|Sandra Benedetto||Martin Cruzat|
As a member of the OECD, Chile signed the Convention on Mutual Administrative Assistance in Tax Matters (the Convention) in October 2013, which was approved by the Chilean Congress in November 2015 and promulgated in November 2016. Along with the Convention's promulgation, the government will soon release local legislation on the automatic exchange of financial accounts information (the Regulation). This Regulation will likely follow the OECD's model on the common reporting standard (CRS) and due diligence for financial account information.
The Convention regulates the automatic exchange of information, stating that contracting states must determine how information will be exchanged via a mutual agreement. Part of this would be accomplished through the Regulation, which will standardise the way that financial institutions identify financial accounts related to foreign tax residents and how they provide the account holder's information to the tax authority for it to be exchanged.
The due diligence procedure
In accordance with the CRS, the Regulation will establish that financial institutions, understood as custodial institutions, depository institutions, investment entities and specified insurance companies, must obtain the full name, address, place and date of birth, jurisdiction or jurisdictions of tax residency and tax identification number of the financial accounts holders, or their controllers, who have tax residency abroad.
For this purpose, financial institutions must distinguish between financial accounts held by individuals or entities and whether their accounts are pre-existing or new. To determine this, it must apply a specific due diligence procedure to each account. Also, within pre-existing accounts held by individuals, the Regulation will differentiate between the value of the accounts, depending on whether the account balance is lower or higher than $1 million.
The application of the due diligence procedure should, therefore, result in identified accounts being treated as related to a person with a foreign tax residency abroad, or in them being treated as non-documented in cases where no relevant information is found. For non-documented accounts an annual review should be carried out by reapplying the due diligence procedure, taking into account the nature of the corresponding account.
What should be expected
Any local entity qualifying as a financial institution as defined by the Regulation should be ready to adopt and incorporate the CRS provisions.
The changes will pose a challenge, not only because of the administrative burden it would impose of financial institutions managing a large number of accounts, but also because of the IT burden it poses on classifying the respective accounts and gathering the necessary data.
Finally, financial institutions should consider the time required to compile such information. This is particularly important because the Chilean government has committed to start sharing information with other states by September 2018.
However, it remains to be seen how the second stage of the automatic exchange of information will be developed, which refers to reportable information.
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