Raising the Bar on Transparency: A Guide to Compliance with Common Reporting Standards in Kenya for Financial Institutions and Account Holders

1.??????????Introduction

In the recent years, the Kenyan government has been actively working towards ensuring compliance with the Common Reporting Standards (CRS) in order to combat tax evasion and promote transparency in the financial sector. Thus, being a member state of the Global Forum on Transparency and Exchange of Information for Tax matters, on 22nd July 2020, Kenya signed and ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC). MAC allows for the Exchange of Information on Request (EOIR) and the Automatic Exchange of Information (AEOI).

To implement the EOIR and AEOI, the government introduced Section 6A and 6B to the Tax Procedures Act, No. 29 of 2015 (TPA) through the Finance Act, 2021. Section 6B makes provisions for CRS in Kenya. Specifically, sub-section 6 empowers the Cabinet Secretary, National Treasury and Economic Planning (CS) to make Regulations prescribing the CRS to be followed under the TPA. Consequently, on 7th February 2023, the CS, vide the Legal Notice No. 8 of 2023, gazetted the Tax Procedures (Common Reporting Standards) Regulations, 2023 (CRS Regulations), which Regulations apply retrospectively from 1st January, 2023.

As a Reporting Financial Institution operating in Kenya and as an individual or entity holding financial assets in foreign countries, it is important to understand what CRS is, how it works, and what your obligations are in terms of compliance.

In this Article, we will demystify the CRS and provide a comprehensive guide to compliance for financial institutions operating in Kenya and account holders. ?

2.??????????What is the Common Reporting Standards (CRS)?

The CRS is a global reporting standard for the automatic exchange of financial account information between participating jurisdictions. The standard was developed in 2014 by the Organization for Economic Cooperation and Development (OECD) aimed to combat tax evasion by providing tax authorities with information on the financial accounts held by their taxpayers in other countries.

Under the CRS, financial institutions are required to identify and report information on accounts held by foreign tax residents to their respective tax authorities.

3.??????????Who is an account holder?

This is an individual, entity or trust that holds a financial account in a foreign country.

4.??????????Who is a Reporting Financial Institution (RFI)?

An RFI then is any financial institution that is obligated to comply with the CRS Regulations. In Kenya, RFIs include:

a)??????custodial institutions-entities that hold, as a substantial portion of their businesses, financial assets for the account of others;

b)?????depository institutions- institutions that accept deposits in the ordinary course of a banking or similar business;

c)??????investment entities- institutions that primarily conduct business activities or operations relating to trading in money market instruments, individual and collective portfolio management, or investing, administering and managing financial assets on behalf of clients; and

d)?????specified insurance companies- insurance companies which issue or are obligated to make payments with respect to a Cash Value Insurance Contract or an Annuity Contract.

The CRS Regulations prescribe the reporting obligations and due diligence procedures that RFIs must comply with on an annual basis.?

5.??????????What are the CRS Compliance Obligations for RFIs?

5.1.?????Reporting Obligations

Some of the key reporting obligations include:

(a)????Reporting to the Kenya Revenue Authority (KRS- RFIs must file with the Commissioner-General of the KRA, on an annual basis, a declaration providing the reportable information under the CRS Regulations; and

(b)????Identify Reportable Accounts: RFIs must report the account number of any account held, the account balance at the date of the relevant calendar year, the total gross amount paid or credited to the account holder during the calendar year and the name and identifying number of the RFI in question. With respect to depository accounts, the RFIs must report the total gross amount of interest paid or credited to the account during the calendar year. For custodial accounts, RFIs must report:

(i)?????the total gross amount of interest, dividends and other income generated by assets paid or credited to the account; and

(ii)???the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year with respect to which the RFI acted as a custodian, broker, nominee or an agent of the account holder.

There are, however, certain exemptions afforded to RFIs in some circumstances. For instance:

(a)????RFIs, with respect to a reportable account, which is either a pre-existing account or an account which subsequently becomes a reportable account after its opening, are exempted from reporting the Tax Identification Number (TIN) or date of birth if the RFIs do not have such information. This information, however, must be reported by the end of the second calendar year;

(b)????RFIs are exempt from reporting the TIN if the same is not issued by the reportable jurisdiction or where the domestic law of the reportable jurisdiction does not require the collection of the TIN issued by such reportable jurisdiction; or

(c)????Unless the RFIs are required to report the place of birth and it is electronically searchable data maintained by the RFIs, the RFIs are exempt from reporting the place of birth.

5.2.?????Due Diligence Obligations

RFIs are mandated to establish, maintain and document due diligence procedures set out in the CRS Regulations. The aim of due diligence procedures will be to determine the tax residency and identify the reportable accounts maintained by RFIs.

Once an account is deemed a reportable account, the reportable information, as discussed above, must be reported annually. The choice of the type of due diligence procedure to apply shall depend on whether:

(a)????the account held is a new or preexisting one; or

(b)????the account is held by an individual or entity

Accounts, whether owned by an individual or an entity, are classified into:

(a)???lower value accounts- accounts with an aggregate balance of value that does not exceed USD 1,000,000,000; or

(b)??high value accounts- accounts with an aggregate value that exceeds USD 1,000,000,000.

5.3.?????Maintenance of Records

RFIs are mandated to maintain records of their due diligence procedures, the information reported to the KRA, and any other relevant documents for a period of six (6) years.

5.4.?????How do the RFIs implement compliance procedures?

RFIs are now therefore required to implement the compliance procedures to ensure that they are able to comply with the CRS requirements. To do so, RFIs should follow the following steps:

(a)????RFIs must develop Compliance Plan that outlines their CRS compliance obligations and procedures;

(b)????RFIs must report and file returns electronically to the KRA as earlier discussed, in compliance with the CRS Regulations, at a date no later than 31st May the following year after the declaration was made;

(c)????RFIs must now retain the records used in the due diligence procedures for a period of at least six (6) years after the end of the period within which the RFIs have filed information returns;

(d)????They should have systems in place that will enable them undertake the due diligence procedures, including AML/KYC procedures. Connectedly, RFIs are expected to identify all reportable accounts that they maintain; and

(e)????RFIs should train their staff on CRS requirements and procedures.

Notably, pursuant to Regulations 17 and 23 of the CRS Regulations, RFIs were expected to review all the pre-existing high value individual accounts and high value entity accounts, respectively, by 31st December, 2022. However, with the gazettement of the CRS Regulations this year, such requirement seems to have been overtaken by events. Clarity on the application of the above provisions would have to be sought from the CS or KRA.

On the other hand, with respect to pre-existing lower value individual accounts, their review must be completed by 31st December 2023.

6.??????????What are the CRS Compliance Obligations for Account Holders?

Account holders are required to, as from 1st January, 2023, furnish the RFIs with a self-certification to establish their tax residence where the due diligence procedures dictate that an RFI should obtain a self-certification. Where the account holder is an entity, this requirement will extend to the controlling persons.

Additionally, account holders must be aware of the most recent residential address that they had submitted to the RFI. This is because such residential address will be regarded as the current residential address for the purposes of the residence address test in determining whether the account is reportable. Also, any change in the circumstances of the account, including change of a mailing address, may lead to an account being deemed reportable.

Therefore, account holders should ensure that any change of residential and/or mailing address is properly communicated to the RFIs to avoid being deemed as a reportable person in a reportable jurisdiction where the account holder is not present.

6.1.?????How do the account holders comply with the CRS Regulations?

To maintain compliance with the CRS Regulations, the account holders should adopt the following steps:

(a)????Provide accurate information: it is essential to provide accurate and complete information to your financial institution when opening a new account or updating your account information. This information includes your name, address, TIN and any other information requested by the financial institution.

(b)???Consent to information exchange: account holders will be required to give their consent to their financial institution to share their financial information with the KRS and any other countries where they hold financial assets.

(c)?????Update information: it is important to ensure to keep account information up-to-date, including any changes to name, address or TIN.

(d)???Report all income earned: account holders must report all incomed earned on their financial assets to the KRA. Failure to do so can result in penalties and fines.

(e)????Seek professional advice: if unsure about how to comply with the CRS, we advise seeking professional advice from a tax expert or financial advisor.

7.??????????Conclusion

The CRS, a global tax reporting system, is designed to promote transparency and prevent tax evasion. In Kenya, compliance with CRS Regulations is mandatory for all RFIs and account holders. RFIs and account holders must therefore be cognizant of the CRS Regulations in order to comply with the additional regular compliance procedures and due diligence requirements set out therein. ?

As an RFI operating in Kenya, you can ensure compliance with the CRS and contribute to the global fight against tax evasion by implementing compliance procedures such as developing a compliance plan, conducting due diligence, training staff and maintaining records.

On the other hand, it is essential for account holders to provide accurate information, consent to information exchange, update your information, report all incomed earned and seek professional advice if necessary to avoid risk of being penalized for non-compliance.

Authors: Esther Omulele , Melissa Wango Were and Eric Agevi