BVI investment funds community getting to grips with CRS

Harneys Partner Philip Graham recently shared these comments on the impact of CRS on the BVI investment funds community

One of the hottest topics in the hedge fund industry for 2016 is the Common Reporting Standard (CRS). It is affecting everyone far and wide and given it was implemented in the British Virgin Islands (BVI) on 1 January, 2016, the investment funds community in this jurisdiction are working very hard and diligently towards ensuring that every fund domiciled in the BVI is fully compliant before all of the requisite time periods.

For those that have been hibernating in caves over the last few months, 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 all of the signatory jurisdictions. At its heart is a requirement for financial institutions, including British Virgin Islands investment funds, based in such jurisdictions to report financial information to their national competent authority.

Therefore, in order to comply with CRS, BVI investment funds will need to report information on the holders of ‘Reportable Accounts’ which are tax resident in a ‘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.

So which jurisdictions are signatories?

As at the date of this article, more than 90 countries and territories have committed to implementation of CRS and the full list can be found at http://www.oecd.org/tax/transparency/AEOI-commitments.pdf.

The BVI is a part of the “Early Adopters Group” which 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, although the one big omission is the USA, which led to The Economist publishing a fascinating article entitled “The Biggest Loophole Of All”. Whilst it is not this author’s intent to comment on that position any further, the hypocrisy involved given everything started with the imposition of the Foreign Account Tax Compliant Act (FATCA) is quite staggering.

So what should existing BVI investment funds be doing right now to comply with CRS?

Clearly, all investment funds must begin to add a layer of compliance with CRS to their existing systems and controls for FATCA. 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 allow them to report to the ITA on an ongoing basis. The offering documents should also be reviewed to ensure there are appropriate disclosures made about CRS within the document, including an analysis of what might happen if they have a recalcitrant investor, which potentially might lead to an update to the constitutional documents to add in new mechanisms. Finally, they should also be speaking to their administrator to ensure that appropriate steps are being taken 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.

Separately, all BVI domiciled funds should register with the ITA on the online portal (the AEOI Portal) by 30 April 2017. This is the same portal that is used for FATCA currently.

Should I be examining the details we have on all of our investors?

CRS defines the investors in a BVI fund as either “Pre-Existing Accounts” (which are those investors in the fund as of 31 December 2015) and “New Accounts” (which are those that invest from 1 January 2016 onwards).

There is no de minimis threshold for New Accounts and therefore all investors that come into a BVI fund on or after 1 January 2016 will be deemed to be New Accounts and should be reported on accordingly.

For Pre-Existing Accounts, the limited de minimis threshold of US$250,000 does apply to accounts held by entities, which means that accounts under that value need not be reviewed at all unless they later become higher value accounts. Sadly though, this threshold does not apply to Pre-Existing Accounts held by individuals and so they must all be reviewed.

What information do I have to obtain on my investors?

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

For New Accounts, the fund must collate the following due diligence information:

  • the name, address, tax information numbers and date and place of birth (in the case of an individual) of every “Reportable Person” that is an investor and, in the case of any entity that is an investor, the same details for each “Controlling Person” of that entity;
  • the account number;
  • the account balance or value as of the end of the relevant reporting period; and
  • the total amount of interest, dividends, redemption payments or other income credited or paid to the investor.

Once the information, as outlined above is obtained, the fund must then determine the residence of the investor for tax purposes.

In order to be able to classify New Accounts appropriately, funds should now be updating subscription documents 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.

What if a Pre-Existing Account fully redeems out of the fund before the due diligence and reporting is complete?

I am afraid they must still be included in any filing with the ITA.

What if the fund has no investors that are deemed to be “Reportable Accounts”?

The good news on this front is that the fund would not be required to make a return to the ITA (in other words, no ‘nil reporting’ applies in the BVI), but funds are still welcome to do so.

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 on Pre-Existing Accounts (31 December 2016 for high value accounts, 31 December 2017 for lower value accounts), reports will need to be submitted by the funds to the ITA by 31 May 2017.

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