Background: The Wider Approach
The ‘wider approach’ enables Reporting Financial Institutions to capture and maintain information on the tax residence of Account Holders irrespective of whether or not that Account Holder is a reportable person for any given reportable period. The due diligence procedures in each of the agreements governing automatic exchange are designed to identify accounts which are held by the residents of the jurisdictions with which the UK is committed to exchange information. However, the number of these jurisdictions is not fixed and there is an expectation that under the CRS more jurisdictions will reach agreement with the UK over time. As a result, the regulations applying the due diligence rules have been designed to adopt a wider approach to recording the territory in which a person is tax resident irrespective of whether that territory is a Reportable Jurisdiction at the time that the regulations come into force.
Financial Institutions are required to identify the territory in which an Account Holder or a Controlling Person is resident for income tax or corporation tax purposes, or for the purposes of any other tax of a similar character that has been imposed by that territory. They are also required to maintain this information for a period of 5 years from the end of the period in which the account was last included in a return, or 5 years from the end of the period in which the due diligence process was last relied upon to treat the account as not being reportable. This effectively enables the financial institution to ‘future proof’ their processes such that when a new jurisdiction is added to the list of Reportable Jurisdictions the work in identifying where existing customers are resident has already been carried out. Reducing the number of times that due diligence processes have to be carried out should result in lower costs for the Financial Institutions in complying with their obligations. Financial Institutions will only need to revisit the determination of tax residence in those cases where there has been a change of circumstance.
The main concern is to provide Financial Institutions with the legal cover they require in the context of data protection law. The regulations impose an obligation on Financial Institutions without any discretion on their part to collect this information. In such circumstances it is the legislator that must consider the question of proportionality for Data Protection Act purposes. The obligation to identify the territory in which an Account Holder is tax resident and to maintain that information for 5 years from the end of the period in which the account was last included in a return, or 5 years from the end of the period in which the due diligence was last relied upon to treat the account as not being reportable, provides the necessary data protection cover for financial institutions to comply with their obligations. Financial Institutions are permitted to apply the same due diligence standards that are required to be applied to Account Holders resident in a reportable CRS jurisdiction to all Account Holders regardless of country of residence. This includes collecting information on country of residence and TINs for Account Holders, and entity classification, if relevant.