each participating jurisdiction’s reporting rules (for example, alternatives include: tax year, fiscal year, etc).[39]

Nil returns

5.24 The CRS leaves it optional whether a participating jurisdiction allows a reporting financial institution to file nil returns (when the financial institution has no reportable accounts or undocumented accounts to report for CRS purposes).[40]

Whether certain CRS terms need to be defined

5.25 A number of CRS terms are not defined in the CRS and may need to be defined under our domestic law.[41] Such terms include:

• debt interest;
• gross income;
• maintaining an account;
• passive income; and
• policyholder dividend.

Currency translation rules

5.26 The CRS states that all dollar amounts to be reported are in US dollars and shall be read to include equivalent amounts in other currencies, as determined by domestic law.[42]

5.27 We are interested in your submissions regarding whether reporting financial institutions should be able to simply apply the dollar amounts specified in the CRS in New Zealand dollars (rather than US – as referred to in the CRS). This would reduce compliance costs, in the sense that reporting financial institutions would not need to undertake currency conversion procedures to determine the value of financial accounts in US.

5.28 For example, a pre-existing individual account will be a high value account[43] if its balance exceeds US $1,000,000 as at the relevant date[44] or, if a reporting financial institution chooses to apply the threshold in New Zealand dollar terms (to the extent permitted by domestic law), if the account exceeds NZ $1,000,000 as at that date.

Pre-existing accounts – TINs and date of birth

5.29 The CRS provides that with respect to each reportable account maintained by a reporting financial institution that is a pre-existing account, the TIN(s) and date of birth are not required to be reported[45] if such TIN(s) and date of birth are not in the records of the reporting financial institution, and are not otherwise required to be collected under domestic law. This is subject to the reporting financial institution making reasonable efforts to obtain such information by the end of the second year following the year in which such accounts are identified as reportable accounts.[46]

5.30 Thus, TIN(s) and date of birth information would be required to be obtained and reported (beyond merely making such reasonable efforts to obtain such information) if, with respect to a pre-existing account, such information is required to be collected under domestic law.

“Place of birth” of individuals

5.31 The CRS provides that the place of birth of an individual is not required to be reported with respect to a reportable account unless the reporting financial institution is otherwise required to obtain and report it under domestic law and it is available in the electronically searchable data maintained by the reporting financial institution.[47]

5.32 Thus, place of birth information would be required to be reported with respect to a reportable account if the reporting financial institution is required to obtain and report it under domestic law and it is available in the electronically searchable data maintained by the reporting financial institution.

Reporting average monthly balances or values

5.33 The CRS provides that a reporting financial institution that maintains a reportable account must report the balance or value of the account as at the end of the calendar year (or other appropriate reporting period) or, if the account was closed during the reporting period, the reporting financial institution must report the fact that the account was closed.

5.34 However, the CRS Commentaries also provide scope for a participating jurisdiction to require the reporting of average balance or average value instead of the reporting of the account balance or value as at the end of the calendar year (or other reporting period).[48]

5.35 This option is directed at those participating jurisdictions that already require reporting financial institutions to report the average balance or value for US FATCA purposes instead of the reporting of the account balance or value as at the end of the calendar year or other reporting period.

5.36 New Zealand does not require reporting financial institutions to report the average balance or value for US FATCA purposes. Therefore, we do not intend to require a similar reporting of average balance or value for CRS purposes.

Certain trades facilitated by brokers

5.37 Reporting financial institutions are obliged to carry out due diligence on their non-exempt accounts to identify and report reportable accounts and undocumented accounts. This extends to cover exchange traded funds that are reporting financial institutions and whose trades are facilitated by brokers. The CRS Commentaries acknowledge that this could pose difficulties where the broker may have due diligence information, but it is the reporting financial institution fund that has the CRS due diligence and reporting obligations. The Commentaries set out as an option that participating jurisdictions may address such a case, for example, by requiring the brokers to provide all the necessary information to the fund, so that it may fulfil its reporting obligations.[49]

Service providers

5.38 The CRS provides that each participating jurisdiction may allow reporting financial institutions to use third-party service providers to fulfil their due diligence and reporting obligations. The reporting financial institution would remain responsible for fulfilling these requirements and the actions of the service provider would be imputed to the reporting financial institution.[50]

New Zealand resident controlling persons as “reportable persons”

5.39 Although not required by the CRS, it states that some participating jurisdictions may want to extend their due diligence procedures to cover their own residents that are controlling persons of passive NFEs.[51]

5.40 This may be done by broadening the scope of the definition of the term “reportable person”. For example, this would (if implemented in New Zealand) require a New Zealand reporting financial institution that maintains an account held by a passive NFE to report to Inland Revenue any New Zealand controlling persons, in addition to other controlling persons from reportable jurisdictions of the passive NFE.[52]

Pre-existing entity accounts – using standard industry coding systems

5.41 A participating jurisdiction may, with respect to pre-existing entity accounts, allow reporting financial institutions to use as documentary evidence for the purposes of CRS due diligence, any classification in their records with respect to the account holder that was determined based on a standard industry coding system (provided that certain conditions are met, as set out in the CRS Commentaries).[53]

Using the “residence address” test for lower value pre-existing individual accounts

5.42 The CRS provides that a participating jurisdiction may give reporting financial institutions the option to use a residence address test for Lower value pre-existing individual accounts (as an alternative to the electronic records test) to identify the tax residence of the account holder, including using an “in care of” address or post office box for the same purposes, in certain special defined circumstances. A participating jurisdiction is also able to apply the “change in circumstances” procedures to the residence address test.[54] This is explained in detail in the Appendix.

“Related entity” definition and managed investment funds

5.43 This option relates to the ability of a participating jurisdiction to adopt an expanded definition of “related entity” to cover managed investment funds for the purposes of CRS due diligence.

5.44 “Related entities” are generally defined in the CRS as one entity that controls another entity, or two or more entities that are under common control.

5.45 As provided in the CRS Commentaries, most investment entity funds may not qualify as a related entity of another fund, and thus, will not be able to apply the rules for treating certain new accounts opened by pre-existing customers (referred to below) as being pre-existing accounts, or to apply the account aggregation rules to financial accounts maintained by related entities. (These types of accounts and procedures are expanded upon in the Appendix and Glossary).

5.46 However, the CRS provides that a participating jurisdiction may choose to adopt an expanded definition of “related entity” that also covers two managed investment entities that are under common management where such management fulfils the due diligence obligations of such entities.

5.47 If such an expanded definition of “related entity” is used, this will allow managed funds to benefit from the CRS due diligence procedures that leverage off the “related entity” test, such as the ability to treat certain new accounts opened by pre-existing customers (referred to below) as being pre-existing accounts, or to apply the account aggregation rules to financial accounts maintained by related entities.[55]

Pre-existing entity accounts’ threshold

5.48 The CRS provides that a participating jurisdiction may give reporting financial institutions the option of excluding from due diligence and reporting a pre-existing entity account that they maintain has an aggregate balance or value of US $250,000 or less at the relevant CRS date.[56]

5.49 If, at the end of a subsequent reporting period, the aggregate account balance or value of the pre-existing entity account exceeds US $250,000, then the reporting financial institution would need to apply the due diligence procedures to identify whether the account is a reportable account.

5.50 This threshold recognises compliance costs associated with reviewing pre-existing entity accounts.

Alternative due diligence procedures

5.51 Each participating jurisdiction may allow reporting financial institutions the option to apply the due diligence procedures for new accounts to pre-existing accounts in defined circumstances. This means, for example, if this option is allowed, a reporting financial institution would be able to elect to obtain a self-certification for all pre-existing individual accounts consistent with the due diligence procedures for new individual accounts, which are explained in the Appendix. Note however, that existing CRS rules otherwise applicable to pre-existing accounts would continue to apply.

5.52 A participating jurisdiction may also allow a reporting financial institution to apply the due diligence procedures for high value pre-existing individual accounts to lower value pre-existing individual accounts in defined circumstances.[57] These types of accounts are explained in detail in the Appendix.

New accounts opened by pre-existing customers

5.53 For CRS purposes, a “financial account” is classified depending on the date of opening, and in terms of when the CRS is implemented in a participating jurisdiction. Thus, a financial account can be either a “pre-existing account” (broadly, an account opened prior to the implementation of CRS in New Zealand – an account open as of 30 June 2017 based on the indicative time-frame), or a “new account” (broadly, an account opened on or after the implementation of CRS in New Zealand 1 July 2017).

5.54 However, when implementing the CRS, the CRS provides that participating jurisdictions are free to modify the term “pre-existing account” in order to include certain new accounts of pre-existing customers in defined circumstances.[58]

5.55 This would involve expanding the definition of “pre-existing account” to simplify the process when a reporting financial institution (or a related entity within the same participating jurisdiction) has a pre-existing customer and that customer opens a new account, whereby such account would be able to be treated as a pre-existing account in defined circumstances.

Group cash value insurance contracts or annuity contracts

5.56 With respect to a group cash value insurance contract or annuity contract that is issued to an employer and individual employees, a participating jurisdiction may allow a reporting financial institution to treat such a contract as a financial account that is not a reportable account until the date on which an amount is payable to an employee or certificate holder or beneficiary provided that certain conditions are met.[59]

Custodial accounts – reporting of “gross proceeds”

5.57 Under the CRS, a participating jurisdiction may provide for the gradual introduction of reporting of “gross proceeds” of custodial reportable accounts to commence in a later reporting period.[60]

5.58 This recognises that it may be more difficult for reporting financial institutions to implement procedures to obtain the total gross proceeds from the sale or redemption of property for reportable accounts that they maintain.

Trust beneficiaries as controlling persons of passive NFEs

5.59 With trusts that are passive NFEs, a participating jurisdiction may allow reporting financial institutions, that maintain financial accounts held by such trusts, to align the scope of the beneficiary(ies) of the trust treated as controlling person(s) of the trust, with the scope of the beneficiary(ies) of a trust treated as reportable persons of a trust that is a financial institution (that is, aligning with those beneficiaries that would have an “equity interest” in the trust if the trust was a financial institution).

5.60 In such a case, if allowed, the New Zealand reporting financial institution would only need to report a discretionary beneficiary in a period in which the person receives a distribution from the trust, provided that the New Zealand reporting financial institution has in place appropriate safeguards and procedures to identify whether distribution have been made by its trust account holders in a given period.[61]

Grandparenting rule for certain bearer shares of collective investment vehicles

5.61 The CRS provides that a regulated collective investment vehicle (CIV) that has issued physical shares in bearer form will not fail to qualify as an exempt CIV provided that the CIV:[62]

• has not issued and does not issue any physical shares in bearer form after the date provided by the participating jurisdiction;
• retires all such shares upon surrender;
• performs the due diligence procedures and reports (if required) with respect to such shares when presented for redemption or payment; and
• has in place policies and procedures to ensure the shares are redeemed or immobilised as soon as possible and in any event prior to the date provided by the participating jurisdiction.

36 Some of these options come from the CRS itself, while others come from the CRS Commentaries.

37 This is a type of “Reportable Account Information”, which is referred to in the Glossary.

38 Any such requirement to obtain and report a TIN would be subject to CRS Section I.D.

39 CRS Section 1.A(4)-(7), and CRS Commentaries pp.99-100.

40 CRS Commentaries p.184.

41 Implementation Handbook pp.17-18 and 40-41.

42 CRS Section VII.C.4.

43 High value accounts are explained in more detail in the Appendix.

44 The “relevant date” will be defined in the domestic legislation implementing CRS.

45 In contrast, TIN and date of birth information will generally be required to be reported for new reportable accounts, subject to CRS Section I.D.

46 CRS Section I.C, and CRS Commentaries pp.102-104.

47 CRS Section I.E, CRS Commentaries p.104.

48 CRS Commentaries p.98, paragraph 11.

49 This is mentioned on p.177 of the CRS Commentaries (paragraph 65).

50 CRS Section II.D, and CRS Commentaries p.108.

51 CRS Section VIII.D(1),(6) and (8), CRS Annex 5 pp.285-286, and Implementation Handbook p.94.

52 The passive NFE itself would also be reportable if it is a reportable person.

53 CRS Commentaries pp.203-204, and Implementation Handbook p.15.

54 CRS Section III.B(1), CRS Commentaries pp.111-112, and Implementation Handbook pp.13 and 17.

55 CRS Section VIII.E(4), CRS Commentaries p.183, and Implementation Handbook pp.16 and 94.

56 CRS Section V.A, CRS Commentaries p.135, and Implementation Handbook p.14. The relevant date will be set out in implementing legislation.

57 CRS Section II.E, CRS Commentaries pp.108-109, and Implementation Handbook p.95.

58 CRS Section VIII.C(9) and (10), and CRS Commentaries pp.181-182.

59 CRS Section VII.B, CRS Commentaries p.153, and Implementation Handbook p.14.

60 CRS Section I.A(5)(b), I.F and VIII.C.3, and CRS Commentaries pp.73, 100-101 and 105.

61 CRS Section VIII.C(4) and VIII.D(6), CRS Commentaries pp.178 and 198-199, and Implementation Handbook p.17.

62 CRS Section VIII.B(9), CRS Commentaries pp.173-174, and Implementation Handbook p.16.