Andrew Knight, Partner in Luxembourg, wrote a detailed “mid-term” retrospective on the Common Reporting Standard (CRS) which was published in Trusts and Trustees. He argues that while the OECD has, through the CRS, achieved significant success in implementing a global system of automatic exchange of information (AEOI), that success is tempered by a number of weaknesses.

In the second half of 2017, 49 Early Adopter Countries went through the first wave of reporting under the CRS and some 53 Late Adopter Countries will be doing the same thing in the first half of 2018. It is an opportune moment to look back and acknowledge that achieving this global level of automatic exchange of information is a significant accomplishment. At the same time, it is also worth noting that there are some less accomplished aspects of the CRS, in particular as regards its legal framework which gives rise to uncertainties in the application of the CRS and thus reduces its effectiveness.

The real beginning of the CRS – the FATCA IGA

It was the United States which in 2010, was the first to put in place a comprehensive solution to the difficulties of obtaining information relating to financial assets and related income for purposes of enforcing tax compliance by its taxpayers. This was the Foreign Account Tax Compliance Act (FATCA).

Governments responded to FATCA by pointing out that there were rules in many countries governing matters such as data protection which made it difficult or impossible for financial institutions to disclose information to the US Internal Revenue Service (IRS) in the way contemplated by FATCA.

Thus were born the inter-governmental agreements (IGAs) signed between the United States and numerous governments. Under the IGAs, governments are required to pass laws to compel their financial institutions to disclose FATCA information either to their own tax authority which then passes it on to the IRS (the Model 1 approach) or direct to the IRS (the Model 2 approach). These laws serve to overcome the issues that would otherwise prevent information going to the IRS.

The methodology applied by governments to bring their financial institutions within the FATCA compliance net involved, for the most part, simply enacting the FATCA IGA as part of local legislation. It is worth noting that the Model 1 IGA (including the Annexes) deals with FATCA by way of a document consisting of a little over 50 pages, while the US Regulations that provided the detail to FATCA as initially legislated comprise a document of over 250 pages. The US Regulations contain a carefully drafted set of detailed rules with a high degree of clarity regarding the application of FATCA to most fact patterns that might arise. Inevitably, the IGAs, and thus the local rules, do not provide that same degree of certainty, a feature that also applies to the CRS and to which this article will shortly return.

The success of the CRS

The CRS was formally introduced by the OECD on 21 July 2014 through the publication of its Standard for Automatic Exchange of Financial Account Information in Tax Matters.

Three and a half years later, 105 countries have committed to a timetable (in three cases starting after 2018) for implementing the CRS.

This is no small achievement and is a good illustration of what can be achieved with the level of political momentum that grew out of the 2008 financial crisis and numerous banking scandals and that was given added stimulus by the arrival of FATCA and the ongoing difficulties of obtaining adequate information through other processes.

Weaknesses of the CRS

However, behind this success story there are elements of the CRS which reflect weaknesses in this global reporting regime, including:

  • The ongoing absence of a large number of countries as participants of which the United States is the most prominent example.
  • The differences in timing of implementation, such that, even with the current participants, implementation is spread over three years.
  • The differences in the approach of the Participating Jurisdictions to the identification of the countries with which they are proposing to exchange information, the so-called Reportable Jurisdictions.
  • A lack of transparency regarding the due diligence process that each Participating Jurisdiction is required to apply in order to satisfy itself that the confidentiality and secrecy obligations that the CRS itself contains will be fulfilled by any Reportable Jurisdiction.
  • Indications that the information already exchanged may contain errors such as to reduce its usefulness to the countries receiving it and that further work will be required by governments and financial institutions to rectify those errors.
  • A legal framework that contains areas of uncertainty in the implementation of the CRS. It is the legal framework that will now be explored by the remainder of this article.

CRS – a weak legal framework?

The strength of the CRS legal framework depends fundamentally on the rigour of the rules that apply to the financial institutions and require them to undertake the CRS compliance.

The legal structure of the CRS is very similar to that of FATCA for countries that signed the Model 1 IGA and as discussed above. In essence, the Model 1 IGA gave way to a similarly crafted Model Competent Authority Agreement (CAA) which incorporates by reference the due diligence and reporting obligations that comprise the CRS.

As with the IGAs, the CAA is not itself binding on financial institutions. As with FATCA, the CRS is for the most part made binding on financial institutions in their countries of residence through their local legislature simply adopting the wording of the CRS that forms part of the CAA signed by their particular government.

It is important to bear in mind that the CAA is an international treaty. Treaties are different from domestic laws both in terms of their objective and the way they are drafted. Double tax treaties are a good example. The principal purpose of tax treaties is to ensure an allocation of taxing rights between governments in a way that does not result in double taxation. For the most part they do not themselves set out the tax rules, which are left to be dealt with under domestic law. The domestic tax laws are generally the product of a legislative process that results in a very precise and detailed set of rules. This is not the methodology followed for the CRS.

The net result is that financial institutions are subject to a set of CRS rules that are not drafted with sufficient precision and detail to provide the level of certainty that is required for rules where non-compliance can lead to significant penalties and where those rules have a significant impact on the privacy of those individuals that are the subject of reporting.

OECD guidance

The OECD clearly recognised this lack of precision as, in line with its normal approach on tax treaties, it published a detailed set of Commentaries. It also felt that it should provide governments with their own additional guidance in the form of the so-called Implementation Handbook.

At the time of publishing the Handbook in August 2015, the OECD seemingly recognised that not even the Commentaries and Handbook were sufficient to resolve a number of detailed, and yet material, issues of interpretation of certain provisions of the CRS. Thus began the publication of a set of Frequently Asked Questions. The first set, forming part of the Handbook, contained 29 questions. Updates followed and the latest version published in December 2017 contains 68 questions. The OECD indicates that “these FAQs were received from business and government delegates and answers to such questions clarify the CRS and assist in ensuring consistency in implementation”. However, a more carefully drafted set of rules at the outset, along the lines of the US FATCA Regulations, would have avoided the need for the FAQs and one might reasonably be excused for thinking that there is an element of the OECD attempting to develop the rules further as difficulties of interpretation arise.

The fact that the OECD has felt it necessary to provide guidance on certain provisions of itself implies that the OECD accepts that those provisions are capable of being interpreted in more than one way. Where it is reasonable to argue an interpretation that is different from the OECD guidance, the question arises as to whether one is obliged to accept the OECD view.

OECD guidance – part of the legal framework?

The CRS and associated guidance apply to a financial institution only to the extent that it forms part of the local laws that are binding on that financial institution. Thus, whenever a particular financial institution’s compliance obligations are considered, there is a fundamental, but sometimes overlooked, exercise to be done, namely an enquiry as to what part of the CRS guidance published by the OECD forms part of those local rules.

As already explained, domestic CRS legislation generally sets out, largely verbatim, the terms of the CAA and the CRS and frequently makes no reference to any of the OECD publications. In such cases, those publications therefore do not technically form part of the domestic rules and the interpretation of those rules is left to be carried out in accordance with normal principles of legal interpretation that apply in the country concerned.

It is likely that, in spite of the current uncertainty regarding their legal status, the Commentaries will become an accepted and authoritative source for the interpretation of the CRS. In this regard, it is likely that an approach will be taken similar to that in relation to the OECD’s Commentaries on its Model Tax Convention where significant authority is accorded to those Commentaries.

Can the same be said about the Handbook? By its own admission the Handbook does not itself form part of the CRS and serves the following purposes:

  • “To assist government officials in the implementation of the Standard …”
  • “To assist in the understanding and implementation of the Standard and should not be seen as supplementing or expanding on the Standard itself”.

On that basis, although it may provide an interesting insight into how governments are being guided by the OECD, it will not be binding on that financial institution without being formally incorporated into the laws that govern a financial institution. A similar view should be taken of the FAQs bearing in mind that they were initially published as part of the Handbook. While the OECD describes the FAQs as “received from business and government delegates and answers to such questions clarify the CRS and assist in ensuring consistency in implementation”, this does not provide a legal basis for their being binding on financial institutions.

As already indicated, the only true basis on which any of the OECD guidance can be binding on financial institutions is if the guidance is incorporated into the local laws that apply to those financial institutions (based on those financial institutions being resident in the jurisdiction that issues those laws).


In conclusion, a particular weakness of the CRS is in the legal framework that has its origins in the IGAs that grew out of the initial introduction of FATCA. The way in which the OECD allowed the CRS to build off the FATCA IGAs meant that it was inevitable that that weakness would spill over into the CRS. However, the role that the OECD has played in driving the implementation of the CRS has aggravated that weakness by seemingly ignoring the need for each country to legislate its own set of rules requiring its financial institutions to carry out their CRS compliance obligations. The attempts of the OECD to dominate local law should not distract financial institutions from carefully examining which elements of the CRS are binding on them and applying normal rules of legal interpretation to those elements.

Member of the Maitland network of law firms, M Partners is a law firm regulated by the Barreau de Luxembourg.

Key Contacts

Andrew Knight

Tel: +352 263 868 608


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