Georgia has recently become a member of the CRS, thus joining the global effort towards fiscal transparency. In this article, we will discuss what CRS is, how it works, and, most importantly, how Georgia’s membership affects the taxpayers.
Origins of the CRS
The Common Reporting Standard (CRS) was developed by the Organization for Economic Co-operation and Development (OECD) in 2014. It aims to implement the Automatic Exchange of Information (AEOI) framework. CRS serves as a standardized set of protocols and procedures for member jurisdictions to obtain financial information from financial institutions concerning taxpayers and automatically exchange this collected data with other participating jurisdictions annually.
In simple terms, if you live in one country and have a bank account in another, the authorities of the latter country will collect financial information about your bank activity there and share it with your home country, provided that both countries are members of the CRS. This prevents individuals and businesses from committing offshore tax evasion.
Presently, over 100 jurisdictions, including Georgia, have committed to the automatic exchange of information under the CRS. This obligation originates from the Convention on Mutual Administrative Assistance in Tax Matters, a treaty involving over 100 participating jurisdictions. Specifically, Article 6 of this Convention imposes the responsibility on signatory countries to collaboratively determine the scope and procedure for the automatic exchange of information. Furthermore, the Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA) stems from Article 6 of the Convention. It serves as an international agreement facilitating the implementation of CRS on a multilateral basis. By signing the CRS MCAA, countries commit to exchanging financial information automatically with all other signatory countries. The main benefit of this multilateral mechanism of the implementation process is that countries do not have to negotiate separately with each other to conclude bilateral agreements per jurisdiction.
European Union and United States
The EU has established multiple information exchange agreements with non-EU countries (CRS EU agreements). Under these agreements, third countries are obligated to exchange financial information with EU member states. Alternatively, countries can also conclude bilateral agreements for financial information exchange, such as double tax avoidance treaties or administrative cooperation agreements.
Notably, the United States is not a member of the CRS. The US introduced the Foreign Account Tax Compliance Act (FATCA) in 2010, which closely resembles CRS. FATCA obligates foreign financial institutions to collect and report information about financial accounts held by US citizens in other jurisdictions. Georgia is a signatory to FATCA. Consequently, the obligation of the Georgian Revenue Service to receive relevant information from registered financial institutions in Georgia and exchange it with the IRS is codified in the Tax Code of Georgia (Articles 43.2^1, 49.1.n, 70.3^1, and 71.1.h).
General obligations under CRS
Signatory states of the CRS MCAA are obligated to exchange information regarding financial accounts held by non-resident individuals or entities with the member states where these individuals or entities are tax residents. The information subject to exchange includes:
- Details about the financial institution maintaining the financial account.
- The account number.
- Account balances.
- Names and addresses of account holders.
- Taxpayer identification numbers of account holders, among other pertinent data.
Financial institutions primarily tasked with collecting this data are banks. However, this obligation may also extend to hedge funds and investment trusts.
To facilitate this exchange of information, member states must possess an appropriate legal framework that encompasses:
- Local laws requiring financial institutions to collect and report financial information to the tax authorities.
- Policies ensuring the confidentiality of the collected financial information.
- A domestic law mandating local tax authorities to exchange the received information with the respective foreign tax authorities.
Georgia and CRS
In 2020, Georgia committed to implementing the Common Reporting Standard (CRS) within its domestic legislation.
Subsequently, on April 5, 2023, the Ministry of Finance of Georgia issued an Ordinance detailing local procedures for financial institutions to collect and exchange financial information with other jurisdictions for the exchange of financial information. 2023 will be the first reporting year.
The process for information exchange is as follows:
- Gathering of Information by Financial Institutions:
Firstly, financial institutions have to gather information concerning financial accounts held by tax residents of jurisdictions with which Georgia must exchange financial information. For example, banks determine a person’s tax residency status by using standard Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.
- Reporting the collected information to the Georgian Revenue Service (RS)
After the conclusion of a reporting calendar year, financial institutions have a six-month window (ending no later than June 30 of the following calendar year) to report the compiled information to Georgian tax authorities.
- Information Exchange
Finally, upon receipt of the relevant information from financial institutions, Georgian tax authorities are responsible for transferring this data to the jurisdiction where the individual subject to reporting is a tax resident.
Determining the tax residency status of account holders is one of the more more challenging parts of gathering information. Unless otherwise indicated, Georgian rules dictate that financial institutions can classify individuals as tax residents of the country where their habitual address is located. However, self-declaration by an individual about their habitual address alone may not suffice to establish tax residency. Hence, such self-declaration must be substantiated by supporting documentation. Notably, the legislation does not specify the exact nature of documents qualifying as supporting documentation.
In conclusion, Georgia’s decision to join the CRS is a big step towards the global trend of financial transparency. This development could materially affect individuals or businesses who are tax residents of Georgia or have bank accounts here. Thus, it is important to be fully aware of how your financial information is shared and the tax implications it could have for you.
Interested in learning the CRS rules in greater detail?