Guidance on the Common Reporting Standard For Automatic Exchange of Information June 2017

Transcription

1 Guidance n the Cmmn Reprting Standard Fr Autmatic Exchange f Infrmatin June 2017 IN CONFIDENCE Page 1 f 165

2 Cntents Disclaimer Backgrund Overview f the Cmmn Reprting Standard fr the Autmatic Exchange f Infrmatin Use f infrmatin by Inland Revenue Purpse f this guidance High level summary f CRS due diligence and reprting bligatins CRS due diligence incrprating the wider apprach CRS reprting reprtable accunts and undcumented accunts Meaning f accunt hlder and cntrlling persn fr CRS purpses Meaning f accunt hlder fr the purpses f CRS due diligence Identifying cntrlling persns fr the purpses f CRS due diligence Optins that a Reprting NZFI can adpt fr CRS purpses Ability fr a Reprting NZFI t use Anti-Mney Laundering/Knw Yur Custmer prcedures and FATCA prcedures fr Cmmn Reprting Standard purpses Penalties and anti-avidance Radmap fr the fllwing guidance Reprting NZFIs fr CRS purpses Types f financial institutins Custdial institutin Depsitry institutin Investment entity Specified insurance cmpany Circumstances when a financial institutin will be a New Zealand Financial Institutin Circumstances when a NZFI will be a Reprting New Zealand Financial Institutin Circumstances when a NZFI will be a Nn-Reprting New Zealand Financial Institutin Financial institutins that the CRS defines as being Nn-Reprting Financial Institutins Financial institutins that implementing jurisdictins can treat as Nn-Reprting Financial Institutins (excluded entities) The financial institutin presents a lw risk f being used t evade tax The financial institutin has substantially similar characteristics t any f types f institutins described in sectin VIII(B)(1)(a) r (b) f the Cmmn Reprting Standard.. 36 IN CONFIDENCE Page 2 f 165

3 4 What financial accunts are subject t CRS due diligence? Depsitry accunt Annuity cntract Cash value insurance cntract Custdial accunt Equity r debt interest Equity r debt interest in an investment entity Equity r debt interest in anther type f financial institutin What accunts are excluded frm being financial accunts? Accunts that the CRS explicitly defines as excluded accunts Accunts that can be treated as Excluded Accunts What des the CRS due diligence prcess invlve? High level verview f the CRS due diligence prcess Detailed utline f due diligence prcedures Pre-existing individual accunts Overview CRS due diligence prcedures fr lwer-value pre-existing individual accunts CRS due diligence prcedures fr high-value pre-existing individual accunts balance r value that exceeds USD 1,000,000 as f 30 June 2017 r any subsequent 31 March New individual accunts Frm f self-certificatin Obtaining a valid self-certificatin n accunt pening Changes in circumstances Pre-existing entity accunts Whether the entity is a relevant freign tax resident Whether the entity accunt hlder is a passive nn-financial entity When an entity accunt hlder is a passive nn-financial entity identifying cntrlling persns Timeframe fr cmpletin f initial due diligence and reprting Recrd-keeping requirements Change in circumstances New entity accunts Whether the entity is a relevant freign tax resident Whether the entity is a passive nn-financial entity When an entity accunt hlder is a passive nn-financial entity identifying cntrlling persns Recrd-keeping requirements Change in circumstances IN CONFIDENCE Page 3 f 165

4 6 Outline f the CRS infrmatin that needs t be reprted Identity infrmatin that Reprting NZFIs will need t reprt fr a reprtable accunt Financial accunt infrmatin that Reprting NZFIs will need t reprt fr a reprtable accunt Frmat that a Reprting NZFI can use fr reprting CRS infrmatin Infrmatin regarding hw t reprt yur CRS infrmatin will be made available frm the Inland Revenue website frm March 2018 in time fr the first CRS reprting perid CRS recrd-keeping bligatins Obligatin t keep and retain recrds Recrds t be in English and retained in New Zealand Perid f retentin f recrds Publicly available infrmatin Due diligence dcumentary evidence Self-certificatins Reasnable effrts t btain a TIN Penalties regime Penalties regime financial institutins Civil abslute liability penalties Criminal knwledge-based penalties Penalties regime infrmatin prviders Civil penalties Criminal knwledge-based penalties CRS requirement t have an avidance prvisin New Zealand s anti-avidance prvisin What cnstitutes an arrangement under sectin 185R(1) What is meant by a main purpse f a persn in entering int such an arrangement being t avid a requirement under Part 11B The avidance purpse need nly be a main purpse The avidance purpse f a persn Recnstructin Applicatin f CRS t particular types f entities and structures Trusts When will a trust be a Reprting New Zealand Financial Institutin? When will a trust be a financial institutin? When will a trust be a New Zealand financial institutin? When will a trust be a Reprting NZFI? What are the due diligence and reprting bligatins f Reprting NZFI trusts? Accunts held by nn-financial entity trusts IN CONFIDENCE Page 4 f 165

5 11.2 Applicatin f CRS t specific types f trusts Family trusts Charitable trusts Freign trusts Slicitrs trust accunts Applicatin f CRS t partnerships When will a partnership be a financial institutin? When will a partnership be a New Zealand financial institutin? When will a partnership be a Reprting NZFI? What are the due diligence and reprting bligatins f a partnership? Applicatin f CRS t cllective investment vehicles What is a cllective investment vehicle? When will a cllective investment vehicle be a financial institutin? When will a cllective investment vehicle be a NZFI? When will a NZFI cllective investment vehicle be a Reprting NZFI? What are the due diligence and reprting bligatins f a Reprting NZFI cllective investment vehicle? Deceased estates Will a deceased estate be a financial institutin? Whether accunts held by deceased estates are subject t due diligence Appendix 1: A Cmparisn between the CRS and FATCA A1.1 FATCA Inter-Gvernmental Agreement A1.2 Cmmn Reprting Standard (CRS) A1.3 Residence A1.4 Nn-Reprting Financial Institutins A1.5 Excluded accunts A1.6 Due diligence and reprting Appendix 2: Optins permitted by the Cmmn Reprting Standard Appendix 3: Dcumentary evidence under the CRS Appendix 4: Definitins f Nn-Financial Entity, active Nn-Financial Entity, Passive incme, and Passive Nn-Financial Entity Appendix 5: Definitin f Excluded Accunt Appendix 6: Definitin f Nn-Reprting Financial Institutin Appendix 7: Requirements t be satisfied t be a Nn-Reprting Financial Entity under the Cmmn Reprting Standard IN CONFIDENCE Page 5 f 165

6 Disclaimer: This guidance is limited t the Autmatic Exchange f Infrmatin (AEOI) bligatins that entities r ther persns may have under New Zealand law. It des nt cver the bligatins that such entities r ther persns may have in relatin t any ther jurisdictin. It shuld nt be used as a substitute fr legal, business, accunting, tax r ther prfessinal advice. This guidance will be reviewed by the Organisatin fr Ecnmic C-peratin and Develpment (OECD), s is ptentially subject t change. Inland Revenue (IR) will update this guidance, if necessary, as a result f this review. A number f parts f this guidance: Summarise parts f the Cmmn Reprting Standard (CRS), CRS cmmentary, and the related prvisins f the Tax Administratin Act The reader shuld refer t these surces fr further detail f any bligatins they may have; and Are based n guidance set ut in the OECD s CRS Implementatin Handbk 1 and related infrmatin n the OECD s AEOI prtal. 2 Inland Revenue will update this guidance, if necessary, if the OECD materials are updated. Dllar values stated in this guidance shuld be read as referring t either New Zealand dllars r United States dllars accrding t the electin by the relevant Reprting New Zealand financial institutin IN CONFIDENCE Page 6 f 165

7 1 Backgrund 1.1 Overview f the Cmmn Reprting Standard fr the Autmatic Exchange f Infrmatin Glbalisatin has made it easier fr persns t invest utside f their jurisdictin f tax residence. This has prvided pprtunities fr ffshre tax evasin. In respnse, the Organisatin fr Ecnmic C-peratin and Develpment (OECD) has develped the Cmmn Reprting Standard (CRS) fr Autmatic Exchange f Financial Accunt Infrmatin in Tax Matters (AEOI) t prvide a glbal framewrk fr the cllectin, reprting, and exchange f financial accunt infrmatin abut persns that invest utside f their jurisdictin f tax residence. This will assist in detecting and deterring ffshre tax evasin. In brad terms, the CRS requires that financial institutins carry ut the fllwing steps: Due diligence: review their financial accunts t identify accunts held (and/r, in certain circumstances, cntrlled) by relevant freign tax residents; and cllect prescribed 3 identity and financial accunt infrmatin abut such persns (and accunts); and Reprting: reprt 4 this infrmatin t the lcal revenue authrity fr exchange 5 with the jurisdictin(s) f tax residence f the accunt hlder (r cntrlling persn); and reprt prescribed infrmatin t the lcal revenue authrity abut certain individual accunts that are referred t in the CRS as undcumented accunts where the institutin has nt been able t identify the persn s tax residency. The CRS is accmpanied by a Cmmentary (the CRS Cmmentary), which supplements these due diligence and reprting bligatins. The OECD has als prduced guidance abut the practical applicatin f these bligatins. This includes a CRS Implementatin Handbk and guidance set ut in answers t Frequently Asked Questins. All f the OECD guidance is available n the OECD s website. 6 The success f the CRS will depend n hw effectively and cnsistently it is implemented arund the wrld. The OECD will rigrusly mnitr whether implementing jurisdictins (such as New Zealand) are cmplying with the CRS. This will ccur thrugh the OECD s mnitring agency the Glbal Frum n Transparency and Exchange f Infrmatin fr Tax Purpses. 3 This prescribed infrmatin is utlined in detail further belw at sectin 6. 4 As explained at sectin 1.6, the scpe f a Reprting New Zealand Financial Institutin s reprting bligatins will depend n: what jurisdictins New Zealand has agreed t prvide AEOI infrmatin t (knwn as Reprtable Jurisdictins ); and whether the institutin has therwise chsen t adpt what is knwn as the wider apprach t reprting. 5 This wuld ccur if there is an AEOI agreement in place between the tw jurisdictins requiring the prvisin f such infrmatin. 6 IN CONFIDENCE Page 7 f 165

8 The G20 has stated that it will (if necessary) apply sanctins t address nn-cmpliance by jurisdictins. The New Zealand Gvernment has made internatinal cmmitments t implement the CRS in full accrdance with the CRS and the CRS Cmmentary. Therefre, bth the CRS and the CRS Cmmentary have been directly incrprated int New Zealand law, subject t certain mdificatins set ut in the Tax Administratin Act The CRS builds largely ff a similar bilateral framewrk that applies fr due diligence, reprting, and exchanging f financial accunt infrmatin under the Freign Accunt Taxatin Cmpliance Act (FATCA) Intergvernmental Agreement (IGA) that New Zealand has entered int with the United States f America. Hwever, as explained further belw, a key difference is that the CRS is multilateral. 7 CRS will apply in New Zealand frm 1 July Frm that date: Reprting New Zealand Financial Institutins (Reprting NZFIs) will have CRS due diligence and reprting bligatins. In brad terms, Reprting NZFIs will be required t: review their financial accunts t identify accunts held (and/r, in certain circumstances, cntrlled) by relevant freign tax residents; cllect prescribed 8 identity and financial accunt infrmatin abut such persns (and accunts); reprt 9 this infrmatin annually t Inland Revenue. Inland Revenue will then exchange this infrmatin with the persn s jurisdictin(s) f tax residence if New Zealand has an AEOI agreement t prvide this infrmatin t that jurisdictin (r thse jurisdictins); and reprt prescribed infrmatin annually t Inland Revenue abut certain individual accunts that the CRS refers t as being undcumented accunts where the institutin has nt been able t identify the persn s tax residency. persns that hld, act as intermediaries fr, r cntrl financial accunts with such Reprting NZFIs will smetimes be required t btain and prvide infrmatin t assist the institutin t carry ut their due diligence and reprting bligatins. 10 In brad terms, this will generally invlve the persn prviding infrmatin abut whether they (r any f the persns they hld an accunt fr) are freign tax residents. Currently, apprximately 100 jurisdictins have cmmitted t implementing the CRS n a similar r earlier timeline t that adpted by New Zealand. 7 The similarities and differences between CRS and FATCA are summarised at Appendix 1. 8 This prescribed infrmatin is utlined in detail further belw at sectin 6. 9 This is subject t certain prcesses and exceptins that are utlined in detail further belw. As explained at sectin 1.6, the scpe f a Reprting New Zealand Financial Institutin s reprting bligatins will depend n: what jurisdictins New Zealand has agreed t prvide AEOI infrmatin t (knwn as Reprtable Jurisdictins ); and whether the institutin has therwise chsen t adpt what is knwn as the wider apprach t reprting. 10 As explained in detail further belw (at sectin 9.2 f this guidance) these bligatins n such persns will apply fr the purpses f bth CRS and FATCA. IN CONFIDENCE Page 8 f 165

9 These implementing jurisdictins will nt necessarily all exchange with each ther. Fr example, sme jurisdictins withut tax systems may nt be interested in receiving AEOI infrmatin as they d nt face tax evasin cncerns. Imprtantly, the OECD als acknwledges that infrmatin shuld nly be prvided t jurisdictins that have cnfidentiality and data safeguards in place that will ensure that exchanged infrmatin is nly disclsed t authrised persns and is nly used fr authrised purpses. Internatinally, the OECD has prcesses in place fr reviewing the cnfidentiality and data safeguards f implementing jurisdictins and fr disseminating infrmatin n the jurisdictins that have agreed t exchange with each ther. The jurisdictins that New Zealand will prvide AEOI infrmatin t are knwn as Reprtable Jurisdictins. The jurisdictins that New Zealand will receive AEOI infrmatin frm are knwn as Participating Jurisdictins. All exchanges f infrmatin between jurisdictins will be cnducted under, and be subject t the strict terms f, internatinal tax treaties. 11 The list f Reprtable Jurisdictins and Participating Jurisdictins can be fund at the fllwing link Use f infrmatin by Inland Revenue The exchange f financial accunt infrmatin under AEOI will mean that New Zealand will receive better infrmatin abut New Zealand tax residents ffshre investments. This will assist Inland Revenue in verifying that these persns have paid the crrect tax n these ffshre investments. This will, in turn, aid in detecting and deterring ffshre tax evasin by New Zealand tax residents. Infrmatin cllected frm Reprting NZFIs under CRS may als be used by Inland Revenue fr purpses ther than AEOI. This infrmatin will nly be used by Inland Revenue fr matters cnsistent with its statutry rle and bligatins. Fr example, Inland Revenue culd ptentially use this infrmatin t assist it t verify that the crrect rates have been used fr nn-resident withhlding tax. Inland Revenue has been liaising with the Office f the Privacy Cmmissiner regarding ptentially using the infrmatin in this way and will cntinue t d s. 1.3 Purpse f this guidance This guidance is intended t prvide peratinal advice in the New Zealand cntext, fr financial institutins that are implementing the CRS, and thers wh may have CRS (and FATCA) bligatins. It includes references t specific parts f the CRS, the CRS Cmmentary (and the related OECD CRS Implementatin Handbk, and the OECD s answers t Frequently Asked Questins ) that the reader may find useful. 11 The predminant tax treaty t be used fr AEOI exchanges will be the jint OECD/Cuncil f Eurpe Multilateral Cnventin n Mutual Administrative Assistance in Tax Matters, which New Zealand signed in Other pssible tax treaties that culd ptentially be used fr AEOI exchanges include duble tax agreements (DTAs) and tax infrmatin exchange agreements (TIEAs). IN CONFIDENCE Page 9 f 165

10 This guidance is intended t be a self-cntained dcument that can be used by a wide range f taxpayers t clarify their CRS bligatins. The fllwing radmap shuld assist taxpayers in identifying the part f the guidance that is mst relevant t them: Taxpayers that are seeking t clarify whether they are Reprting NZFIs with CRS bligatins shuld g t sectin 3 f the guidance. Taxpayers that knw they are Reprting NZFIs, but are seeking t clarify what their CRS due diligence bligatins are shuld g t sectins 4-5 f the guidance. Taxpayers that knw they are Reprting NZFIs, but are seeking t clarify what their CRS reprting bligatins are shuld g t sectin 6 f the guidance. Taxpayers that hld accunts with Reprting NZFIs (r are therwise cnnected with such accunts) and want t knw what bligatins they have under the CRS and FATCA shuld g t sectin 9.2 f the guidance. These bligatins are als summarised in an Inland Revenue brchure (IR1033) that can be fund at the fllwing link Taxpayers that are seeking t clarify hw the CRS applies t fund managers and investment advisers shuld g t sectins and f the guidance. Taxpayers that are seeking t clarify hw the CRS applies t trusts shuld g t sectins 11.1 t 11.2 f the guidance. These parts f the guidance are particularly relevant t: Trusts that perate as cllective investment vehicles, managed investment schemes, and unit trusts; and Trusts that are prfessinally managed. Fr example, a trust may be managed by: 12 A financial institutin crprate trustee that has discretinary authrity t manage the trust s assets (in whle r in part); r A financial institutin prvider f discretinary investment management services that has discretinary authrity t manage the trust s assets (in whle r in part). Taxpayers that are seeking t clarify hw the CRS applies t partnerships shuld g t sectin 11.3 f the guidance. Taxpayers that are seeking t clarify hw the CRS applies t cllective investment vehicles shuld g t sectin 11.4 f the guidance. Taxpayers that are seeking t clarify hw the CRS applies t deceased estates shuld g t sectin 11.5 f the guidance. The Appendices t the guidance als cntain a summary f varius matters. This includes: 12 As explained in detail further belw at sectin 11.1 f the guidance such a managed trust will generally be a managed investment entity if it derives mst f its grss incme frm investing, reinvesting, r trading in financial assets. IN CONFIDENCE Page 10 f 165

11 a cmparisn between FATCA and CRS; 13 and the ptins that Reprting NZFIs can take when carrying ut CRS due diligence and reprting. 14 The infrmatin in these Appendices will assist Reprting NZFIs that are lking fr ways t: leverage ff existing prcedures when implementing CRS; and take advantage f ptins t decrease the cmpliance csts assciated with implementing CRS. 1.4 High level summary f CRS due diligence and reprting bligatins In brad terms, the CRS will require Reprting NZFIs frm 1 July 2017 t: review their financial accunts t identify accunts held (and/r, in certain circumstances, cntrlled) 15 by relevant freign tax residents 16 ; cllect prescribed 17 identity and financial accunt infrmatin abut such persns (and accunts); reprt 18 this infrmatin annually t Inland Revenue. Inland Revenue will then exchange this infrmatin with the persn s jurisdictin(s) f tax residence if New Zealand has an AEOI agreement t prvide this infrmatin t that jurisdictin (r thse jurisdictins); and reprt prescribed infrmatin annually t Inland Revenue abut certain individual accunts that the CRS refers t as being undcumented accunts where the institutin has nt been able t identify the persn s tax residency. Reprting NZFIs will be able t use service prviders 19 t carry ut these due diligence and reprting bligatins n their behalf. Hwever, the legal bligatins will remain with the Reprting NZFI. 13 Appendix Appendix A Reprting NZFI will be required t identify cntrlling persns when they maintain an accunt that is held by a passive nn-financial entity. This is bradly similar t the FACTA due diligence prcedures. The due diligence prcedures relating t cntrlling persns are set ut at sectins and Fr these purpses, an entity such as a partnership, limited liability partnership r similar legal arrangement that has n residence fr tax purpses is required t be treated fr CRS purpses as being resident in the jurisdictin in which its place f effective management is situated. 17 This prescribed infrmatin is utlined in detail further belw at sectin This is subject t certain prcesses and exceptins that are utlined in detail further belw. As explained at sectin 1.6, the scpe f a Reprting New Zealand financial institutin s reprting bligatins will depend n: what jurisdictins New Zealand has agreed t prvide AEOI infrmatin t; and whether the institutin has therwise chsen t adpt what is knwn as the wider apprach t reprting. 19 Pages f the CRS Cmmentary set ut the prcedures and steps that a Reprting NZFI wuld need t have in place if they chse t use such a service prvider. IN CONFIDENCE Page 11 f 165

12 1.5 CRS due diligence incrprating the wider apprach A Reprting NZFI s due diligence bligatins incrprate what is knwn as the wider apprach t due diligence. Under the wider apprach t due diligence, Reprting NZFIs will be required t identify any relevant freign tax resident irrespective f whether such persns are frm Reprtable Jurisdictins (jurisdictins that New Zealand will be prviding AEOI infrmatin t). This is a cmpliance cst measure t deal with the fact that the number f Reprtable Jurisdictins is likely t increase ver time. Therefre, withut the wider apprach t due diligence Reprting NZFIs wuld need t cnstantly red their due diligence each time a new jurisdictin becmes a Reprtable Jurisdictin. Reprting NZFIs will be required t adpt the wider apprach t due diligence as fllws: t review their financial accunts t identify accunts held (and/r, in certain circumstances, cntrlled) by relevant freign tax residents; and t cllect prescribed identity and financial infrmatin abut such persns (and accunts). The relevant persns (in this cntext) cver all freign tax residents ther than: a crpratin the stck f which is regularly traded n ne r mre established securities markets; any crpratin that is a related entity f a crpratin the stck f which is regularly traded n ne r mre established securities markets; a Gvernment entity; an internatinal rganisatin; a central bank; r a financial institutin. This guidance will refer t freign tax residents that are nt excluded in this way as being relevant freign tax residents. 1.6 CRS reprting reprtable accunts and undcumented accunts In brad terms, Reprting NZFIs will be required t reprt prescribed 20 identity and financial infrmatin annually t Inland Revenue abut any accunt they have identified as being held (and/r, in certain circumstances, cntrlled) by a relevant freign tax resident if: the persn is resident in a Reprtable Jurisdictin (a jurisdictin that New Zealand has agreed t prvide AEOI infrmatin t). These are knwn as Reprtable Persns. Reprting NZFIs will als have the ptin f adpting what is knwn as the wider apprach t reprting and reprting t Inland Revenue all accunts that they have identified as being 20 The infrmatin that Reprting NZFIs will need t reprt abut such accunts is utlined in detail at sectin 6 f this guidance. IN CONFIDENCE Page 12 f 165

13 held (and/r, in certain circumstances, cntrlled) by a relevant freign tax resident, irrespective f whether thse persns are resident in Reprtable Jurisdictins. This is a cmpliance cst measure. This is because a Reprting NZFI that chses t adpt the wider apprach t reprting wuld simply be able t reprt all f the relevant freign tax residents they have identified withut needing t cnstantly review the list f Reprtable Jurisdictins. Fr the purpses f this guidance such accunts will be referred t as being reprtable accunts. Reprting NZFIs will als be required t reprt t Inland Revenue certain accunts where they have nt been able t determine the residency f an accunt hlder. These are knwn as undcumented accunts. 21 New Zealand will be adpting a 31 March tax year fr CRS due diligence and reprting purpses. 22 Fr these purpses, any reference in the CRS (and the related Cmmentary) t calendar year shuld be read as referring t the relevant perid ended 31 March unless the cntext requires therwise. In brad terms, Reprting NZFIs will have a windw frm 1 April t 30 June f the year t reprt t Inland Revenue the prescribed infrmatin abut their reprtable accunts fr the perid ended 31 March. 23 Inland Revenue will srt all the infrmatin it receives frm Reprting NZFIs. It will identify the infrmatin fr thse accunts that are held (and/r cntrlled) by relevant freign tax residents frm Reprtable Jurisdictins (knwn as Reprtable Persns) and will prvide the prescribed infrmatin abut thse accunts (and persns) t thse jurisdictins by 30 September f the relevant year. These timeframes fr CRS reprting and exchanging are in line with the FATCA timelines. Example 1: A Reprting NZFI bank maintains an accunt held by Tm. The bank carries ut due diligence n the accunt and determines that Tm is tax resident in jurisdictin B. New Zealand has an AEOI exchange relatinship t prvide financial accunt infrmatin t jurisdictin B (ie jurisdictin B is a Reprtable Jurisdictin). Therefre, the accunt is a held by a Reprtable Persn (Tm). The bank will be required t reprt prescribed infrmatin abut the accunt t Inland Revenue in its annual CRS reprt by 30 June f the relevant year. Inland Revenue will then prvide this infrmatin t jurisdictin B by 30 September. Example 2: A Reprting NZFI bank maintains an accunt held by Daniel. The bank carries ut due diligence n the accunt and determines that Daniel is tax resident in jurisdictin C. New Zealand des nt have an AEOI exchange agreement with jurisdictin C. Therefre, althugh 21 The limited circumstances when a Reprting NZFI is required t reprt an accunt as an undcumented accunt are utlined at sectins and f this guidance. Inland Revenue will nt exchange undcumented accunt infrmatin. Hwever, as cntemplated at page 210 f the CRS Cmmentary, Inland Revenue may use such infrmatin fr review and (in certain circumstances) audit activity. 22 The first perid will be a transitinal perid running frm 1 July 2017 t 31 March The CRS reprting fr a particular perid will generally nly cver accunts identified as reprtable by the end f the 31 March reprting perid. Hwever, as explained further belw at sectins 5.3 and 5.5, there is a special rule fr the first tw perids, which will require immediate reprting f certain reprtable pre-existing accunts. IN CONFIDENCE Page 13 f 165

14 the accunt is held by a persn that is tax resident in a freign jurisdictin (Daniel), it is nt held by a persn frm a Reprtable Jurisdictin (New Zealand des nt have an AEOI exchange agreement t prvide infrmatin t Daniel s jurisdictin f tax residence jurisdictin C). This means that, subject t the fllwing, the bank is nt required t reprt this accunt. Hwever, the bank may chse t adpt the wider apprach t reprting. If the bank chses t adpt the wider apprach t reprting it wuld be required t reprt prescribed infrmatin abut the accunt t Inland Revenue in its annual CRS reprt by 30 June f the relevant year. Infrmatin received by the Inland Revenue frm a Reprting NZFI adpting the wider apprach and which relates t a tax resident in a jurisdictin which is nt a Reprtable Jurisdictin (such as Daniel), will be retained by the Inland Revenue and nt be exchanged under AEOI. 1.7 Meaning f accunt hlder and cntrlling persn fr CRS purpses As nted abve, Reprting NZFIs will need t carry ut due diligence n their financial accunts t identify accunts held (and/r, in certain circumstances, cntrlled) by relevant freign tax residents. Reprting NZFIs will then need t reprt annually t Inland Revenue prescribed identity and financial accunt infrmatin abut the reprtable accunts they have identified. 24 There are three imprtant building blcks that need t be highlighted at this pint in the guidance: wh is an accunt hlder? when is it necessary t identify the cntrlling persns f an accunt hlder? wh will be the cntrlling persns f an accunt hlder? 1.8 Meaning f accunt hlder fr the purpses f CRS due diligence As nted abve, the CRS requires that Reprting NZFIs carry ut due diligence n their financial accunts t identify accunts held (and/r, in certain circumstances, cntrlled) by relevant freign tax residents. Therefre, a key threshld issue here is what cnstitutes wh hlds a financial accunt fr CRS purpses. Sectin VIII(E)(1) f the CRS defines accunt hlder as meaning: The persn listed r identified as the hlder f a Financial Accunt by the Financial Institutin that maintains the accunt. A persn, ther than a Financial Institutin, hlding a Financial Accunt fr the benefit r accunt f anther persn as agent, custdian, nminee, signatry, investment advisr, r intermediary, is nt treated as hlding the accunt fr purpses f the Cmmn Reprting Standard, and such ther persn is treated as hlding the accunt. In the case f a Cash Value Insurance Cntract r an Annuity Cntract, the Accunt Hlder is any persn entitled t access the Cash Value r change the beneficiary f the cntract. If n persn can access the Cash Value r change the beneficiary, the Accunt Hlder is any persn named as the wner in the cntract and 24 Reprting NZFIs will als need t reprt undcumented accunts. The meaning f undcumented accunt is utlined at sectins 1.6, and f this guidance. IN CONFIDENCE Page 14 f 165

15 any persn with a vested entitlement t payment under the terms f the cntract. Upn the maturity f a Cash Value Insurance Cntract r an Annuity Cntract, each persn entitled t receive a payment under the cntract is treated as an Accunt Hlder. Therefre, the general rule is that a Reprting NZFI shuld treat a persn as an accunt hlder if that persn is listed r identified as hlding the accunt (including bth persns fr jint accunts). In mst cases, the applicatin f this general rule will be fairly self-explanatry. Hwever, the CRS Cmmentary als prvides sme clarificatin abut hw the accunt hlder definitin will apply in the cntext f estates, trusts and partnerships. Fr example, the CRS Cmmentary states (at page 200) that: if a trust r an estate is listed as the hlder r wner f a financial accunt the trust r the estate is the accunt hlder, rather than its wners r beneficiaries; and if a partnership is listed as the hlder r wner f a financial accunt, the partnership is the accunt hlder, rather than the partners f the partnership. The definitin f accunt hlder als cntains a trace-thrugh rule that applies where the accunt is held by a persn, ther than a financial institutin, as agent, custdian, nminee, signatry, investment advisr, r intermediary fr anther persn. In such circumstances, the ther persn that has been identified is the relevant accunt hlder. Page 200 f the CRS Cmmentary prvides that fr the purpses f identifying wh an accunt hlder is under this trace-thrugh rule, a Reprting NZFI is able t rely n the infrmatin in their pssessin (including infrmatin cllected fr Anti-Mney Laundering/Knw Yur Custmer prcedures AML/KYC prcedures) t reasnably determine this pint. Example 1: Reprting NZFI 1 maintains an accunt listed in Simn s name. Reprting NZFI 1 determines based n the infrmatin in its pssessin that Simn hlds accunt fr himself, as ppsed t hlding the accunt fr the benefit r accunt f smene else. Reprting NZFI 1 crrectly determines that Simn is the accunt hlder. Example 2: Reprting NZFI 2 maintains an accunt listed in Tm s name. Tm hlds the accunt as nminee fr Bill. Tm infrms Reprting NZFI 2 f this nminee relatinship when he pens the accunt. Reprting NZFI 2 applies the trace thrugh rule in the definitin f accunt hlder and crrectly determines that the accunt is held by Bill. Example 3: Reprting NZFI 3 maintains an accunt held by financial institutin 4. Financial institutin 4 is a custdial institutin that hlds fund as custdian fr varius investrs. Reprting NZFI 3 crrectly determines that financial institutin 4 is the accunt hlder. Reprting NZFI 3 is nt required t apply the trace thrugh rule in the definitin f accunt hlder (ie they are nt required t lk thrugh financial institutin 4). This is because the persn listed as hlding the accunt is a financial institutin. The reasn why a Reprting NZFI generally 25 des nt need t trace thrugh a financial institutin accunt hlder (such as 25 Hwever, as explained further belw at sectins and 5.6.2, a Reprting NZFI will be required t trace thrugh a managed investment entity accunt hlder that is tax resident in a jurisdictin that is nt a Participating Jurisdictin t identify that entity s cntrlling persns. This is because such entities are deemed t be passive nn-financial entities, as ppsed t financial institutins. IN CONFIDENCE Page 15 f 165

16 financial institutin 4) is because that institutin will be ding its wn due diligence. Therefre, this is a measure that is intended t avid duplicatin and minimise cmpliance csts. Accrdingly, under this example Reprting NZFI 3 crrectly determines that financial institutin 4 is the accunt hlder. Example 4: Reprting NZFI 4 maintains an accunt fr a trustee f a family trust and crrectly determines that the accunt is held by the trust. 1.9 Identifying cntrlling persns fr the purpses f CRS due diligence As nted abve, the CRS als requires that Reprting NZFIs carry ut due diligence n their financial accunts t identify certain accunts cntrlled by relevant freign tax residents. This extra step will apply if the accunt hlder is a type f entity knwn as a passive nnfinancial entity. This then raises the questin f what types f entities are passive nn-financial entities. There are tw types f entities 26 fr CRS purpses: financial institutins and nn-financial entities (NFEs). There are, in turn, fur categries f financial institutins: a custdial institutin; a depsitry institutin; an investment entity; and a specified insurance cmpany. The meaning f financial institutin is utlined in detail further belw at sectin 3.1. Financial Institutin Nn-financial Entity (NFE) Passive NFE (subject t lkthrugh requirements) Active NFE 26 The CRS definitin f entity is brad and includes legal arrangements such as trusts. IN CONFIDENCE Page 16 f 165

17 If an entity is nt a financial institutin it will (by default) be a NFE. There are als tw categries f NFEs: active NFEs and passive NFEs. An NFE that is nt an active NFE will (by default) be a passive NFE. The fllwing matters are relevant when determining whether an NFE is a passive NFE (and, therefre, subject t the abve lk-thrugh rule): In brad terms, a passive NFE will generally cver an entity that: is nt a financial institutin; and derives predminantly (50% r mre) passive incme and / r has assets that predminantly prduce r are held fr the prductin f passive incme. Hwever, there are sme exceptins t this. Fr example: if a registered charity is an NFE it wuld generally be an active NFE even if it derives predminantly passive incme. The reader shuld refer t the definitins f NFE, active NFE, and passive NFE in Appendix 4 fr further detail; and a managed investment entity (discussed belw) that is tax resident in a jurisdictin that is nt a Participating Jurisdictin is als deemed t be a passive NFE. If a Reprting NZFI maintains an accunt that is held by a passive NFE it will need t lk thrugh that entity t identify its cntrlling persns (just like under FATCA), s that it can then determine whether any f thse persns are relevant freign tax residents. This then raises the questin f wh wuld be a cntrlling persn in this cntext. The CRS defines cntrlling persns f a passive NFE as meaning the natural persns wh exercise cntrl ver the NFE (as summarised at pages 198 t 199 f the CRS Cmmentary), with special rules that apply fr trusts. The term cntrlling persns must als be interpreted in a manner cnsistent with the Financial Actin Task Frce Recmmendatins. This is bradly in line with FATCA. In the case f a passive NFE trust, this term means the settlr(s), the trustee(s), the prtectr(s), the beneficiaries r classes f beneficiaries, and any ther natural persn exercising ultimate effective cntrl ver the trust. The CRS Cmmentary cnfirms (at page 198) that settlrs, trustees, prtectrs, and beneficiaries will be treated as cntrlling persns f a passive NFE trust irrespective f whether they actually exercise cntrl ver the trust. (In the case f a legal arrangement ther than a trust, this term means the persns in equivalent r similar psitins.) Hwever, as explained in detail further belw: there are sme special rules that apply (and ptins that can be adpted) fr identifying discretinary beneficiaries f a passive NFE trust as being cntrlling persns f the trust; and IN CONFIDENCE Page 17 f 165

18 there is smetimes scpe fr a Reprting NZFI t rely infrmatin that they have cllected and maintained pursuant t AML/KYC prcedures fr the purpses f determining cntrlling persns fr CRS purpses Optins that a Reprting NZFI can adpt fr CRS purpses The CRS (and related Cmmentary) cntain a number f ptins that Reprting NZFIs can adpt when carrying ut such CRS due diligence prcedures. The OECD s CRS implementatin handbk and answers t Frequently Asked Questins n its AEOI prtal 27 als build n these ptins by setting ut varius prcedures that Reprting NZFIs are able t adpt when carrying ut their CRS bligatins. The purpse f these ptins is t minimise cmpliance csts and prvide fr the practical implementatin f the CRS. Reprting NZFIs will generally be able t take advantage f any ptin set ut in the CRS (and the related Cmmentary). This is permitted under the Tax Administratin Act Reprting NZFIs will als be able t adpt prcedures endrsed by the OECD (including in the CRS implementatin handbk and answers t Frequently Asked Questins ) that are cnsistent with the CRS. The nly current exceptins t this general ability t rely n such ptins are: Reprting NZFIs will be required t adpt the reprting perid ended 31 March; Reprting NZFIs will be required t adpt the wider apprach t due diligence ; Reprting NZFIs will nt be able t adpt a transitinal apprach t the reprting f grss prceeds infrmatin (the reprting f grss prceeds infrmatin is explained further belw in sectin 6); and Reprting NZFIs will nt be able t use the average balance r value methd. This guidance sets ut further belw the varius CRS ptins that Reprting NZFIs will be able t take advantage f. These ptins are als summarised in Appendix Ability fr a Reprting NZFI t use Anti-Mney Laundering/Knw Yur Custmer prcedures and FATCA prcedures fr Cmmn Reprting Standard purpses The CRS is related t a number f different regulatry regimes. Fr example: the CRS due diligence and reprting prcedures build largely ff a number f key cncepts, definitins, prcedures, and types f reprtable infrmatin, frm the FATCA IGA; and sme f the CRS prcedures leverage ff Anti-Mney Laundering (AML)/Knw yur Custmer (KYC) prcedures. Therefre, the CRS des nt apply in islatin. This prvides pprtunities fr a degree f alignment between CRS, FATCA, and AML/KYC prcedures. This guidance highlights these 27 IN CONFIDENCE Page 18 f 165

19 areas. Appendix 1 als prvides a summary f sme f the areas where alignment can be achieved between the CRS and FATCA (and where alignment is nt pssible). Reprting NZFIs will generally be able t design their systems in a way that mst efficiently integrates their CRS bligatins with the bligatins that they have under these ther regulatry regimes. Fr example, the fllwing guidance highlights hw these prcesses can be integrated when n barding a new custmer: Mst Reprting NZFIs will nt treat AML/KYC (including infrmatin gathered under New Zealand withhlding tax prcesses), CRS, and FATCA requirements as discrete. Instead, they will be likely t treat these requirements as part f a single prcess when nbarding new custmers. Reprting NZFIs are able t gather this infrmatin in a way that is mst efficient frm an peratinal pint f view. Fr instance, infrmatin n tax residence (f an accunt hlder and/r, where applicable, cntrlling persn) that is relevant fr CRS purpses (and indeed New Zealand withhlding tax purpses) will ften be gathered in the same KYC frm as AML infrmatin/fatca infrmatin; and Reprting NZFIs will need t cnsider the reasnableness f any CRS self-certificatin (f tax residency fr example, f an accunt hlder and/r, where applicable, cntrlling persn) they receive taking int accunt all f the infrmatin they btain in cnnectin with the pening f the accunt (including any infrmatin/dcumentatin cllected pursuant t AML/KYC prcedures) ie crss-checking the reasnableness f the CRS self-certificatin against this ther infrmatin. Hwever, t the extent that there are any differences between prcedures that must be adpted under the CRS, FATCA and AML, the CRS itself (and the related Cmmentary), as implemented in New Zealand, will be the driver f CRS bligatins. Fr example, the CRS smetimes requires Reprting NZFIs t carry ut further due diligence, cllect additinal infrmatin, and carry ut additinal reprting cmpared t FATCA and AML. This guidance highlights these areas further belw Penalties and anti-avidance As nted abve, the success f the CRS fr AEOI as a glbal standard will depend n hw effectively and cnsistently it is implemented arund the wrld. In this cntext, the OECD has recgnised that the effectiveness f the CRS depends n implementing jurisdictins (such as New Zealand) having legal and administrative framewrks t mnitr cmpliance and penalise nn-cmpliance. Therefre, there will be a penalty framewrk designed t penalise CRS nn-cmpliance at varius parts f the infrmatin cllectin chain including the Reprting NZFI, the accunt hlder and ther persns cnnected with an accunt. The intentin underpinning these prvisins is t ensure that the required infrmatin is able t effectively flw frm such persns t Reprting NZFIs and then t Inland Revenue fr exchange. Sectin IX(A)(1) f the CRS and page 208 f the CRS Cmmentary als requires implementing jurisdictins t supplement their cmpliance framewrk with an effective anti-avidance rule. This shuld be designed t prevent persns frm adpting practices intended t circumvent the CRS due diligence and reprting prcedures. IN CONFIDENCE Page 19 f 165

20 Accrdingly, the New Zealand CRS implementing legislatin includes an anti-avidance rule that will apply t arrangements entered int by a persn with a main purpse f aviding CRS due diligence and reprting. The penalties and avidance framewrk is set ut in detail further belw in sectins 9 t 10 f this guidance. 2 Radmap fr the fllwing guidance This guidance will nw, having set ut sme high-level backgrund t the CRS fr AEOI, utline sme f the key CRS building blcks in mre detail. The purpse f this detail is t highlight the fllwing pints: wh needs t carry ut CRS due diligence and reprting? ie What determines when an entity is a Reprting NZFI? what des CRS due diligence and reprting invlve? ie What des a Reprting NZFI need t d t cmply with their CRS due diligence and reprting bligatins? The guidance will then set ut hw these principles apply in practice fr particular types f entities. Fr the purpses f the fllwing guidance, the reference t CRS will be used t refer t the bligatins that Reprting NZFIs will have t carry ut due diligence and reprting n their financial accunts. The reference t AEOI will, in turn, be used t refer t the exchanging f infrmatin (which is facilitated by the CRS) between New Zealand (thrugh Inland Revenue) and ther jurisdictins. 3 Reprting NZFIs fr CRS purpses As nted abve, Reprting NZFIs will have CRS due diligence and reprting bligatins. This raises the fllwing questins: when will an entity be a financial institutin? when will a financial institutin be a NZFI? when will a NZFI be a Reprting NZFI? 3.1 Types f financial institutins An entity will be a financial institutin based n the activities that it carries ut r hw it is managed. It is imprtant t nte, fr these purpses, that the CRS definitin f entity cvers bth legal persns (fr example, incrprated cmpanies) and legal arrangements (fr example, trusts and partnerships). This means that such legal persns and legal arrangements can (depending n the circumstances) be financial institutins. Hwever, the definitin f entity des nt cver individuals. This means that individuals cannt be financial institutins. IN CONFIDENCE Page 20 f 165

21 There are fur types f financial institutins cvered by the CRS: custdial institutins; depsitry institutins; investment entities; and specified insurance cmpanies. These types f financial institutins are bradly similar t FATCA Custdial institutin The first type f financial institutin is a custdial institutin. A custdial institutin is an entity that hlds, as a substantial prtin f its business, financial assets fr the accunt f thers. In this cntext, a substantial prtin means at least 20% f the entity s grss incme is attributable t hlding financial assets and prviding related financial services in the shrter f: 28 the three year perid ending immediately befre the reprtable perid in which its status as a custdial institutin is t be determined; r the perid in which the entity has been in existence. The term financial asset is, in turn, generally intended t encmpass any asset that may be held in an accunt. Sme examples f assets that wuld be financial assets are: shares; bnds; debentures; and mney. Hwever, the term financial asset des nt include a nn-debt direct interest in real prperty; r a cmmdity that is a physical gd, such as wheat. 28 Fr the purpses f the fllwing guidance this perid will be referred t as the specified perid. IN CONFIDENCE Page 21 f 165

22 Incme attributable t hlding financial assets and prviding related financial services includes the fllwing: custdy, accunt maintenance and transfer fees; cmmissins and fees earned frm executing and pricing securities transactins with respect t financial assets held in custdy; incme earned frm extending credit t custmers with respect t financial assets held in custdy (r acquired thrugh such extensin f credit); incme earned n the bid-ask spread f financial assets held in custdy; fees fr prviding financial advice with respect t financial assets held (r ptentially t be held in) custdy by the entity; and fees fr prviding clearance and settlement services. Example: Cmpany A carries n a business f hlding varius financial assets (shares and bnds) as custdian fr a unit trust (and perfrming related financial services fr the trust). Cmpany A has derived all f its incme frm such activities ver the specified perid. Cmpany A is a custdial institutin and, therefre, a financial institutin Depsitry institutin The secnd type f financial institutin is a depsitry institutin. A depsitry institutin is an entity that accepts depsits in the rdinary curse f a banking r similar business. An entity is cnsidered t be engaged in a banking r similar business if, in the rdinary curse f its business with custmers, the entity accepts depsits r ther similar investments f funds and regularly engages in ne r mre f the fllwing activities: a. makes persnal, mrtgage, industrial r ther lans, r prvides ther extensins f credit; b. purchases, sells, discunts r negtiates accunts receivable, instalment bligatins, ntes, drafts, cheques, bills f exchange, acceptances r ther evidences f indebtedness; c. issues letters f credit and negtiates drafts drawn thereunder; d. prvides trust r fiduciary services; e. finances freign exchange transactins; r f. enters int, purchases, r dispses f finance leases r leased assets. IN CONFIDENCE Page 22 f 165

23 A depsitry institutin will include, fr example: a registered bank under the Reserve Bank Act 1989; and nn-bank depsit takers supervised by the Reserve Bank, such as credit unins and mutual building scieties Investment entity The third type f financial institutin is an investment entity. Entities that typically meet this definitin wuld include cllective investment vehicles, mutual funds, exchange traded funds, private equity funds, hedge funds, venture capital funds, leveraged buy-ut funds r any similar investment vehicle established with an investment strategy f investing, reinvesting r trading in financial assets. Fr example, this definitin wuld generally capture unit trusts and managed investment schemes. This list is nt exhaustive. Entities such as family trusts may be investment entities, particularly if the trust s financial assets are managed by anther financial institutin. Fund managers and investment advisers will als ften be investment entities. There are tw different sets f criteria fr determining whether an entity is an investment entity. If an entity meets either f these it will generally be an investment entity: 29 in business investment entities; and managed investment entities. Investment Entity by virtue f primarily cnducting an investment business fr r n behalf f custmers (in business investment entity) An entity will be an investment entity if it primarily cnducts as a business fr r n behalf f custmers ne r mre f a number f specified investment activities. This is different frm the crrespnding limb f the FATCA definitin f investment entity, which des nt cntain such a primarily requirement The ne exceptin t this is if the entity is an active NFE because it meets the criteria in subsectins D(9)(d) thrugh (g) f sectin VIII f the CRS. The definitin f active NFE is set ut in full in Appendix 4. It is assumed that this exceptin des nt apply fr the purpses f the examples set ut belw. The reader shuld refer t subsectins D(9)(d) thrugh (g) f sectin VIII f the CRS t determine whether this exceptin may apply t their circumstances. 30 Hwever, as explained in the FATCA/CRS cmparisn chart in Appendix 1, the FATCA US Treasury Regulatins definitin f investment entity is in line with the CRS definitin f investment entity. An entity can chse t adpt the US Treasury Regulatins definitin f investment entity fr FATCA purpses (in lieu f the crrespnding definitin in the FATCA IGA) in rder t achieve alignment here. IN CONFIDENCE Page 23 f 165

24 The activities that will bring the entity within the definitin are: trading in: mney market instruments (cheques, bills, certificates f depsit, derivatives, etc); freign exchange; exchange, interest rate and index instruments; transferable securities; cmmdity futures. individual and cllective prtfli management; therwise investing, administering r managing funds r mney n behalf f ther persns. Fr the purpses f this guidance such activities will be referred t as being specified investment activities. An entity is regarded as primarily cnducting as a business these specified investment activities fr custmers when at least half f its grss incme (50% r mre) is derived frm such specified investment activities in the shrter f: the three year perid ending immediately befre the reprtable perid in which its status as an investment entity is t be determined; r the perid in which the entity has been in existence. Fr the purpses f this guidance this perid will be referred t as the specified perid. Example 1: Wide Trust is a New Zealand unit trust that carries n, as its business, cllective prtfli management activities fr custmers. Wide Trust derived 80% f its grss incme frm such activities ver the specified perid. Is the Wide Trust an in business investment entity? Yes: Wide Trust perfrmed specified investment activities (cllective prtfli management) fr custmers ver the specified perid. Wide Trust als derived its incme primarily (50% r mre) frm such activities ver that perid. Therefre, Wide Trust is an in business investment entity. This means that Wide Trust is a financial institutin. Example 2: A fund manager (an entity), amng its varius business peratins, rganises and manages a variety f funds, including Fund A, a fund that invests primarily in equities. The fund manager has earned all f its grss incme ver the specified perid frm prviding such services. The fund manager hires an investment adviser (anther entity) t prvide advice and discretinary management f a prtin f Fund A s financial assets. The investment adviser has earned all f its grss incme ver the specified perid frm prviding such services. Is the fund manager an in business investment entity? IN CONFIDENCE Page 24 f 165

25 Yes: The fund manager perfrmed specified investment activities (fund management) fr custmers ver the specified perid. The fund manager als derived its incme primarily (50% r mre) frm such activities ver that perid. Therefre, the fund manager is an in business investment entity. This means that the fund manager is a financial institutin. Is the investment adviser an in business investment entity? Yes: The investment adviser perfrmed specified investment activities (fund management and related advice) fr custmers ver the specified perid. The investment adviser als derived its incme primarily (50% r mre) frm such activities ver that perid. Therefre, the investment adviser is an in business investment entity. This means that the investment adviser is a financial institutin. Investment Entity by virtue f being managed by anther financial institutin (managed investment entity) An entity will be a managed investment entity if: it derives its incme primarily (at least half f its grss incme 50% r mre) ver the specified perid frm investing, reinvesting r trading in financial assets; and it is managed by anther financial institutin (ther than 31 a managed investment entity). This is different frm the crrespnding limb f the FATCA IGA definitin f investment entity, which des nt cntain a primarily requirement fr the prtin f the entity s incme frm financial assets (50% r mre) and where the relevant manager needs t be an investment entity. 32 Meaning f financial asset The term financial asset is generally intended t encmpass any asset that may be held in an accunt. Sme examples f assets that wuld be financial assets are: shares; bnds; debentures; and mney. 31 It is assumed that this exceptin des nt apply fr the purpses f the examples set ut belw. 32 Hwever, as explained in the FATCA/CRS cmparisn chart in Appendix 1, the FATCA US Treasury Regulatins definitin f investment entity is in line with the CRS definitin. An entity can chse t adpt the US Treasury Regulatins definitin fr FATCA purpses (in lieu f the crrespnding definitin in the FATCA IGA) in rder t achieve alignment between the relevant CRS and FATCA definitins f investment entity. IN CONFIDENCE Page 25 f 165

26 Hwever, the term financial asset des nt include a nn-debt direct interest in real prperty; r a cmmdity that is a physical gd, such as wheat. Meaning f managed by a financial institutin An entity will be regarded as managed by anther financial institutin (that perfrms specified investment activities fr it) where that financial institutin has discretinary authrity t manage the entity s assets (either in whle r in part.) A financial institutin trustee will generally manage a trust (in this regard). An entity may als utsurce management f its assets (either in whle r part). Fr example, where a trustee f a trust sets the parameters within which a financial institutin fund manager can invest sme r all f the trust s assets, but gives the fund manager full discretin t invest within thse parameters, the trust s assets will be managed by the fund manager. Hwever, where the trustee retains full cntrl ver the investment decisins and the financial institutin fund manager simply acts n instructin frm the trustee withut discretin, then the assets will nt be managed by the fund manager. Furthermre, if a financial institutin merely prvides advice t an entity, this will nt be sufficient by itself t mean that the financial institutin manages the entity. It is the discretinary authrity t manage the entity s assets (either in whle r in part) that is crucial. An entity may be managed by a mix f ther entities and individuals. If any f the persns invlved in the management f the entity is a financial institutin the entity will be regarded as managed by that financial institutin. The residence f the financial institutin manager is nt relevant in this case. This part f the definitin f managed investment entity simply requires that the manager is a financial institutin (ie it des nt specify where that institutin needs t be resident). Example 3: A trust set up in New Zealand has the fllwing investments: interest-bearing accunts with tw different Reprting NZFI banks; shares and bnds under discretinary investment with a Reprting NZFI fund manager (a prvider f discretinary investment management services DIMS prvider); and a rental prperty. The trust derived 80% f its incme frm the accunts, share, and bnds (financial assets) ver the specified perid. The trust derived the ther 20% f its incme frm the rental prperty. Is the trust a managed investment entity? Yes: The trust derives its incme primarily (50% r mre) frm financial assets (the accunts, shares and bnds) ver the specified perid. The trust s assets are als managed (in part) by a financial institutin (the Reprting NZFI fund manager DIMS prvider). Therefre, the trust is a managed investment entity financial institutin. Example 4: Kea Trust has assets that cnsist f shares and bnds. The trust has tw individual trustees, ne f which has been empwered t manage the trust s assets. Kea Trust des nt utsurce any management f financial assets t any financial institutin. Kea Trust derives its incme primarily frm the shares and bnds. IN CONFIDENCE Page 26 f 165

27 Is the Kea Trust a managed investment entity? N: The Kea Trust is managed by an individual trustee an individual is nt an entity under the CRS. It fllws that the trustee cannt be a financial institutin under the CRS. The trustee als des nt utsurce any management t any financial institutin. Therefre, the trust is nt a managed investment entity. Applicatin f principles t interests in real prperty It is imprtant t understand hw these principles apply in the cntext f direct and indirect interests in real prperty. If an entity s grss incme is primarily attributable t investing, reinvesting r trading in nndebt direct interests in real prperty, it will nt be an investment entity irrespective f whether it is managed. This is because such interests are nt financial assets. Example 5: A family trust hlds a direct interest in an investment prperty, which it lets ut t generate rental incme. The trust has n ther assets. The prperty is managed by a prperty management cmpany, which arranges tenants and management f rental incme and expenditure. Is the trust a managed investment entity? N. The trust s incme is primarily attributable (50% r mre) t investing in a direct interest in real prperty (nt a financial asset). Therefre, the trust is nt an investment entity. Hwever, this principle des nt apply t indirect interests in real prperty. Example 6: A family trust hlds shares and units in varius prperty funds. The prperty funds, in turn, hld interests in real prperty. The family trust rganises fr a financial institutin prvider f discretinary investment management services t have authrity t manage these shares and units. The financial institutin has authrity t buy and sell shares and units in such prperty funds, subject t a mandate that they have agreed with the trustee. The family trust earns all f its incme frm investing in such shares/units ver the specified perid (ie earning dividends frm thse investments). Is the trust a managed investment entity? Yes. The trust s incme is primarily attributable t the shares and units (financial assets). The trust is als managed by the financial institutin. Therefre, the trust is a managed investment entity financial institutin. IN CONFIDENCE Page 27 f 165

28 On-ging nature f the test It is als imprtant t nte that an entity s CRS status may change frm year t year if there are changes t the nature f the assets that it hlds, hw it derives its incme, and/r hw it is managed. Example 7: A family trust hlds a direct interest in an investment prperty, which it lets ut t generate rental incme. The trust has n ther assets. The prperty is managed by a prperty management cmpany, which arranges tenants and management f rental incme and expenditure. As nted abve (in example 5), the trust is nt an investment entity at that stage. Hwever, the family trust then chses t sell its rental prperties and btain a prtfli f financial assets (including shares and bnds). The trust rganises fr a financial institutin prvider f discretinary investment management services t have authrity t manage these financial assets. The financial institutin service prvider has authrity t buy and sell such assets, subject t a mandate that they have agreed with the trustee. The family trust earns all f its incme frm such financial assets ver the specified perid (ie earning dividends and interest frm such investments). Is the trust a managed investment entity? Yes: The trust s incme is primarily attributable t the shares and bnds (financial assets). The trust is als managed by a financial institutin. Therefre, the trust is a managed investment entity financial institutin Specified insurance cmpany The furth type f financial institutin is a specified insurance cmpany What is a Specified Insurance Cmpany? Fr CRS purpses, an entity that is an insurance cmpany (including its hlding cmpany) is treated as a specified insurance cmpany if it :33 issues investment prducts that are classified as cash value insurance cntracts r annuity cntracts; r makes payments under the terms and cnditins f these cntracts. These types f insurance and annuity cntracts usually include an investment cmpnent. 33 See CRS sectin VIII.A(8) definitin f Specified Insurance Cmpany. IN CONFIDENCE Page 28 f 165

29 In the New Zealand cntext and the CRS, an insurance cmpany is an entity: that is regulated as an insurance business under the laws f New Zealand; the grss incme f which (fr example, grss premiums and grss investment incme) arising frm insurance, reinsurance, and annuity cntracts fr the immediately preceding perid exceeds 50% f ttal grss incme fr such perid; r the aggregate value f the assets f which assciated insurance, reinsurance and annuity cntracts at any time during the immediately preceding perid exceeds 50% f ttal assets at any time during that perid. [An insurance cmpany that nly prvides general insurance 34 r term life insurance 35 is usually nt a specified insurance cmpany. Neither are reinsurance cmpanies that nly prvide indemnity reinsurance cntracts. These cmpanies are treated instead as nnfinancial entities. Mst life insurance cmpanies are generally cnsidered t be specified insurance cmpanies. Hwever, entities that d nt issue cash value insurance cntracts r annuity cntracts, and are nt bligated t make payments with respect t them, such as mst nn-life insurance cmpanies, mst hlding cmpanies f insurance cmpanies and insurance brkers, are usually nt specified insurance cmpanies. 36 An insurance brker entity that sells cash value insurance cntracts r annuity cntracts n behalf f an insurance cmpany (and is part f the payment chain), will nt be a specified insurance cmpany unless it is bliged t make payments t the accunt hlder under the terms f these cntracts. Additinally, the reserving activities f an insurance cmpany d nt, themselves, cause it t becme anther type f financial institutin, such as a custdial institutin, a depsitry institutin, r an investment entity.] There are tw key issues that feed int what cmprises a specified insurance cmpany: what cnstitutes a cash value insurance cntract ; and what cnstitutes an annuity cntract 34 General insurance is typically any insurance that is nt life insurance (ther than term life plicies), des nt include any investment cmpnent, and prvides payments fr ecnmic lss frm particular adverse events. Fr example: business r cmmercial, health, hme and hme cntents, incme prtectin, mtr vehicle, public liability, travel, etc. 35 The CRS includes as an Excluded Accunt certain term life insurance cntracts that meet the cnditins specified in CRS sectin VIII.C(17)(c). See als the CRS Cmmentary n Sectin VIII, sectins 86 and 91, pages 184 t185 which use the wrding term life insurance cntract. 36 See CRS Cmmentary, sectin 28 n page 165. IN CONFIDENCE Page 29 f 165

30 What is a cash value insurance cntract? Definitin f Cash Value Insurance Cntract The term cash value insurance cntract is defined t mean an insurance cntract (ther than an indemnity reinsurance cntract between tw insurance cmpanies) that has a cash value. 37 A cash value insurance cntract is an insurance cntract where the plicyhlder is entitled t receive payment n surrender r terminatin f the cntract. Definitin f Insurance Cntract The CRS defines the term insurance cntract 38 as meaning a cntract (ther than an annuity cntract) under which the issuer agrees t pay an amunt upn the ccurrence f a specified cntingency invlving mrtality, mrbidity, accident, liability r prperty risk. Definitin f Cash Value The CRS defines Cash Value 39 as the greater f: the amunt that the plicyhlder is entitled t receive n the terminatin r surrender f the cntract withut reductin fr any surrender charge r lans utstanding against the plicy. Fr example, when the plicyhlder receives an annual statement f the value f the plicy that will be the cash value in that year; and the amunt the plicyhlder can brrw against accrding t the plicy. Nte that the plicyhlder des nt need t have pledged the accunt as cllateral fr brrwing fr this secnd test t apply. It is the amunt that the plicyhlder culd expect t brrw against the cash value insurance cntract if they chse t use it as cllateral fr a lan. Hwever, the term Cash Value excludes any amunt payable under an insurance cntract: slely by reasn f the death f an individual insured under a life insurance cntract; r as a persnal injury r sickness benefit r ther benefit prviding indemnificatin f an ecnmic lss incurred upn the ccurrence f the event insured against; r as a refund f a previusly paid premium (less cst f insurance charges whether r nt actually impsed) under an insurance cntract (ther than an investment-linked life insurance r annuity cntract) due t cancellatin r terminatin f the cntract, decrease in risk expsure during the effective perid f the cntract, r arising frm the crrectin f a psting r similar errr with regard t the premium fr the cntract; r as a plicyhlder dividend (ther than a terminatin dividend) prvided that the dividend relates t an insurance cntract under which the nly benefits payable are described in subsectin C(8)(b); r 37 CRS sectin VIII.C(7); CRS Cmmentary, pages 179 t CRS sectin VIII.C(5). 39 CRS sectin VIII.C(8). IN CONFIDENCE Page 30 f 165

31 as a return f an advance premium r premium depsit fr an insurance cntract fr which the premium is payable at least annually if the amunt f the advance premium r premium depsit des nt exceed the next annual premium that will be payable under the cntract. Excluded frm the term Cash Value is als an amunt payable under an insurance cntract as a persnal injury r sickness benefit, r ther benefit, prviding indemnificatin f an ecnmic lss incurred upn the ccurrence f the event insured against. 40 Such ther benefit des nt include any benefit payable under an investment-linked life insurance r annuity cntract. A plicyhlder dividend that satisfies all the requirements described in subsectin C(8)(d) f Sectin VIII f the CRS (per abve), and relating t a persnal injury r sickness insurance plicy, is als excluded frm the term Cash Value. A plicyhlder dividend is any dividend r similar distributin t plicyhlders in their capacity as such, including: an amunt paid r credited (including as an increase in benefits) if the amunt is nt fixed in the cntract but rather depends n the experience f the insurance cmpany r the discretin f management; a reductin in the premium that, but fr the reductin, wuld have been required t be paid; and an experience-rated refund r credit based slely upn the claims experience f the cntract r grup invlved. A plicyhlder dividend cannt exceed the premiums previusly paid fr the cntract, less the sum f the cst f insurance and expense changes (whether r nt actually impsed) during the cntract s existence and the aggregate amunt f any prir dividends paid r credited accrding t the cntract. A plicyhlder dividend des nt include any amunt that is in the nature f interest that is paid r credited t a cntract hlder t the extent that the amunt exceeds the minimum rate f interest required t be credited with respect t cntract values under lcal law. The CRS prvides a further exclusin frm cash value in relatin t a return f an advance premium r premium depsit fr an insurance cntract fr which the premium is payable at least annually, if the amunt f the advance premium r premium depsit des nt exceed the next annual premium that will be payable under the cntract. Investment-linked insurance cntracts Investment-linked insurance cntracts are treated as cash value insurance cntracts fr CRS purpses. An investment-linked insurance cntract means an insurance cntract under which benefits, premiums, r the perid f cverage is adjusted t reflect the investment return r market value f assets assciated with the cntract CRS sectin VIII.C(8)(b). 41 CRS Cmmentary, sectin 76 n page 180. IN CONFIDENCE Page 31 f 165

32 Insurance wrapper prducts Insurance wrapper prducts, such as private placement life insurance cntracts, are generally cnsidered t be cash value insurance cntracts. An insurance wrapper prduct usually includes an insurance cntract, the assets f which are: held in an accunt maintained by a financial institutin; and managed in accrdance with a persnalised investment strategy r under the cntrl r influence f the plicyhlder, wner r beneficiary f the cntract What is an annuity cntract? The term Annuity Cntract 42 is defined in the CRS t mean a cntract under which the issuer agrees t make payments fr a perid f time determined in whle r in part by reference t the life expectancy f ne r mre individuals. The term Annuity Cntract, als includes a cntract that is cnsidered t be an annuity cntract in accrdance with the law, regulatin r practice f the jurisdictin in which the cntract was issued and under which the issuer agrees t make payments fr a term f years. 3.2 Circumstances when a financial institutin will be a New Zealand Financial Institutin This guidance has set ut abve the circumstances where an entity will be a financial institutin. This will be the case if the entity is a custdial institutin, a depsitry institutin, an investment entity, r a specified insurance cmpany. This then raises the questin f when such a financial institutin will have a sufficient cnnectin t New Zealand t be a NZFI. A financial institutin will be a NZFI fr CRS purpses if: it is a New Zealand resident (excluding any branch lcated utside New Zealand); r it has a New Zealand branch. The general rule is that a financial institutin will be resident in New Zealand fr CRS purpses and, be a NZFI, if it is tax-resident in New Zealand. Hwever, there are special rules that apply fr trusts 43 and entities (ther than trusts) that d nt have a tax residency. In the case f a financial institutin trust (irrespective f whether it is resident fr tax purpses in New Zealand), the trust will generally be resident in New Zealand fr CRS purpses, and, therefre an NZFI, if it has ne r mre trustees that are tax-resident in New Zealand. 42 CRS sectin VIII.C(6). 43 This special rule that applies t trusts des nt apply t unit trusts. Unit trusts are treated as cmpanies fr New Zealand tax purpses. Therefre, New Zealand s tax residence rules that apply t cmpanies will determine when a financial institutin unit trust is resident in New Zealand fr CRS purpses. This is bradly in line with the apprach that applies fr FATCA purpses (see Appendix 1). IN CONFIDENCE Page 32 f 165

33 Hwever, the exceptin t this is if the trust is tax-resident in anther Participating Jurisdictin and reprts all the infrmatin required t be reprted accrding t the CRS (with respect t reprtable accunts maintained by the trust) t that jurisdictin because it is a tax resident in that jurisdictin. Therefre, this exceptin will be relevant t sme financial institutin trusts that have trustees lcated verseas. Where a financial institutin (ther than a trust) des nt have a tax residence (fr example, a financial institutin partnership may be treated as fiscally transparent), it will be resident in New Zealand and, therefre, be an NZFI, if: it is incrprated under the laws f New Zealand; r it has its place f management (including effective management) in New Zealand; r it is subject t financial supervisin in New Zealand. Where such a financial institutin (ther than a trust) is resident in tw r mre participating jurisdictins, the financial institutin will be subject t the CRS due diligence and reprting bligatins f the jurisdictin in which it maintains the financial accunts. 44 A NZFI is generally able t adpt these same residency tests fr FATCA purpses as well. This pint is summarised in the CRS/FATCA cmparisn chart in Appendix 1. There are als special rules that apply in determining whether a financial institutin has a branch in a Participating Jurisdictin (such as New Zealand). In this respect, a branch fr CRS purpses is a unit, business r ffice f a financial institutin that is treated as a branch under the regulatry regime f a jurisdictin r that is therwise regulated under the laws f a jurisdictin as separate frm ther ffices, units r branches f the financial institutin. A branch includes a unit, business r ffice f an institutin lcated in a jurisdictin in which the financial institutin is resident, and a unit, business r ffice f a financial institutin lcated in the jurisdictin in which the financial institutin is created r rganised. All units, businesses r ffices f an institutin in a single jurisdictin shuld be treated as a single branch. 3.3 Circumstances when a NZFI will be a Reprting New Zealand Financial Institutin A NZFI will be a Reprting NZFI unless it is a Nn-Reprting NZFI. The fllwing guidance utlines the circumstances when a NZFI will be a Nn-Reprting NZFI. 3.4 Circumstances when a NZFI will be a Nn-Reprting New Zealand Financial Institutin As explained belw, the CRS explicitly defines varius types f financial institutins as being nn-reprting financial institutins (NRFIs). The CRS als prvides scpe fr implementing jurisdictins (such as New Zealand) t define ther types f financial institutin as being a NRFI (ie NRFI in the cntext f New Zealand) if certain specified criteria are met. The Cmmissiner f Inland Revenue will determine what 44 This is assuming that the financial institutin is a Reprting Financial Institutin. IN CONFIDENCE Page 33 f 165

34 ther types f financial institutins are Nn-reprting NZFIs (in this regard) and publish the determinatin. CRS determinatins are set ut n Inland Revenue s website at the fllwing link This guidance sets ut the types f financial institutins that the CRS specifically defines as being NRFIs. It als sets ut the criteria that will be used t determine whether any ther types f financial institutins shuld als be treated as NRFIs. 3.5 Financial institutins that the CRS defines as being Nn-Reprting Financial Institutins Sectin VIII(B)(1) f the CRS defines a NRFI as meaning any financial institutin that cmes within any f the fllwing: a. a Gvernmental Entity, Internatinal Organisatin r Central Bank, ther than with respect t a payment that is derived frm an bligatin held in cnnectin with a cmmercial financial activity f a type engaged in by a Specified Insurance Cmpany, Custdial Institutin r Depsitry Institutin; b. a Brad Participatin Retirement Fund; a Narrw Participatin Retirement Fund, a Pensin Fund f a Gvernmental Entity, Internatinal Organisatin r Central Bank r a Qualified Credit Card Issuer; c. any ther Entity that presents a lw risk f being used t evade tax, has substantially similar characteristics t any f the Entities described in subsectins B(1)(a) and (b), and is defined in dmestic law as a NRFI, prvided that the status f such Entity as a NRFI des nt frustrate the purpses f the CRS; d. an Exempt Cllective Investment Vehicle; r e. a trust t the extent that the trustee f the trust is a Reprting Financial Institutin and reprts all infrmatin required t be reprted pursuant t Sectin I with respect t all Reprtable Accunts f the trust (knwn as trustee dcumented trusts ). A full list f the requirements that must be satisfied fr these entities t be treated as NRFIs is set ut in Appendix 7. It is imprtant at this pint t briefly refer t the trustee dcumented trust categry f Nn-reprting NZFI set ut in sectin VIII(B)(1)(e) f the CRS. This categry is likely t be particularly relevant t thse NZFI trusts: that are managed investment entities; and that have financial institutin crprate trustees. The trustee dcumented trust categry prvides that a NZFI trust will be a Nnreprting NZFI t the extent that the trustee f the trust is a reprting financial institutin and reprts all f the infrmatin required t be reprted with respect t all reprtable accunts f the trust. Fr example, a NZFI trust may engage a reprting financial institutin crprate trustee t carry ut such bligatins with respect t the trust. IN CONFIDENCE Page 34 f 165

35 Hwever, it is imprtant t nte that if the trustee f such a trustee-dcumented trust des nt cmply with these bligatins the trust will, therefre, nt be able t benefit frm this exclusin and will be a Reprting NZFI. In ther wrds, where a trustee fails t fulfil any f these bligatins, the trust will be respnsible fr cmpleting due diligence r reprting as a Reprting NZFI. Therefre, essentially, the trust will be reliant n the trustee cmplying with its bligatins (n behalf f the trust) in rder fr the trust itself t have cmplied with the CRS. These pints are explained at page 174 f the CRS Cmmentary. The scpe f the varius types f NRFI is als explained in mre detail at pages 166 t 174 f the CRS Cmmentary. Readers shuld refer t thse pages f the Cmmentary fr further cntext. 3.6 Financial institutins that implementing jurisdictins can treat as Nn-Reprting Financial Institutins (excluded entities) The CRS als prvides in sectin VIII(B)(1)(c) that a Participating Jurisdictin (such as New Zealand) can treat a financial institutin as being a NRFI if: the financial institutin presents a lw risk f being used t evade tax; the financial institutin has substantially similar characteristics t any f the types f institutins described in sectin VIII(B)(1)(a) r (b): Gvernment entity, Internatinal Organisatin, Central Bank, Brad Participatin Retirement Fund, Narrw Participatin Retirement Fund, Pensin fund f a gvernment entity (r Internatinal Organisatin r Central Bank), r a Qualified Credit Card Issuer; the financial institutin is defined in dmestic law as being a NRFI (ie in accrdance with a legislative framewrk that allws the financial institutin t be listed as a NRFI); and defining the financial institutin as a NRFI des nt frustrate the purpses f the CRS. The expectatin is that participating jurisdictins (such as New Zealand) will make their list f NRFI publicly available and that each jurisdictin will have a single list f NRFIs, as ppsed t different lists fr different participating jurisdictins. CRS determinatins made by the Cmmissiner f thse entities that have already been treated as NRFIs (in this way) are available frm NZFIs are able t prvide submissins t be cnsidered fr being treated as Nn-reprting NZFIs. These submissins shuld utline why the NZFI satisfies all f the bullet pints utlined abve and can be sent via plicy.webmaster@ird.gvt.nz Pages 170 t 173 f the CRS Cmmentary prvide the fllwing cntext n hw this exemptin is intended t apply. This shuld assist NZFIs that intend t make a submissin that they shuld be treated as Nn-reprting NZFIs The financial institutin presents a lw risk f being used t evade tax The first requirement described in subsectin B(1)(c) f Sectin VIII f the CRS is that the financial institutin presents a lw risk f being used t evade tax. IN CONFIDENCE Page 35 f 165

36 Factrs that may be cnsidered t determine such a risk include: Lw-risk factrs: the financial institutin is subject t regulatin; and infrmatin reprting by the financial institutin t the tax authrities is required. High-risk factrs: the type f financial institutin is nt subject t AML/KYC Prcedures; and the type f financial institutin is allwed t issue shares in bearer frm and is nt subject t effective measures implementing the Financial Actin Task Frce Recmmendatins with respect t transparency and beneficial wnership f legal persns, and the type f financial institutin is prmted as a tax minimisatin vehicle The financial institutin has substantially similar characteristics t any f types f institutins described in sectin VIII(B)(1)(a) r (b) f the Cmmn Reprting Standard The secnd requirement described in subsectin B(1)(c) f sectin VIII f the CRS is that the financial institutin has substantially similar characteristics t any f the fllwing types f financial institutins described in subsectins B(1)(a) r (b) f sectin VIII f the CRS: Gvernment Entity, Internatinal Organisatin, Central Bank; Brad Participatin Retirement Fund; Narrw Participatin Retirement Fund; A pensin fund f a Gvernment Entity, Internatinal Organisatin, Central Bank; r Qualified Credit Card Issuer. This requirement cannt be used slely t eliminate a specific element f a descriptin. Each jurisdictin may evaluate the applicatin f this requirement t a type f financial institutin that des nt satisfy all the requirements f a particular descriptin listed in subsectins B(1)(a) r (b). As part f such evaluatin, a jurisdictin (such as New Zealand) must identify which requirements are satisfied and which are nt satisfied, and with respect t the requirements that are nt satisfied, must identify the existence f a substitute requirement that prvides equivalent assurance that the relevant type f financial institutin presents a lw-risk f tax evasin. Page 172 f the CRS Cmmentary sets ut (as a guideline) the fllwing examples t illustrate the pints that will be relevant when determining whether a financial institutin shuld be treated as a NRFI under subsectin B(1)(c) f sectin VIII f the CRS. This shuld assist NZFIs that intend t make a submissin that they shuld be treated as Nn-reprting NZFIs: IN CONFIDENCE Page 36 f 165

37 Example 1 (Nn-prfit rganisatin): A type f nn-prfit rganisatin that is a financial institutin des nt satisfy all the requirements f any particular descriptin listed in subsectins B(1)(a) r (b). This type f nn-reprting financial institutin cannt be defined in dmestic law as a nnreprting financial institutin slely because it is a nn-prfit rganisatin. Example 2 (Retirement fund als fr self-emplyed individuals): A type f retirement fund that is a Financial Institutin satisfies all the requirements listed in subsectin B(5). Hwever, under the laws f the jurisdictin in which the fund is established r perates, it is required t als prvide benefits t beneficiaries that are self-emplyed individuals. Because there is an verall substitute requirement that prvides equivalent assurance that the fund presents a lw-risk f tax evasin, this type f financial institutin culd be defined in dmestic law as a Nn- Reprting Financial Institutin. Example 3 (Unlimited retirement fund): A type f retirement fund that is a Financial Institutin satisfies all the requirements listed in subsectin B(6), apart frm the ne cntained in subsectin B(6)(c) (ie emplyee and emplyer cntributins are nt limited). Hwever, the tax relief assciated t the emplyee and emplyer cntributins is limited by reference t earned incme and cmpensatin f the emplyee, respectively. Because there is a substitute requirement that prvides equivalent assurance that the fund presents a lw risk f tax evasin, this type f financial institutin culd be defined in dmestic law as a Nn-Reprting Financial Institutin. Example 4 (Investment vehicle exclusively fr retirement funds): A type f investment vehicle that is a Financial Institutin is established exclusively t earn incme fr the benefit f ne r mre retirement r pensin funds described in subsectins B(5) thrugh (7), r retirement r pensin accunts described in subsectin C(17)(a). Because all the incme f the vehicle inures t the benefit f Nn- Reprting Financial Institutins r excluded accunts, and there is an verall, substitute requirement that prvides equivalent assurance that the vehicle presents a lw risk f tax evasin, this type f financial institutin culd be defined in dmestic law as a Nn- Reprting Financial Institutin. 4 What financial accunts are subject t CRS due diligence? This guidance has utlined the key building blcks that determine when an entity is a Reprting NZFI. The guidance nw sets ut the bligatins such Reprting NZFIs will have. Reprting NZFIs need t carry ut due diligence n the financial accunts they maintain t identify accunts held (and/r, in the case f passive nn-financial entities, cntrlled) by relevant freign tax residents. This then raises the fllwing questins: what cnstitutes a financial accunt ; and when will a Reprting NZFI maintain a financial accunt IN CONFIDENCE Page 37 f 165

38 The term financial accunt includes: 45 depsitry accunts; annuity cntracts; cash value insurance cntracts; custdial accunts; and equity and debt interest in certain financial institutins (generally limited t investment entities). A financial accunt des nt, hwever, include any accunt that is an excluded accunt. A financial accunt will be maintained by a Reprting NZFI in the fllwing circumstances: in the case f a depsitry accunt, by the Reprting NZFI that is bligated t make payments with respect t the accunt (excluding the agent f a Reprting NZFI); in the case f a custdial accunt, by the Reprting NZFI that hlds custdy ver the assets in the accunt (including a Reprting NZFI that hlds assets in street name - ie in the brker s name fr an accunt hlder in such institutin); in the case f a cash value insurance cntract r an annuity cntract, by the Reprting NZFI that is bligated t make payments with respect t the cntract; and in the case f any equity r debt interest in a Reprting NZFI that cnstitutes a financial accunt, by that institutin. This guidance nw prvides a high level utline f the varius types f financial accunts. This will assist Reprting NZFIs that maintain such accunts t determine what accunts they need t carry ut due diligence n. 4.1 Depsitry accunt A depsitry accunt is defined in sectin C(2) f sectin VIII f the CRS as including any cmmercial, cheque, savings, time r thrift accunt, r an accunt that is evidenced by a certificate f depsit, thrift certificate, investment certificate, certificate f indebtedness r ther similar instrument maintained by a Reprting NZFI in the rdinary curse f banking r similar business. It als includes an amunt held by an insurance cmpany pursuant t a guaranteed investment cntract r similar agreement t pay r credit interest theren. 45 This is subject t a number f exclusins that are utlined belw. IN CONFIDENCE Page 38 f 165

39 4.2 Annuity cntract Annuity cntracts will generally be financial accunts. An annuity cntract is defined in sectin C(6) f sectin VIII f the CRS as meaning a cntract under which the issuer agrees t make payments fr a perid f time determined in whle r in part by reference t the life expectancy f ne r mre individuals. It als includes a cntract that is cnsidered t be an annuity cntract in accrdance with the law, regulatin r practice f the jurisdictin in which the cntract was issued and under which the issuer agrees t make payments fr a term f years. Hwever, an annuity cntract is nt a financial accunt if it is a nn-investment linked, nntransferable immediate life annuity issued t an individual mnetising a pensin r disability benefit prvided under an excluded accunt Cash value insurance cntract A cash value insurance cntract will be a financial accunt. It is defined in sectin C(7) f sectin VIII f the CRS as meaning an insurance cntract (ther than an indemnity reinsurance between tw insurance cmpanies) that has a cash value. There are three key elements t the definitin f cash value insurance cntract : insurance cntract; cash value insurance cntract; and cash value. insurance cntract is defined in the CRS in sectin C(5) as a cntract (ther than an annuity cntract) under which the issuer agrees t pay an amunt upn the ccurrence f a specified cntingency invlving mrtality, mrbidity, accident, liability r risk. Under sectin C(7) f the CRS a cash value insurance cntract means an insurance cntract (ther than an indemnity reinsurance cntract between tw insurance cmpanies) that has a cash value. A cash value is the greater f the amunt a plicy hlder is entitled t receive upn surrender f the plicy, r the amunt the plicyhlder can brrw under it, but des nt include an amunt payable: slely upn the death f the insured under a life insurance cntract; as a persnal injury r sickness benefit r ther benefit prviding indemnificatin f an ecnmic lss incurred upn the ccurrence f an event insured against; as a refund f a previusly paid premium due t cancellatin r terminatin f the cntract, decrease in risk expsure, r arising frm the crrectin f a psting r similar errr with regard t the premium fr the cntract; 46 The meaning f excluded accunt is utlined in detail further belw in sectin 4.6. IN CONFIDENCE Page 39 f 165

40 as a plicyhlder dividend (ther than a terminatin dividend) prvided it relates t an insurance cntract under which the nly benefits payable are fr a persnal injury r sickness benefit, r ther benefit prviding indemnificatin f an ecnmic lss incurred upn the ccurrence f an event insured against; r as a return f an advance premium r premium depsit fr which the premium is paid at least annually if the amunt f the advance premium r premium depsit des nt exceed the next annual premium payable. 4.4 Custdial accunt A Custdial Accunt is defined in sectin C(3) f sectin VIII f the CRS as an accunt (ther than an insurance cntract r annuity cntract) fr the benefit f anther persn that hlds ne r mre financial assets. As nted abve, a financial asset generally cvers all assets that may be held in an accunt (including, fr example shares, bnds, debentures, and mney). Hwever, the term financial asset des nt include a nn-debt direct interest in real prperty; r a cmmdity that is a physical gd, such as wheat. 4.5 Equity r debt interest Equity r debt interest in an investment entity A debt r equity interest in an investment entity is generally cnsidered a financial accunt. This then raises the fllwing questins: what cnstitutes an equity interest; what cnstitutes a debt interest; and when is an equity r debt interest in an investment entity a financial accunt? What is an equity interest? In the case f a partnership that is a financial institutin, the term equity interest means a capital r prfits interest in the partnership. In the case f a trust that is a financial institutin, an equity interest is cnsidered t be held by any persn treated as a settlr r beneficiary f all r a prtin f the trust, r any ther natural persn exercising ultimate effective cntrl ver the trust (see page 178, sectin 69 f the CRS Cmmentary). The fllwing pints are relevant in this regard: If a settlr r beneficiary is an entity the relevant equity interest will be held by the cntrlling persns f that entity. A persn will be treated as being a beneficiary f a trust if they have the right t receive (directly r indirectly) a mandatry r discretinary distributin frm the trust (see page 178, sectin 69 f the CRS Cmmentary). Hwever, a discretinary beneficiary will nly be treated as having an equity interest if they receive (paid r payable) a distributin (directly r indirectly) in the perid ie this will be the pint when the beneficiary s accunt will be pened: IN CONFIDENCE Page 40 f 165

41 The OECD has prvided guidance in the answer t a Frequently Asked Questin n the AEOI prtal 47 that if a discretinary beneficiary f a financial institutin trust receives a distributin frm the trust is a particular perid, that beneficiary will be treated as hlding an accunt fr the perid when they receive the distributin and (subject t the fllwing) in subsequent perids as well. The beneficiary s equity interest accunt in the trust will remain pen unless and until the beneficiary is subsequently excluded frm the trust ie the absence f any distributin in a subsequent perid will nt cnstitute an accunt clsure as lng as the beneficiary is nt permanently excluded frm receiving future distributins frm the trust. The reference t ther natural persn exercising ultimate effective cntrl ver the trust wuld, at a minimum, include the trustee. The same criteria fr a trust that is a financial institutin are applicable fr a legal arrangement that is equivalent r similar t a trust, r a fundatin that is a financial institutin What is a debt interest? A debt interest wuld cver amunts laned t a financial institutin and securities and bnds that are nt equity interests r depsitry accunts. When is an equity r debt interest in an investment entity a financial accunt? Equity r debt interests in an investment entity will generally be financial accunts (f that entity). It is imprtant t nte that the entity des nt need t slely be an investment entity (ie it culd cme within anther categry f financial institutin as well). This is different frm FATCA, which requires that the financial institutin is slely an investment entity in rder fr such an interest t be a financial accunt. Hwever, the definitin f Financial Accunt des nt include any equity r debt interest in an entity that is an investment entity slely because it (i) renders investment advice t, and acts n behalf f, r (ii) manages prtflis fr, and acts n behalf f, a custmer fr the purpse f investing, managing r administering financial assets depsited in the name f the custmer with a financial institutin ther than that entity. Example: If Investment Entity A (a fund manager) merely facilitated investing a custmer s funds in the custmer s name with an investment entity unit trust the custmer wuld nt have an equity interest in Investment Entity A. Instead, the custmer wuld have an equity interest in the unit trust. This means that it wuld be the unit trust that carries ut due diligence n the custmer Equity r debt interest in anther type f financial institutin An equity r debt interest in any ther type f financial institutin will als be a financial accunt if the interest was established with a purpse f aviding reprting under the general CRS reprting requirements IN CONFIDENCE Page 41 f 165

42 4.6 What accunts are excluded frm being financial accunts? As nted abve, Reprting NZFIs need t carry ut due diligence n financial accunts they maintain. Hwever, a financial accunt des nt include an accunt that is an excluded accunt. This raises the questin f what accunts are excluded accunts fr these purpses, and therefre, excluded frm CRS due diligence Accunts that the CRS explicitly defines as excluded accunts The CRS defines excluded accunt as meaning the fllwing accunts in sectin VIII(C)(17(a) t (f) prvided that thse accunts meet specified criteria: retirement and pensin accunts; nn-retirement tax-favured investment/savings accunts; term life insurance cntracts; estate accunts; escrw accunts; and depsitry accunts due t nn-returned verpayments. The scpe f these excluded accunts is explained in pages 184 t 187 f the CRS Cmmentary. Readers shuld refer t thse pages f the Cmmentary fr further backgrund. A full list f the requirements that must be satisfied fr these accunts t be excluded is als set ut in Appendix Accunts that can be treated as Excluded Accunts The CRS als prvides in sectin VIII(C)(17)(g) that an implementing jurisdictin (such as New Zealand) can treat an accunt as an excluded accunt if: The accunt presents a lw risk f being used t evade tax. The accunt has substantially similar characteristics t any f types f accunts that are explicitly defined in the CRS as excluded accunts (see abve). The accunt is defined in dmestic law as an excluded accunt (ie in accrdance with a legislative framewrk that allws the accunt t be listed as an excluded accunt). Defining the accunt as an excluded accunt wuld nt frustrate the purpses f the CRS. The Cmmissiner f Inland Revenue will determine what types f accunts are excluded accunts (in this regard). The OECD s expectatin is that Participating Jurisdictins (such as New Zealand) will make their excluded accunts publicly available (just like the NRFIs). CRS determinatins made by the IN CONFIDENCE Page 42 f 165

43 Cmmissiner f Inland Revenue abut thse accunts that have already been treated as excluded accunts (in this way) are available frm Reprting NZFIs are able t make submissins fr their accunts t be treated as excluded accunts. Submitters shuld utline why the accunt satisfies all f the bullet pints utlined abve. These submissins shuld be sent via plicy.webmaster@ird.gvt.nz The CRS Cmmentary als prvides the fllwing cntext t the criteria that will need t be satisfied befre an accunt is treated as an excluded accunt (in this way). Submitters shuld cnsider these pints when they are preparing their submissin The accunt presents a lw risk f being used t evade tax The first requirement fr an accunt t be treated as an excluded accunt under sectin VIII(C)(17)(g) f the CRS is that the accunt presents a lw risk f being used t evade tax. The CRS Cmmentary prvides that the fllwing factrs may be used when cnsidering whether an accunt presents a lw risk f being used t evade tax: Lw-risk factrs: the accunt is subject t regulatin; the accunt is tax-favured; infrmatin reprting t the tax authrities is required with respect t the accunt; cntributins r the assciated tax relief are limited; and the type f accunt prvides apprpriately defined and limited services t certain types f custmers, s as t increase access fr financial inclusin purpses. High-risk factrs: the type f accunt is nt subject t AML/KYC Prcedures; and the type f accunt is prmted as a tax minimisatin vehicle. The accunt has substantially similar characteristics t any f types f accunts that are explicitly defined in the CRS as excluded accunts in sectin VIII(c)(17)(a) t (f). The secnd requirement fr such an accunt being treated as an excluded accunt is that the accunt has substantially similar characteristics t any types f accunts that are explicitly defined in sectin VIII(C)(17(a) t (f) f the CRS as excluded accunts. The CRS Cmmentary als prvides that the requirement that the accunt has substantially similar characteristics t any types f accunts that are explicitly defined in the CRS as excluded accunts cannt be used slely t eliminate a specific element f a descriptin. Each jurisdictin (including New Zealand) may evaluate the applicatin f this requirement t a type f accunt that des nt satisfy all the requirements f an explicitly excluded accunt in sectin VIII(C)(17(a) t (f) f the CRS. As part f the evaluatin, a jurisdictin (including New IN CONFIDENCE Page 43 f 165

44 Zealand) must identify which requirements are satisfied and which are nt satisfied, and with respect t the requirements that are nt satisfied, must identify the existence f a substitute requirement that prvides equivalent assurance that the relevant type f accunt presents a lw risk f tax evasin. Page 189 f the CRS Cmmentary sets ut (as a guideline) the fllwing examples t illustrate the pints that will be relevant when determining whether an accunt culd be treated as excluded accunts under sectin VIII(C)(17)(g). Submitters shuld cnsider these examples fr further cntext. Example 1 (Unlimited annuity cntract): A type f annuity cntract satisfies all the requirements listed in subsectin C(17)(a), apart frm the ne cntained in subsectin C(17)(a)(v) (ie cntributins are nt limited). Hwever, the applicable penalties apply t all withdrawals made befre reaching a specified retirement age and include taxing the cntributins that were previusly tax-favured with a high flat-rate surtax (eg 60%). Because there is a substitute requirement that prvides equivalent assurance that the accunt presents a lw risk f tax evasin, this type f accunt culd be defined in dmestic law as an excluded accunt. Example 2 (Unlimited savings accunt): A type f savings accunt satisfies all the requirements listed in subsectin C(17)(b), apart frm the ne cntained in subsectin C(17)(b)(iv) (ie cntributins are nt limited). Hwever, the tax relief assciated t the cntributins is limited by reference t an indexed amunt. Because there is a substitute requirement that prvides equivalent assurance that the accunt presents a lw risk f tax evasin, this type f accunt culd be defined in dmestic law as an excluded accunt. Example 3 (Micr cash value insurance cntract): A type f cash value insurance cntract nly satisfies the requirement described in subsectin C(17)(b)(i) (ie it is regulated as a savings vehicle fr purpses ther than fr retirement). Hwever, under the micr insurance regulatins f the Participating Jurisdictin, (i) it is targeted t individuals (r grups f individuals) that are belw the pverty line (eg living n less than USD1.25 per persn per day in 2005 US dllars), and (ii) the ttal grss amunt payable under the cntract cannt exceed USD 7,000. Because there is an verall, substitute requirement that prvides equivalent assurance that the accunt presents a lw-risk f tax evasin, this type f accunt culd be defined in dmestic law as an excluded accunt. Example 4 (Scial welfare accunt): A type f savings accunt nly satisfies the requirement described in subsectin C(17)(b)(i) (ie it is regulated as a savings vehicle fr purpses ther than fr retirement). Hwever, under the scial welfare regulatins f the Participating Jurisdictin, it can slely be held by an individual that (i) is belw the pverty line (eg living n less than USD 1.25 per persn per day in 2005 US dllars) r therwise lw-incme, and (ii) is participating in a scial welfare prgramme. Because there is an verall substitute requirement that prvides equivalent assurance that the accunt presents a lw risk f tax evasin, this type f accunt culd be defined in dmestic law as an excluded accunt. Example 5 (Financial inclusin accunt): A type f depsitry accunt nly satisfies the requirements described in subsectin C(17)(b)(i) and (iv) (ie it is regulated as a savings vehicle fr purpses ther than fr retirement, and annual cntributins are limited). Hwever, under the financial regulatins f the Participating Jurisdictin, (i) it prvides defined and limited services t individuals, s as t increase access fr financial inclusin purpses; (ii) mnthly depsits cannt exceed USD 1,250 (excluding depsits by an authrised gvernment bdy under a scial welfare prgramme); and (iii) financial institutins have been allwed t apply simplified AML/ KYC IN CONFIDENCE Page 44 f 165

45 Prcedures with respect t this type f accunt, since it has been regarded as having a lwer mney laundering and terrrist financing risk in accrdance with the Financial Actin Task Frce Recmmendatins. Because there are verall substitute requirements that prvide equivalent assurance that the accunt presents a lw risk f tax evasin, this type f accunt culd be defined in dmestic law as an excluded accunt. Example 6 (Drmant accunt): A type f depsitry accunt (i) with an annual balance that des nt exceed USD1,000, (ii) that is a drmant accunt (see sectin 9 f the CRS Cmmentary n sectin III). Because there are verall substitute requirements that prvide equivalent assurance that the accunt presents a lw risk f tax evasin, this type f accunt culd be defined in dmestic law as an excluded accunt during the drmancy perid. 5 What des the CRS due diligence prcess invlve? This guidance has set ut: when an entity will be a Reprting NZFI with CRS due diligence and reprting bligatins; and what financial accunts will be in scpe fr such CRS due diligence. It will nw utline what the CRS due diligence prcess will invlve. 5.1 High level verview f the CRS due diligence prcess The CRS requires that Reprting NZFIs carry ut due diligence n their financial accunts t identify accunts held (and/r, in the case f passive NFEs, cntrlled) by relevant freign tax residents. 48 Reprting NZFIs will need t use different due diligence prcedures (in this regard) depending n: when the financial accunt is pened; and whether the accunt is held by an individual r entity. The fllwing is a high-level summary f these different due diligence prcedures. A mre detailed utline is prvided further belw: Pre-existing individual accunts: Accunts held by an individual that are pen as f 30 June These accunts are, in turn, split int the fllwing categries: lwer-value accunts with a balance r value f less than USD 1,000,000; and 48 Hwever, there are sme special rules that apply here fr identifying such freign tax residents in the cntext f certain insurance prducts that prvide death benefits t beneficiaries and fr emplyerspnsred grup insurance schemes (see page 153 f the CRS Cmmentary). IN CONFIDENCE Page 45 f 165

46 high-value accunts with a balance r value f USD 1,000,000 r mre. As explained further belw, Reprting NZFIs will be required t carry ut enhanced due diligence n these high-value accunts. Pre-existing individual accunt due diligence will generally invlve the Reprting NZFI either: 49 applying a residential address test 50 (supprted by dcumentary evidence) t determine whether the accunt hlder is a freign tax resident; r reviewing the accunt infrmatin they have fr indicia (indicatrs) that the accunt hlder is a freign tax resident. Fr example, the Reprting NZFI may identify in its electrnic recrds that the accunt hlder has a mailing address in a freign jurisdictin and is a freign tax resident. New individual accunts: Accunts held by an individual that are pened n r after 1 July 2017 (fr example, an accunt that an individual pens with a bank n 10 August 2017). New individual accunt due diligence will generally invlve the Reprting NZFI: btaining self-certificatins frm the accunt hlder as t whether they are a relevant freign tax resident (ie the accunt hlder signing r affirming whether they are a freign tax resident); and crss-checking the reasnableness f this self-certificatin against ther infrmatin btained in cnnectin with the pening f the accunt (including AML/KYC infrmatin). This prcess is knwn as validating the self-certificatin. This is imprtant because a Reprting NZFI cannt rely n a self-certificatin r dcumentary evidence if they knw r have reasn t knw that it is incrrect r unreliable. Pre-existing entity accunts: Accunts held by an entity (such as a trust, partnership r cmpany) that are pen as f 30 June Pre-existing entity accunt due diligence will generally invlve the Reprting NZFI relying n a cmbinatin f accunt infrmatin n file and valid self-certificatins t determine: whether the accunt hlder is a relevant freign tax resident; and whether the accunt hlder is a passive NFE with cntrlling persns that are relevant freign tax residents. New entity accunts: Accunts held by an entity (such as a trust, partnership r cmpany) and that are pened n r after 1 July New entity accunt due diligence will generally invlve the Reprting NZFI btaining valid self-certificatins t determine: whether the accunt hlder is a relevant freign tax resident; and 49 The Reprting NZFI may have already carried ut due diligence n such accunts fr FATCA purpses and (as part f such due diligence prcedures) btained a self-certificatin frm the accunt hlder. The indicia based CRS tests fr such pre-existing individual accunts generally wuld nt require the Reprting NZFI t btain a further self-certificatin fr CRS purpses. 50 As explained in detail further belw, a Reprting NZFI is nly able t adpt the residential address test fr lwer value pre-existing individual accunts. IN CONFIDENCE Page 46 f 165

47 whether the accunt hlder is a passive NFE with cntrlling persns that are relevant freign tax residents. These due diligence prcedures ften invlve the Reprting NZFI relying (in part) n dcumentary evidence t determine the residency f the accunt hlder (r cntrlling persn). The relevant types f dcumentary evidence are summarised in Appendix 3. There are als a number f threshld and aggregatin rules that feed int these due diligence prcedures. Fr example, the fllwing threshld rules will apply: Pre-existing individual accunts: There is a USD1,000,000 balance r value test (which a Reprting NZFI can simply treat as NZD1,000,000) 51, which will determine whether an accunt is a lwer-value accunt r a high-value accunt. Fr example, whether r nt the balance r value f the accunt is USD1,000,000 r mre n 30 June 2017 r any subsequent 31 March, and, therefre is a high-value accunt subject t enhanced due diligence. Pre-existing entity accunts: There is a USD250,000 balance r value de minimis threshld exclusin (which a Reprting NZFI can simply treat as NZD250,000) frm due diligence and reprting. This wuld apply if the accunt has a balance r value that des nt exceed USD250,000 n 30 June 2017 r any subsequent 31 March. A Reprting NZFI is able t chse nt t adpt this threshld exclusin. Pre-existing entity accunts: A USD1,000,000 balance r value test (which a Reprting NZFI can simply treat as NZD1,000,000), which will determine what due diligence prcess the Reprting NZFI needs t fllw t identify whether any f a passive NFE s cntrlling persns are freign tax residents. The Reprting NZFI will need t btain self-certificatins if the balance f such accunts exceeds USD1,000,000. The CRS als cntains varius aggregatin rules a Reprting NZFI will need t adpt when applying these threshld balance tests. These aggregatin rules cver the fllwing circumstances: Aggregatin f individual accunts: Fr purpses f determining the aggregate balance r value f financial accunts held by an individual: A Reprting NZFI is required t aggregate all financial accunts maintained by the Reprting NZFI, r by a related entity, 52 but nly t the extent that the Reprting NZFI s cmputerised systems link the financial accunts by reference t a data element such as client number r taxpayer identificatin number (TIN), and allw accunt balances r values t be aggregated. Each hlder f a jintly held financial 51 Under the CRS and its Cmmentary, jurisdictins can cnvert USD amunts in the CRS by applying dmestic law methdlgies (eg see sectin YF 1(2) f the Incme Tax Act 2007 regarding freign currency cnversin and the use f spt rates). Additinally, Schedule 2 (clause 12) f the Tax Administratin Act 1994 allws a Reprting NZFI t treat all dllar amunts referred t in the CRS as being in New Zealand dllars. 52 Under the CRS an entity is a related entity f anther entity if either entity cntrls the ther entity r the tw entities are under cmmn cntrl. Fr this purpse, cntrl includes direct r indirect wnership f mre than 50% f the vte and value f such entity. Additinally, tw managed investment entities can be related entities if they are under cmmn management and such management fulfils the due diligence bligatins f such investment entities. IN CONFIDENCE Page 47 f 165

48 accunt shall be attributed the entire balance r value f the jintly held financial accunt fr purpses f applying the aggregatin requirements described abve. Fr the purpses f determining the aggregate balance r value f pre-existing individual financial accunts held by a persn t determine whether the accunt is a high-value accunt, a Reprting NZFI is als required: In the case f any financial accunts that a relatinship manager knws, r has reasn t knw, are directly r indirectly wned, cntrlled r established (ther than in a fiduciary capacity) by the same persn, t aggregate all such accunts. Aggregatin f entity accunts: Fr purpses f determining the aggregate balance r value f financial accunts held by an entity, a Reprting NZFI is required t take int accunt all financial accunts that are maintained by the Reprting NZFI, r by a related entity, but nly t the extent that the Reprting NZFI s cmputerised systems link the financial accunts by reference t a data element such as client number r TIN, and allw accunt balances r values t be aggregated. Each hlder f a jintly held financial accunt shall be attributed the entire balance r value f the jintly held financial accunt fr purpses f applying the aggregatin requirements described abve. Reprting NZFIs are required t carry ut these due diligence prcedures n their financial accunts (including applying these balance r value threshlds and aggregatin rules) t determine whether these accunts are held (and/r, in the case f a passive NFE, cntrlled) by freign tax residents. It is imprtant t nte that these due diligence requirements are nt merely a ne-ff snapsht. Instead, these requirements are n-ging in nature. Fr example, suppse that a Reprting NZFI has carried ut due diligence n an individual accunt hlder, btained a valid self-certificatin frm that accunt hlder, and has determined that the accunt is nt held by a freign tax resident. The expectatin in the CRS is that the Reprting NZFI will have prcedures in place t identify when there is subsequently a change in circumstances that may call int questin the validity f the self-certificatin and require it t carry ut further due diligence. This is in line with an ver-arching pillar in the CRS that a Reprting NZFI cannt rely n a self-certificatin, dcumentary evidence r ther infrmatin t determine the CRS status f an accunt if they knw r have reasn t knw that it is incrrect r unreliable (ie ptentially because f a change in circumstance that calls it int questin). Page 130 f the CRS Cmmentary states (in this regard) that: a Reprting Financial Institutin is expected t institute prcedures t ensure that any change that cnstitutes a change in circumstances is identified by the Reprting Financial Institutin. (Emphasis added). Page 116, sectin 17 f the CRS Cmmentary, in turn, prvides that a change in circumstances includes any change that results in the additin f infrmatin relevant t a persn s status r therwise cnflicts with such a persn s status. In additin, a change in circumstances includes any change r additin f infrmatin t the accunt (including the additin, substitutin r ther change f an accunt hlder) r any change r additin f infrmatin t any accunt assciated with such an accunt (applying the aggregatin rules) if that change r additin f infrmatin affects the status f the accunt. IN CONFIDENCE Page 48 f 165

49 The emphasis here is n Reprting NZFIs having prcedures in place t identify and fllw up n changes that may affect the classificatin f a financial accunt. This wuld include: having prcedures in place t identify the additin f indicia 53 f freign tax residence relating t an accunt; infrming a persn prviding a self-certificatin r dcumentatin relating t an accunt f the persn s bligatin t ntify the Reprting NZFI f a change in circumstances that they are aware f (see pages 130 and 205 f the CRS Cmmentary). This is imprtant because, as nted abve, a Reprting NZFI cannt rely n a self-certificatin r dcumentatin that it knws r has reasn t knw is incrrect r unreliable; having prcedures in place t ensure that any change t the custmer master files that cnstitutes a change in circumstances is identified (see page 204 f the CRS Cmmentary); having prcedures in place t ensure that a relatinship manager identifies any change in circumstances relating t a pre-existing high-value individual accunt that they act as relatinship manager fr (see sectin III(C)(9) f the CRS); having prcedures in place t identify when a pre-existing individual accunt has becme a high-value accunt (and, therefre, subject t enhanced due diligence prcedures); and if the Reprting NZFI maintains an accunt held by a passive NFE trust where the beneficiary(ies) is designated by characteristics r by class (ie as ppsed t being named beneficiaries), it shuld btain sufficient infrmatin cncerning the beneficiary(ies) t satisfy itself that it will be able t establish the identity f the beneficiary(ies) at the time f the pay-ut r when the beneficiary(ies) intends t exercise vested rights (see page 199 f the CRS Cmmentary). This is relevant t the issue f when the Reprting NZFI needs t identify such beneficiaries as cntrlling persns. The prcedures that a Reprting NZFI can adpt t meet this requirement (and similar prcedures that they can chse t adpt t identify when named discretinary beneficiaries f a passive NFE trust will be relevant cntrlling persns) are utlined in detail further belw at sectins and Example 1: Tm pens an accunt with a Reprting NZFI. The Reprting NZFI btains a selfcertificatin frm Tm that New Zealand is the nly jurisdictin that he is tax resident in. Three years after pening the accunt, Tm rings the Reprting NZFI t add a freign mailing address t the accunt. This is a change in circumstances that calls int questin the riginal self-certificatin. The Reprting NZFI wuld need t re-determine the status f the accunt. Hwever, it imprtant t nte that it is cntemplated that a Reprting NZFI will nt necessarily knw abut every change in circumstances pertaining t an accunt that they maintain. The key requirement is that a Reprting NZFI must have reasnable prcedures in place t identify a change in circumstances, even thugh as a practical matter these prcedures may nt always result in the identificatin f a particular change in circumstance. In this 53 The type f indicia that wuld be relevant in this cntext wuld include the indicia f freign tax residency described in the pre-existing individual accunt due diligence prcedures (see sectin III(B)(2)(a)-(f) f the CRS), and that is explained in detail in sectin f this guidance. IN CONFIDENCE Page 49 f 165

50 respect, page 130 f the CRS Cmmentary states that a Reprting NZFI may rely n a selfcertificatin withut having t enquire int pssible changes f circumstances that may affect the validity f the statement, unless it knws r has reasn t knw that circumstances have changed. A Reprting NZFI will nt be cnsidered t knw r t have reasn t knw f such changes, where it has adpted reasnable and prudent prcedures fr identifying a change f circumstance, but where thse prcedures have simply nt led t the identificatin f a change in circumstances. The example set ut belw highlights this pint. Example 2: A Reprting NZFI has prcedures in place t determine whether a self-certificatin is crrect (including infrming any persn prviding a self-certificatin f the persn s bligatin t ntify them f a change in circumstances). Simn pens an accunt with the Reprting NZFI and (as part f the accunt pening prcess) prvides a self-certificatin that New Zealand is the nly jurisdictin that he is tax resident in. Simn subsequently becmes a freign tax resident. Hwever, Simn deliberately fails t infrm the Reprting NZFI f this change. Therefre, the Reprting NZFI is nt aware f this change. Hwever, it is nt at fault. In such circumstances, the Reprting NZFI wuld nt have breached its CRS due diligence bligatins. 5.2 Detailed utline f due diligence prcedures This guidance nw utlines in detail the due diligence prcedures that Reprting NZFIs will need t carry ut fr the fur different types f financial accunts: pre-existing individual accunts (accunts held by an individual that are pen as f 30 June 2017); new individual accunts (accunts held by an individual that are pened n r after 1 July 2017); pre-existing entity accunts (accunts held by an entity (such as a trust, partnership, r cmpany) that are pen as f 30 June 2017); and new entity accunts (accunts held by an entity (such as a trust, partnership r cmpany) that are pened n r after 1 July 2017). 5.3 Pre-existing individual accunts Overview In brad terms, a pre-existing individual accunt is an accunt that is bth: maintained by a Reprting NZFI as f 30 June ; and held by an individual. 54 This may include a number f accunts that the Reprting NZFI has already carried ut due diligence n fr FATCA purpses (ie if they are als a Reprting NZFI fr FATCA purpses). This FATCA due diligence will smetimes (particularly fr accunts pened n r after 1 July 2014) have invlved the Reprting NZFI btaining a self-certificatin frm the accunt hlder f their tax residency. As explained in detail further belw, a Reprting NZFI carrying ut CRS due diligence n pre-existing accunts will generally be able t determine the accunt hlder s tax residency based n a residential address test r indicia f freign residency, withut needing t btain a further self-certificatin frm the accunt hlder. IN CONFIDENCE Page 50 f 165

51 [An additinal accunt pened by a pre-existing custmer n r after 1 July 2017 is als treated as a pre-existing accunt in the fllwing circumstances: the accunt hlder hlds with the Reprting NZFI (r a related entity in New Zealand) a financial accunt that is a pre-existing accunt; the Reprting NZFI (and any related entity) treats bth accunts as a single accunt fr the purpses f satisfying the standards f knwledge requirements and determining the balance r value f the accunt when applying any accunt threshlds; if the financial accunt is subject t AML/KYC prcedures, the Reprting NZFI is permitted t satisfy such prcedures fr the financial accunt by relying n the AML/KYC prcedures perfrmed fr the pre-existing accunt; and pening the financial accunt des nt require the accunt hlder t prvide new, additinal r amended custmer infrmatin (ther than fr the purpses f the CRS). [The OECD has cnfirmed in an answer t a Frequently Asked Questin n the AEOI prtal 55 that this cnditin - that the pening f the financial accunt des nt require the accunt hlder t prvide new, additinal r amended custmer infrmatin (ther than fr the purpses f the CRS) shuld be interpreted t include any instances in which the accunt hlder is required t prvide the Reprting NZFI with new, additinal r amended custmer infrmatin (as a result f a legal, regulatry, peratinal r any ther requirement) in rder t pen the accunt. The ratinale fr this cnditin is that such instances prvide an pprtunity t btain a self-certificatin tgether with new, additinal r amended custmer infrmatin as part f the pening f the accunt]. The scpe fr Reprting NZFIs t treat such additinal accunts as pre-existing accunts in these prescribed circumstances reflects the practical reality that the pening f such additinal accunts is nt a separate n-barding event (ie mst Reprting NZFIs will n-bard the investr, nt each accunt).] A Reprting NZFI is generally required t carry ut due diligence n all pre-existing individual financial accunts t determine whether they are held by relevant freign tax residents. There is n de minimis threshld (cmpared with FATCA, which has varius de minimis threshlds). Hwever, a Reprting NZFI is nt required t review a pre-existing individual accunt that is a cash value insurance cntract r annuity cntract if they are effectively prhibited by law frm selling the cntract t relevant freign tax residents. As explained in detail further belw, the type f due diligence prcedures that the Reprting NZFI will need t carry ut n pre-existing individual accunts will depend n whether: the accunt is a lwer value-accunt: With a balance r value f USD1,000,000 r less (which a Reprting NZFI can simply treat as NZD1,000,000) as f 30 June 2017; r the accunt is a high value accunt: With a balance r value that exceeds USD1,000,000 (which a Reprting NZFI can simply treat as NZD1,000,000) as f 30 June 2017 r any subsequent 31 March. As explained further belw, Reprting NZFIs need t carry ut enhanced due diligence fr such high-value accunts IN CONFIDENCE Page 51 f 165

52 This raises the fllwing questins: What will due diligence invlve fr lwer-value pre-existing individual accunts? What will due diligence invlve fr high-value pre-existing individual accunts? CRS due diligence prcedures fr lwer-value pre-existing individual accunts Reprting NZFIs have sme flexibility when carrying ut due diligence n lwer-value preexisting individual accunts: they can chse t adpt a residence address test as a prxy fr determining whether the accunt hlder is a relevant freign tax resident; r alternatively, they can chse t rely n a freign indicia test (searching fr indicatrs that the accunt hlder is a freign tax resident) as a prxy fr determining whether the accunt hlder is a relevant freign tax resident. This guidance nw explains hw Reprting NZFIs can carry ut due diligence under each f these due diligence pathways fr lwer-value accunts. Residence address test Reprting NZFIs have the ptin f using a current residence address test (based n dcumentary evidence) 56 as a prxy t determine whether a lwer-value pre-existing individual accunt hlder is a relevant freign tax resident. This is a key difference frm FATCA, which des nt have such a test. The relevant types f dcumentary evidence are set ut at Appendix 3 t this guidance. The type f dcumentary evidence that is mst likely t be relevant in the cntext f the residential address test is a valid identificatin issued by an authrised gvernment bdy (fr example, a gvernment r agency theref, r a municipality), that includes the individual s name and is typically used fr identificatin purpses. Pages f the CRS cmmentary prvide a useful summary f the circumstances when a Reprting NZFI can rely n such dcumentary evidence when applying the residence address test. This part f the cmmentary includes a summary f: The circumstances when dcumentary evidence can be relied upn; The circumstances when dcumentary evidence can be supplemented by ther dcumentatin and infrmatin and relied upn; and The prescribed circumstances when a cncessinary apprach can be adpted fr accunts pened at a time where there were n AML/KYC requirements and the Reprting NZFI, therefre, did nt review any dcumentary evidence in the initial nbarding prcess. The cmmentary explicitly states that such an apprach can nly be 56 The relevant types f dcumentary evidence fr CRS purpses are set ut in Appendix 3 f this guidance. IN CONFIDENCE Page 52 f 165

53 adpted in certain exceptinal circumstances (see pages f the CRS cmmentary). Example 1: Reprting NZFI chses t adpt the residence address test t determine the status f its lwer-value pre-existing individual accunts. Reprting NZFI maintains a preexisting individual accunt held by Claire. The accunt has a balance f NZD 10,000 as f 30 June The Reprting NZFI s recrds shw that Claire has a current residential address in freign jurisdictin B. Reprting NZFI has dcumentary evidence supprting the fact that Claire is resident in freign jurisdictin B. Reprting NZFI treats Claire as tax resident in freign jurisdictin B fr CRS purpses. Example 2 (gvernment issued identity card): A Reprting NZFI has plicies and prcedures in place pursuant t which it has cllected a cpy f the identity card f all f the accunt hlders f its pre-existing individual accunts and pursuant t which it ensures that the current residence address in its recrds fr thse accunts is in the same jurisdictin as the address n their identity card. The Reprting NZFI may treat such accunt hlders as being resident fr tax purpses f the jurisdictin in which such address is lcated. Example 3 (passprt and utility bill): A Reprting NZFI has accunt pening prcedures in place pursuant t which it relies n the accunt hlder s passprt t cnfirm the identity f the accunt hlder and n recent utility bills t verify their residence address, as recrded in its systems. The Reprting NZFI may treat its pre-existing individual accunt hlders as being resident fr tax purpses f the jurisdictin recrded in its systems. Example 4 (utility bill with reprting bligatins): A Reprting NZFI has a number f accunts pened prir t 1990 that have been grandfathered frm the applicatin f AML/KYC Prcedures and the related rules n materiality and risk have nt required re-dcumenting the accunts. The Reprting NZFI has in its recrds a current residence address fr these accunts that is supprted by utility bills cllected upn accunt pening. Such address is als the same address as that which the Reprting NZFI peridically reprts with respect t thse accunts under its nn-crs tax reprting bligatins. Because the Reprting NZFI s recrds d nt cntain any dcumentary evidence assciated with these accunts and the Reprting NZFI has nt been required t cllect such evidence under AML/KYC Prcedures, and the current residence address in the Reprting NZFI s recrds is the same as that n the mst recent dcumentatin that they have cllected and that they have reprted under their nn-crs tax reprting bligatins, the Reprting NZFI may treat its accunt hlders as being resident fr tax purpses f the jurisdictin in which such address is issued. If a Reprting NZFI has relied n the residence address test t determine an accunt hlder s tax residency and there is a change in circumstances that causes them t knw r have reasn t knw that the dcumentary evidence (r ther dcumentatin relied n) is incrrect r unreliable, they are required t carry ut further due diligence n the accunt t determine its status. The Reprting NZFI must, by the later f the last day f the relevant reprting perid, r 90 days fllwing the ntice r discvery f such change in circumstances, btain a self-certificatin and new dcumentary evidence t establish the residence(s) fr tax purpses f the accunt hlder. If the Reprting NZFI cannt btain the self-certificatin and new dcumentary evidence by such date, they must apply the electrnic recrd search prcedures utlined belw. IN CONFIDENCE Page 53 f 165

54 Indicia test A Reprting NZFI that des nt adpt the residential address test (r is nt able t apply that test) will need t determine the accunt hlder s tax residence by reviewing its electrnic recrds fr relevant indicia (indicatrs) that the accunt hlder is a freign tax resident. Such indicia (if identified) will be used as a prxy fr determining the accunt hlder s tax residence (ie indicia f tax residence in a freign jurisdictin leading t a presumptin f tax residence in that jurisdictin), unless the Reprting NZFI chses t cure such indicia. The cncept f curing indicia is utlined further belw. The Reprting NZFI must (in these circumstances) review electrnically searchable data that it maintains fr recrds f the fllwing indicia: a. identificatin f the accunt hlder as a resident f a freign jurisdictin; b. current mailing r residence address (including a pst ffice bx) in a freign jurisdictin; c. ne r mre telephne numbers in a freign jurisdictin and n telephne number in New Zealand; d. standing instructins (ther than with respect t a depsitry accunt) t transfer funds t an accunt maintained in a freign jurisdictin; e. currently effective pwer f attrney r signatry authrity granted t a persn with an address in a freign jurisdictin; r f. a hld mail instructin r in-care-f address in a freign jurisdictin if the Reprting NZFI des nt have any ther address n file fr the accunt hlder. If the Reprting NZFI des nt discver any f these indicia in the electrnic search, it is nt required t take any further steps until there is a change in circumstances that results in ne r mre indicia being assciated with the accunt, r the accunt becmes a high value accunt. If the Reprting NZFI discvers any f the indicia f freign tax residence listed in (a) thrugh (e) abve in the electrnic search, r if there is a change in circumstances that results in ne r mre indicia being assciated with the accunt, the Reprting NZFI must treat the accunt hlder as a resident fr tax purpses f each freign jurisdictin fr which an indicium is identified, unless it chses t (and is able t) cure the indicia. The relevant curing prcedures are generally based n the Reprting NZFI btaining a cmbinatin f selfcertificatins 57 and dcumentary evidence 58 t establish the accunt hlder s residence. These prcedures are further explained n pages 120 t 121 f the CRS Cmmentary. If the Reprting NZFI discvers a hld mail instructin r in-care-f address in the electrnic search (and n ther address) and des nt identify any f the ther indicia f freign tax residence listed in (a) thrugh (e) abve fr the accunt hlder they must, in the rder mst 57 Reprting NZFIs shuld refer t the guidance set ut belw fr new individual accunt due diligence (sectin 5.4.1) fr the details f wh can prvide such a self-certificatin and what frm the selfcertificatin can take. 58 The types f dcumentary evidence are set ut in Appendix 3. IN CONFIDENCE Page 54 f 165

55 apprpriate t the circumstances, adpt the fllwing prcedures t determine whether the accunt hlder is a freign tax resident: apply a paper recrd search; r seek t btain frm the accunt hlder a self-certificatin r dcumentary evidence t establish their residence(s) fr tax purpses. The paper recrd search that a Reprting NZFI may need t carry ut in these circumstances is as fllws: Review its current custmer master file and, t the extent nt cntained in the current custmer master file, the fllwing dcuments assciated with the accunt and that it has btained within the last five years fr any f the indicia f freign tax residence in a freign jurisdictin listed in (a) thrugh (e) abve fr the accunt hlder: the mst recent dcumentary evidence cllected with respect t the accunt; the mst recent accunt pening cntract r dcumentatin; the mst recent dcumentatin btained by the Reprting NZFI accrding t AML/KYC Prcedures r fr ther regulatry purpses; any pwer f attrney r signature authrity frms currently in effect; and any standing instructins (ther than with respect t a depsitry accunt) t transfer funds currently in effect. If the paper search fails t establish an indicium and the attempt t btain the self-certificatin r dcumentary evidence is nt successful, the Reprting NZFI must reprt the accunt as an undcumented accunt Infrmatin t cllect If a Reprting NZFI carries ut the abve prcedures, and identifies that the accunt hlder is a relevant freign tax resident, they will need t cllect prescribed infrmatin frm the accunt hlder. 59 This will include: the accunt hlder s tax identificatin number (TIN) (r a functinal equivalent, 60 in the absence f a TIN) with respect t each 61 freign jurisdictin they are identified as being tax resident in (subject t the fllwing qualificatins/exceptins); and 59 It is assumed, fr the purpses f the fllwing, that the Reprting NZFI will already have the accunt hlder s name and address in its recrds. A full list f the infrmatin that the Reprting NZFI needs t cllect and reprt (if the accunt is a reprtable accunt) is set ut in sectin 6 f this guidance. 60 The meaning f functinal equivalent t a TIN is utlined n page 202 f the CRS Cmmentary. Examples f that type f number include, fr individuals, a scial security/insurance number, citizen/persnal identificatin/service cde/number, and resident registratin number; and fr entities, a business/cmpany registratin cde/number. IN CONFIDENCE Page 55 f 165

56 the accunt hlder s date f birth (subject t the fllwing qualificatins). Qualificatins: Transitinal perid fr cllectin TINs and date f birth infrmatin If a Reprting NZFI des nt therwise have the accunt hlder s TIN (r functinal equivalent) r date f birth in its recrds, 62 it will (subject t the fllwing exceptins fr TINs) be required t use reasnable effrts t btain such infrmatin by the end f the secnd reprting perid fllwing the perid in which the accunt hlder is identified as being a Reprtable Persn. Exceptins: Where TINs are nt required t be btained The Reprting NZFI is nt required t btain the accunt hlder s TIN (r functinal equivalent) if either: the accunt hlder has nt been issued with a TIN (r functinal equivalent). Fr example, if: the accunt hlder s jurisdictin(s) f tax residence des nt issue TINs (r a functinal equivalent); r the accunt hlder s jurisdictin(s) f tax residence has nt issued a TIN (r a functinal equivalent) t them. Fr example, the accunt hlder may be a child that has nt been issued with a TIN (r a functinal equivalent); r the accunt hlder s jurisdictin f tax des nt require the cllectin f the TIN issued by such jurisdictin. OECD s AEOI prtal: validating TINs and determining whether TINs need t be btained The OECD s AEOI prtal 63 cntains the rules that jurisdictins adpt fr issuing TINs (r functinal equivalent, in the absence f a TIN) and the frmat f such TINs. The infrmatin n this prtal will assist Reprting NZFIs in carrying ut their due diligence and determining when they need t cllect TINs. If a Reprting NZFI identifies that an accunt hlder is a relevant freign tax resident and the accunt hlder claims nt t have either a TIN (r functinal equivalent) the Reprting NZFI shuld refer t the AEOI prtal fr infrmatin abut whether the accunt hlder s jurisdictin(s) f tax residence wuld have issued a TIN (r functinal equivalent) t them. This will assist the Reprting NZFI t determine the reasnableness f the accunt hlder s claim. The Reprting NZFI may need t ask the accunt hlder further questins t determine the 61 This general principle that a Reprting NZFI must btain such TIN (r functinal equivalent) infrmatin fr all f the jurisdictins that the accunt hlder (r, if applicable, cntrlling persn) is identified as being tax-resident in applies t all accunts. 62 A Reprting NZFI may already have such date f birth infrmatin in its recrds because it has already cllected such infrmatin fr AML r ther regulatry purpses. This CRS transitinal perid fr cllecting date f birth infrmatin fr pre-existing accunts shuld be read as cvering thse instances where the Reprting NZFI des nt have such infrmatin in its recrds and where they are nt therwise required t cllect the infrmatin. This principle fr the timing f the cllectin f date f birth infrmatin applies fr all pre-existing accunts (individual and entity) IN CONFIDENCE Page 56 f 165

57 reasnableness f their claims. The Reprting NZFI is nt required t g beynd the infrmatin n the AEOI prtal in this regard. Fr example, the Reprting NZFI may check the infrmatin n the AEOI prtal and determine, based n this infrmatin, that the accunt hlder is frm a jurisdictin that always issues TINs t their residents. Therefre, the Reprting NZFI wuld reasnably determine that the accunt hlder has a TIN that they shuld be prviding (and that the Reprting NZFI is required t cllect). A Reprting NZFI is generally nt required t cnfirm the frmat and ther specificatins f a TIN with the infrmatin n the AEOI Prtal. Reprting NZFIs may nevertheless wish t d s t enhance the quality f the infrmatin cllected and minimise the administrative burden assciated with any fllw-up cncerning reprting f an incrrect TIN. Ntwithstanding the general rule expressed abve, a Reprting NZFI shuld be familiar with, and check fr, the validity f TINs frm anther jurisdictin in which the Reprting NZFI r a related entity perates if: there are simple r standard rules fr TINs in that jurisdictin (such as the structure r number f digits). A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case; and the IT systems used acrss the jurisdictins are shared r sufficiently similar that the validatin task wuld nt be nerus. A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case. Inland Revenue will mnitr internatinal expectatins n the use f the TIN infrmatin n the OECD s AEOI prtal and update this guidance if necessary Timing fr cmpletin f due diligence and reprting Reprting NZFIs must cmplete their initial review and any reprting (if the accunts are identified as reprtable) f pre-existing individual lwer-value accunts by 30 June Reprting NZFIs will have the ptin f taking advantage f the whle perid up t 30 June 2019 t cmplete their due diligence n such accunts prvided these accunts are reprted by 30 June 2019 if indeed they are identified as being reprtable CRS due diligence prcedures fr high-value pre-existing individual accunts balance r value that exceeds USD 1,000,000 as f 30 June 2017 r any subsequent 31 March 65 A Reprting NZFI that maintains a high value pre-existing individual accunt needs t perfrm enhanced due diligence prcedures n the accunt t determine if the accunt hlder is a relevant freign tax resident. 64 This pint applies t the guidance fr TIN cllectin fr all types f accunts. 65 A Reprting NZFI is able t chse t adpt these prcedures fr lwer-value accunts as well. IN CONFIDENCE Page 57 f 165

58 This includes, in additin t the Reprting NZFI being required t review electrnic recrds fr indicia 66 that the accunt hlder is a relevant freign tax resident (in the way utlined abve with respect t lwer-value accunts): smetimes being required t cnduct a paper recrd search fr such indicia; and applying an actual knwledge test when a relatinship manager has actual knwledge that the accunt is held by a Reprtable Persn (the relatinship manager test ). A Reprting NZFI is nt able t apply the residence address test fr such high-value accunts. The paper-based search As nted abve, the issue f whether a Reprting NZFI that maintains a high-value accunt needs t d a paper-based search fr freign indicia (in additin t the electrnic search fr such indicia) will depend n the facts. A Reprting NZFI is nt required t perfrm this paper recrd search if its electrnically searchable infrmatin includes the fllwing: the accunt hlder s residence status; the accunt hlder s residence address and mailing address is currently n file with the Reprting NZFI; the accunt hlder s telephne number(s) (if any) is currently n file, with the Reprting NZFI; in the case f financial accunts ther than depsitry accunts, whether there are standing instructins t transfer funds in the accunt t anther accunt (including an accunt at anther branch f the Reprting NZFI r anther financial institutin); whether there is a current in-care-f address r hld mail instructin fr the accunt hlder; and whether there is any pwer f attrney r signatry authrity fr the accunt. Hwever, if the Reprting NZFI s electrnically searchable infrmatin des nt include the abve infrmatin it is (in additin t the electrnic recrds search fr freign indicia) required t perfrm the fllwing paper-based search 67 fr indicia f whether the accunt hlder is a 66 The same indicia are relevant fr bth lwer-value and high-value accunts. 67 If the Reprting NZFI s electrnically searchable infrmatin des nt include all the infrmatin described abve, they are nly required t perfrm the paper-based search with respect t the infrmatin described abve that is nt included in its electrnically searchable infrmatin. Fr example, a Reprting NZFI s electrnically searchable database that includes all the infrmatin described abve apart frm standing instructins t transfer funds, nly causes them t perfrm the paper-based search with respect t that infrmatin. Similarly, a Reprting NZFI s electrnically searchable data-base that des nt include all f the infrmatin described abve with respect t a clearly identified grup f high value accunts, nly causes them t perfrm the paper-based search with respect t such grup f accunts and limited t the infrmatin described abve that is nt included in its electrnically searchable infrmatin: see page 122 f the CRS Cmmentary. IN CONFIDENCE Page 58 f 165

59 relevant freign tax resident. The Reprting NZFI needs t review the current custmer master file and, t the extent nt cntained in the current custmer master file, the fllwing dcuments assciated with the accunt and that they have btained within the last five years fr any f the indicia f tax residence in a freign jurisdictin referred t abve: the mst recent dcumentary evidence cllected with respect t the accunt; the mst recent accunt pening cntract r dcumentatin; the mst recent dcumentatin btained by the Reprting NZFI pursuant t AML/KYC Prcedures r fr ther regulatry purpses; any pwer f attrney r signature authrity frms currently in effect; and any standing instructins (ther than with respect t a depsitry accunt) t transfer funds currently in effect. If n indicia f freign tax residence are discvered in the enhanced review f high value accunts described abve, and the accunt is nt identified as held by a Reprtable Persn under the relatinship manager knwledge test (utlined further belw), n further actin is required until there is a change in circumstances that results in ne r mre indicia being assciated with the accunt. If any f the indicia f freign tax residence are discvered in the enhanced review f high value accunts described abve, r if there is a subsequent change in circumstances that results in ne r mre indicia being assciated with the accunt, the Reprting NZFI must treat the accunt hlder as a resident fr tax purpses f each freign jurisdictin fr which an indicium is identified unless it elects t (and is able t) cure the indicia. The relevant curing prcedures are generally based n btaining a cmbinatin f self-certificatins and dcumentary evidence t establish the accunt hlder s residence. These prcedures are further elabrated n pages 120 t 121 f the CRS Cmmentary. If a hld mail instructin r in-care-f address is discvered in the enhanced review f high value accunt described abve (and n ther address) and nne f the ther indicia f freign tax residence are identified fr the accunt hlder, the Reprting NZFI must btain frm such accunt hlder a self- certificatin r dcumentary evidence t establish their residence(s) fr tax purpses. If the Reprting NZFI cannt btain such self- certificatin r dcumentary evidence, it must reprt the accunt as an undcumented accunt. The relatinship manager tests In additin t the electrnic and paper recrd searches described abve, the Reprting NZFI must treat as a reprtable accunt any high value accunt assigned t a relatinship manager (including any financial accunts aggregated with that high value accunt) if the relatinship manager has actual knwledge that the accunt hlder is a Reprtable Persn. Sectin III(C)(9) f the CRS prvides (in this regard) that a Reprting NZFI must implement prcedures t ensure that a relatinship manager identifies any change in circumstances relating t an accunt that it acts as relatinship manager fr. Fr example, if a relatinship manager is ntified that the accunt hlder has a new mailing address in a freign jurisdictin, the IN CONFIDENCE Page 59 f 165

60 Reprting NZFI is required t treat the new address as a change in circumstances and apply further prescribed due diligence prcedures t the accunt Infrmatin t cllect If a Reprting NZFI carries ut these prcedures, and identifies that the accunt hlder is a relevant freign tax resident, it will need t cllect the accunt hlder s TIN (r functinal equivalent) and date f birth. (Hwever, this is subject t the same qualificatins/exceptins utlined abve fr pre-existing lwer value accunts) Timing fr cmpletin f due diligence and reprting Reprting NZFIs will need t have cmpleted their initial review and any reprting (if the accunts are identified as reprtable) f pre-existing individual high-value accunts by 30 June Reprting NZFIs will have the ptin f taking advantage f the whle perid up t 30 June 2018 t cmplete their due diligence n such accunts prvided that the accunts are reprted by 30 June 2018 if indeed they are identified as being reprtable. If a pre-existing individual accunt is nt a high value accunt as f 30 June 2017, but becmes a high-value accunt as f 31 March f a subsequent perid, the Reprting NZFI must cmplete the enhanced review prcedures described abve with respect t such an accunt within the reprting perid fllwing the perid in which the accunt becmes a high-value accunt. Once a Reprting NZFI applies the enhanced review prcedures described abve t a highvalue accunt, they are generally nt (absent any changes in circumstances such as the additin f freign indicia r as a result f the applicatin f the relatinship manager test) required t re-apply such prcedures. Hwever, if the accunt is undcumented the Reprting NZFI shuld re-apply the prcedures annually until the accunt ceases t be undcumented. 5.4 New individual accunts 68 In brad terms, a new individual accunt is an accunt that a Reprting NZFI pens n r after 1 July that is held by an individual. Sectin IV f the CRS states that a Reprting NZFI must carry ut the fllwing due diligence prcedures fr such accunts: btain a self-certificatin upn accunt pening that allws it t determine the accunt hlder s residence(s) fr tax purpses; cnfirm the reasnableness f such self-certificatin based n the infrmatin it has btained in cnnectin with the pening f the accunt (including any dcumentatin 68 A Reprting NZFI is als able t chse t use these prcedures fr pre-existing individual accunts. 69 These new accunt prcedures will apply t thse accunts where the prcess fr pening the accunt has cmmenced n r after 1 July 2017 r where the accunt is therwise pened n r after 1 July They wuld nt apply t thse accunts that are already pen n 30 June This principle applies fr all new accunts (individual and entity). IN CONFIDENCE Page 60 f 165

61 cllected in accrdance with AML/KYC Prcedures). This is knwn as the reasnableness test fr validating the self-certificatin; and there is n de minimis due diligence exclusin (cmpared with FATCA where there is a USD50,000 threshld exclusin fr certain individual accunts). A Reprting NZFI is able t rely n a self-certificatin that it has btained fr such accunts unless it knws r has reasn t knw that the self-certificatin is incrrect r unreliable. The fllwing extract frm page 211 f the CRS Cmmentary highlights hw btaining such valid self-certificatins is a fundamental element f the CRS: it is expected that jurisdictins have strng measures in place t ensure that valid self-certificatins are always btained fr New Accunts. (Emphasis added) This raises the fllwing questins: hw can such self-certificatins be btained; when can such self-certificatins be btained; and what infrmatin will a self-certificatin need t include Frm f self-certificatin A self-certificatin must be signed (r therwise psitively affirmed) by any persn authrised t sign n behalf f the accunt hlder. A parent r guardian wh pens an accunt fr a child will be required t prvide the self-certificatin n behalf f the child accunt hlder. 70 A self-certificatin will be cnsidered t be psitively affirmed if the persn making the selfcertificatin prvides the Reprting NZFI with an unambiguus acknwledgement that it agrees with the representatins made thrugh the self-certificatin. In all cases the affirmatin shuld be recrded by the Reprting NZFI (eg fr an ral self-certificatin, a vice recrding r digital ftprint, s a Reprting NZFI can demnstrate that the self-certificatin was psitively affirmed). A self-certificatin may be btained in any manner and in any frm, ie in writing, electrnically r rally. The nly requirement is that the self-certificatin cntains all the required infrmatin and is signed r psitively affirmed. Fr recrd-keeping purpses, a Reprting NZFI will need t keep a recrd f: Self-certificatins btained. [The Reprting NZFI is nt required t cllect/keep this infrmatin in a single place prvided that they have a recrd f such self-certificatins that is in a frm that they are able t be prvide t Inland Revenue n request] The prcess fllwed t btain self-certificatins ; and Any failure t btain a self-certificatin. This requirement wuld apply fr bth preexisting and new accunts. 70 A new self-certificatin is nt required merely when such a child cmes f age. IN CONFIDENCE Page 61 f 165

62 The recrding threshld fr new accunts (in this regard) wuld be where there is a demnstrated intent t pen an accunt eg where a custmer cmmences the custmer n-barding prcess by starting t fill ut either an n-line r paper applicatin frm fr a Reprting NZFI, but withut prviding the CRS selfcertificatin. 71 The infrmatin that a Reprting NZFI shuld keep in such circumstances (as a recrd f a failure t btain such a self-certificatin) shuld cver when the self-certificatin was requested, the fact that the request(s) were nt met, and the identificatin and address infrmatin that the NZFI was able t btain (t the extent that it has been able t btain such infrmatin). A Reprting NZFI is able t keep this infrmatin in any frm, as lng as the infrmatin is able t be prvided t Inland Revenue upn request and able t be cnverted t print frm. These requirements apply t CRS self-certificatins fr all types f accunts Obtaining a valid self-certificatin n accunt pening The OECD has als prvided the fllwing guidance (in an answer t a Frequently Asked Questin n the AEOI prtal) 72 abut what it cnsiders wuld satisfy the requirement that such self-certificatins fr new accunts are btained upn accunt pening. The fllwing guidance applies fr the purpses f bth individual and entity accunt due diligence: the Standard prvides that a Reprting Financial Institutin must btain a selfcertificatin upn accunt pening (Sectins IV(A) and V(D)(2)). Where a selfcertificatin is btained at accunt pening but validatin f the self-certificatin cannt be cmpleted because it is a day tw prcess undertaken by a back-ffice functin, the self-certificatin shuld be validated within a perid f 90 days. There are a limited number f instances, where due t the specificities f a business sectr it is nt pssible t btain a self-certificatin n day ne f the accunt pening prcess, fr example where an insurance cntract has been assigned frm ne persn t anther r in the case where an investr acquires shares in an investment trust n the secndary market. In such circumstances, the selfcertificatin shuld be bth btained and validated as quickly as feasible, and in any case within a perid f 90 days. Given that btaining a self-certificatin fr New Accunts is a critical aspect f ensuring that the CRS is effective, it is expected that jurisdictins have strng measures in place t ensure that valid self-certificatins are always btained fr New Accunts (see examples in sectin 18 f the Cmmentary n Sectin IX). In all cases, Reprting Financial Institutins shall ensure that they have btained and validated the self-certificatin in time t be able t meet their due diligence and reprting bligatins with respect t the reprting perid during which the accunt was pened. (Emphasis added) 71 This culd be cmpared with where a Reprting NZFI merely enters int a cnversatin with a ptential client but this des nt prgress beynd prviding sme initial infrmatin abut types f accunts which wuld nt be treated as a failure t btain self-certificatin (in the requisite sense) that the Reprting NZFI wuld need t keep a recrd f IN CONFIDENCE Page 62 f 165

63 Therefre, the OECD cnsiders that the CRS requirement fr a Reprting NZFI t btain a selfcertificatin fr an accunt upn accunt pening generally requires that it btains a selfcertificatin n day ne f the accunt pening prcess. Day ne, in this cntext, wuld be when the Reprting NZFI takes the first steps t materially prgress the accunt pening prcess. It is accepted that a Reprting NZFI may nt be able t immediately btain a cmplete and valid self-certificatin frm a persn wanting t pen an accunt (fr example, the persn may nt have their TIN with them when they seek t pen an accunt). Hwever, as explained further belw, a Reprting NZFI can generally make the pening f an accunt cntingent n first btaining a valid self-certificatin (ie the Reprting NZFI can generally decide nt t take steps t materially prgress the accunt pening prcess until it btains a self-certificatin). This is the mst efficient way fr a Reprting NZFI t ensure it meets the expectatin in the CRS that it always btains valid self-certificatins fr new accunts. Hwever, the OECD has acknwledged that there may be exceptinal circumstances when it is nt pssible fr a Reprting NZFI t btain a self-certificatin n accunt pening. Fr example: where an annuity cntract has been assigned; r where an investr acquires shares/units in a cllective investment vehicle n the secndary market. In such exceptinal circumstances, the Reprting NZFI shuld have prcesses in place t btain a validated self-certificatin within 90 days f the accunt being pened (r in time t meet due diligence and reprting bligatins in the perid when the accunt is pened if this is earlier). The OECD s answer t the abve Frequently asked Questin is clear that in such circumstances the Reprting NZFI will have cmplied with its requirement t btain a selfcertificatin upn accunt pening in the requisite sense. Hwever, it is imprtant t nte that the OECD s answer t the abve Frequently Asked Questin is als clear that it is a very high bar befre such exceptinal circumstances wuld apply. The emphasis is n such exceptinal circumstances (where up t 90 days wuld smetimes be permissible t btain a self-certificatin) nly applying where it is nt pssible fr the Reprting NZFI t btain a self-certificatin n day ne f the accunt pening prcess, nt when it wuld merely be difficult fr the Reprting NZFI t btain such a self-certificatin. Inland Revenue cnsiders that, taking int accunt the reference in page 211 f the CRS Cmmentary t the requirement fr a Reprting NZFI t always btaining valid selfcertificatins upn accunt pening and hw the OECD has interpreted this requirement, generally: a Reprting NZFI shuld seek t btain self-certificatins n day ne f the accunt pening prcess; and a Reprting NZFI must btain a valid self-certificatin upn accunt pening r decline t pen the accunt (fr example, the Reprting NZFI shuld nt take material steps t IN CONFIDENCE Page 63 f 165

64 prgress the accunt pening prcess such as accepting depsits befre btaining the requisite self-certificatin). In this regard, the requirement fr a Reprting NZFI t btain a valid self-certificatin n accunt pening includes: the Reprting NZFI btaining all f the infrmatin it needs t btain as part f the self-certificatin (including, fr example, the name, address, jurisdictin(s) f tax residence, and TIN(s) (r functinal equivalent) 73 and date f birth infrmatin f a freign tax resident accunt hlder see belw); and the Reprting NZFI cnfirming the reasnableness f the self-certificatin (ie validating the self-certificatin). The OECD s answer t the abve Frequently Asked Questin is clear that where this validatin prcess cannt be cmpleted n day ne f accunt pening because it is a day tw prcess undertaken by a back ffice functin f a Reprting NZFI, the validatin shuld be cmpleted within 90 days f cmmencement f the accunt pening prcess (r in time t meet due diligence and reprting bligatins in the perid when the accunt is pened if this is earlier). Examples f when a Reprting NZFI wuld have reasn t knw that a self-certificatin is unreliable (ie where the self-certificatin wuld nt pass this validatin test) are: The self-certificatin is incmplete with respect t any item n the self-certificatin that is relevant t the accunt hlder s claims. The self-certificatin cntains any infrmatin which is incnsistent with the accunt hlder s claims. Fr example, the self-certificatin may be incnsistent with ther infrmatin btained in cnnectin with the pening f the accunt, including any dcumentatin btained pursuant t AML/KYC prcedures. There is infrmatin in the Reprting NZFI s accunt files that cnflicts with r calls int questin the accunt hlder s self-certificatin. The emphasis, in this regard, is nt n the Reprting NZFI needing t cnduct a legal analysis f the accunt hlder s tax residency. Instead, this reasnableness validatin is mre fcused n the Reprting NZFI having crss-checks that lk fr flags that the self-certificatin may be incrrect, incmplete, r therwise unreliable and making further inquiries if necessary. These validatin requirements apply t CRS self-certificatins fr all types f accunts. In this respect, the OECD has prvided the fllwing guidance in an answer t a Frequently Asked Questin : 74 A Financial Institutin is nt required t prvide custmers with tax advice r t perfrm a legal analysis t determine the reasnableness f self-certificatin. Instead, as prvided in the Standard, fr New Accunts the Financial Institutin may rely n a self-certificatin made by the custmer unless it knws r has reasn t knw that the self-certificatin is incrrect r unreliable, (the reasnableness test), which will be based n the infrmatin btained in cnnectin with the pening f the accunt, including any dcumentatin 73 This is subject t varius exceptins utlined belw where TIN infrmatin des nt need t be btained IN CONFIDENCE Page 64 f 165

65 btained pursuant t AML/KYC prcedures. The Standard prvides examples f the applicatin f the reasnableness tests (sectin IV, A, and the assciated Cmmentary). A self-certificatin f an individual accunt hlder s tax residence will nly be valid if: It is signed (r therwise psitively affirmed) by the accunt hlder r persn with authrity t sign fr the accunt hlder. It is dated at the latest at the date f receipt. It cntains each accunt hlder s: name; address; jurisdictin(s) f residence fr tax purpses. TIN (r functinal equivalent, in the absence f a TIN) with respect t each freign tax jurisdictin (subject t the exceptins utlined belw). Date f birth. Exceptins where TINs d nt need t be btained The Reprting NZFI is nt required t btain the freign tax resident accunt hlder s TIN (r functinal equivalent) if: The accunt hlder has nt been issued with a TIN (r functinal equivalent). Fr example, if: the accunt hlder s jurisdictin f tax residence des nt issue TINs (r a functinal equivalent); r the accunt hlder s jurisdictin f tax residence has nt issued a TIN (r a functinal equivalent) t them. Fr example, the accunt hlder may be a child that has nt been issued a TIN; r The accunt hlder s jurisdictin f tax residence des nt require the cllectin f the TIN issued by such jurisdictin. OECD s AEOI prtal validating TINs and determining whether TINs need t be btained The OECD s AEOI prtal 75 cntains the rules that jurisdictins adpt fr issuing TINs (r functinal equivalent, in the absence f a TIN) and the frmat f such TINs. The infrmatin n this prtal will assist Reprting NZFIs in carrying ut their due diligence and determining when they need t cllect TINs IN CONFIDENCE Page 65 f 165

66 If an accunt hlder claims nt t have either a TIN (r a functinal equivalent) this statement shuld be part f the self-certificatin cllected fr the accunt, unless the Reprting NZFI reasnably determines, based n infrmatin n the OECD s AEOI Prtal, that the persn wuld nt have either a TIN (r functinal equivalent) fr the relevant freign jurisdictin. A Reprting NZFI is nt able t rely n a self-certificatin that they knw r have reasn t knw is incrrect r unreliable. The TIN infrmatin is a fundamental part f the selfcertificatin. Therefre, a Reprting NZFI shuld carefully scrutinise a claim by a freign tax resident accunt hlder (in a self-certificatin) that they d nt have a TIN (r functinal equivalent) against the infrmatin set ut n the AEOI Prtal t determine the reasnableness f the accunt hlder s claim ie t reach a reasnable view that the selfcertificatin is in fact cmplete and valid. The Reprting NZFI can adpt a day tw prcess when carrying ut this validatin prcess. The Reprting NZFI may need t ask the accunt hlder further questins t determine the reasnableness f the accunt hlder s claims. The Reprting NZFI is nt required t g beynd the infrmatin n the AEOI prtal in this regard. Fr example, the Reprting NZFI may check the infrmatin n the AEOI prtal and determine, based n this infrmatin, that the accunt hlder is frm a jurisdictin that always issues TINs t their residents. Therefre, the Reprting NZFI wuld reasnably determine that the accunt hlder has a TIN that they shuld be prviding (and that the Reprting NZFI is required t cllect). A Reprting NZFI is generally nt required t cnfirm the frmat and ther specificatins f a TIN with the infrmatin n the AEOI Prtal. Reprting NZFIs may nevertheless wish t d s t enhance the quality f the infrmatin cllected and minimise the administrative burden assciated with any fllw-up cncerning reprting f an incrrect TIN. Ntwithstanding the general rule expressed abve, a Reprting NZFI shuld be familiar with, and check fr, the validity f TINs frm anther jurisdictin in which the Reprting NZFI r a related entity perates if: there are simple r standard rules fr TINs in that jurisdictin (such as the structure r number f digits). A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case; and the IT systems used acrss the jurisdictins are shared r sufficiently similar that the validatin task wuld nt be nerus. A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case Inland Revenue will mnitr internatinal expectatins n the use f the TIN infrmatin n the OECD s AEOI prtal and update this guidance if necessary. 76 Example 1: Bb wants t pen a depsitry accunt with a Reprting NZFI bank. The Reprting NZFI infrms Bb that he needs t prvide a self-certificatin f his tax residency befre they will pen the accunt. Bb says he des nt want t prvide such a self-certificatin. Hwever, Bb still wants t depsit funds int the accunt. The Reprting NZFI decides nt t pen the 76 This pint applies t the CRS guidance fr TIN cllectin fr all types f accunts. IN CONFIDENCE Page 66 f 165

67 accunt and infrms Bb that it will nt pen the accunt until Bb prvides a self-certificatin. Bb never prvides a self-certificatin and the accunt is never pened. Reprting NZFI keeps a recrd f Bb s failure t prvide a self-certificatin. In these circumstances, the Reprting NZFI wuld nt have btained a self-certificatin frm Bb. Hwever, the Reprting NZFI has nt pened the accunt r indeed taken the first material steps t prgress the accunt pening prcess (cmpared with if the Reprting NZFI had accepted a depsit frm Bb). Therefre, the Reprting NZFI has nt breached the CRS requirement t btain a selfcertificatin n accunt pening. The Reprting NZFI did nt btain a self-certificatin. Hwever, the Reprting NZFI did nt prgress the accunt pening prcedures in a material way. Therefre, the Reprting NZFI did nt breach its bligatins. Example 2: Clive wants t pen a depsitry accunt with a Reprting NZFI bank. The Reprting NZFI infrms Clive that he needs t prvide a self-certificatin f his tax residency befre it will pen the accunt. Clive says he des nt want t prvide such a self-certificatin. Hwever, Clive still wants t depsit funds int the accunt. The Reprting NZFI decides nt t pen the accunt and infrms Clive that it will nt pen the accunt until Clive prvides a selfcertificatin. Reprting NZFI assigns a reference number t Clive fr administrative purpses in case Clive subsequently prvides the requisite self-certificatin in rder fr the accunt t be pened. Clive never prvides a self-certificatin and the accunt is never pened. Reprting NZFI keeps a recrd f Clive s failure t prvide a self-certificatin. In these circumstances, the Reprting NZFI wuld nt have btained a self-certificatin frm Clive. Hwever, the Reprting NZFI has nt pened the accunt r indeed taken the first material steps t prgress the accunt pening prcess (cmpared with if the Reprting NZFI had accepted a depsit frm Clive). Therefre, the Reprting NZFI has nt breached the CRS requirement t btain a selfcertificatin n accunt pening. The Reprting NZFI did nt btain a self-certificatin. Hwever, the Reprting NZFI did nt prgress the accunt pening prcedures in a material way. Therefre, the Reprting NZFI did nt breach its bligatins. Example 3: Daniel tries t pen a depsitry accunt with a Reprting NZFI. The Reprting NZFI infrms Daniel that he needs t prvide a self-certificatin f his tax residency. Daniel says that he is a freign tax resident frm jurisdictin A but that he cannt cmplete the selfcertificatin at that stage as he des nt have his TIN with him. Reprting NZFI still allws Daniel t prgress accunt pening prcedures and depsit $50,000 in the accunt. Reprting NZFI subsequently endeavurs t btain Daniel s cmpleted self-certificatin (including his TIN). Hwever, the Reprting NZFI is never able t btain the TIN and Daniel des nt prvide a reasnable reasn fr nt prviding a TIN. The AEOI prtal als indicates that jurisdictin A issues TINs t all residents. IN CONFIDENCE Page 67 f 165

68 The Reprting NZFI wuld have breached its CRS requirement t btain a self-certificatin n accunt pening: Day ne f the accunt pening prcess ccurred. Daniel was allwed t depsit funds in the accunt (a material step in advancing the accunt pening prcess). The Reprting NZFI has failed t btain a cmpleted self-certificatin frm Daniel. The Reprting NZFI wuld ptentially be liable fr a penalty fr this failure. The Reprting NZFI wuld als need t cntinue t try t btain a cmpleted and validated self-certificatin frm Daniel. If it is unsuccessful, the reasnable curse f actin may be t clse the accunt. This is cnsistent with the expectatin (utlined abve) that Reprting NZFIs will always btain a valid self-certificatin fr new accunts. Example 4: Erin seeks t pen an accunt with a Reprting NZFI. The Reprting NZFI asks Erin fr a self-certificatin t carry ut its due diligence n the accunt. Erin self-certifies that New Zealand is the nly jurisdictin that she is tax resident in, but asks fr all her mail t be sent t a U.K. Residential address. Erin s self-certificatin includes all f the relevant infrmatin. The Reprting NZFI seeks t validate Erin s self-certificatin - befre pening the accunt - as part f a day 1 prcess. The Reprting NZFI ntes that the fact that Erin has asked fr all her mail t be sent t a U.K. residential address is a flag that indicates that Erin culd in fact be tax resident in the U.K. (ie a persn is ften tax resident in the jurisdictin where they reside). This means that the Erin s self-certificatin is ptentially unreliable. The Reprting NZFI shuld ask Erin further questins t determine whether r nt the self-certificatin is reliable. The Reprting NZFI shuld generally nt pen the accunt unless it is able t btain a valid selfcertificatin. Example 5: A Reprting NZFI has btained a self-certificatin frm Fred upn accunt pening. Fred self-certifies that New Zealand is the nly jurisdictin that he is tax resident in. Fred s selfcertificatin includes all f the requisite infrmatin. The Reprting NZFI prceeds with the accunt pening prcess. The Reprting NZFI has a day 2 validatin prcess fr selfcertificatins as part f a back ffice prcess. As part f this validatin prcess, the Reprting NZFI identifies that the infrmatin it cllected frm Fred as part f the accunt pening specifies a telephne number, signatry authrity and standing instructins t transfer funds t an accunt maintained in Cuntry B (a freign jurisdictin). The self-certificatin is ptentially unreliable. The Reprting NZFI wuld be expected t ask Fred further questins t determine whether r nt the self-certificatin is reliable. If the Reprting NZFI is unable t btain a validated self-certificatin frm Fred in time fr the end f the reprting perid they shuld cnsider whether the reasnable step is t clse Fred s accunt. In this respect, the Reprting NZFI shuld be mindful f the OECD s expectatin (as utlined abve in a Frequently Asked Questin n the AEOI prtal) that: IN CONFIDENCE Page 68 f 165

69 .it is expected that jurisdictins have strng measures in place t ensure that valid selfcertificatins are always btained fr new accunts 78 In all cases, Reprting Financial Institutins shall ensure that they have btained and validated the self-certificatin in time t be able t meet their due diligence and reprting bligatins with respect t the reprting perid during which the accunt was pened (Emphasis added) Changes in circumstances If a Reprting NZFI maintains a new individual accunt, btains a self-certificatin f the accunt hlder s residence(s), and there is a change in circumstances that subsequently causes the Reprting NZFI t knw, r have reasn t knw, that the riginal self-certificatin is incrrect r unreliable, it cannt rely n the riginal self-certificatin and must carry ut further due diligence n the accunt and btain a valid self- certificatin (ie a further self-certificatin) that establishes the accunt hlder s residence(s) fr tax purpses. A change in circumstances affecting a self-certificatin will terminate the validity f the selfcertificatin with respect t the infrmatin that is n lnger reliable, until the infrmatin is updated. A self-certificatin becmes invalid n the date that the Reprting NZFI hlding the self-certificatin knws r has reasn t knw that circumstances affecting the crrectness f the self-certificatin have changed. Hwever, a Reprting NZFI may chse t treat a persn as having the same status that it had prir t the change in circumstances until the earlier f 90 days frm the date that the self-certificatin became invalid due t the change in circumstances, the date that the validity f the self-certificatin is cnfirmed, r the date that a new self-certificatin is btained. Example 6: A Reprting NZFI btains a self-certificatin n accunt pening frm Gerge that he is tax-resident in New Zealand. Three years after accunt pening, Gerge rings the Reprting NZFI t add a freign mailing address t the accunt. This is a change in circumstances that calls int questin Gerge s riginal self-certificatin. The Reprting NZFI wuld need t re-determine the status f the accunt by btaining a valid self-certificatin fr Gerge. 5.5 Pre-existing entity accunts A pre-existing entity accunt is an accunt maintained by a Reprting NZFI as f 30 June that is held by an entity (fr example, held by a trust, cmpany r partnership). Reprting NZFIs are generally required t cnduct due diligence n pre-existing entity accunts t determine: whether the entity is a relevant freign tax resident; whether the entity is a passive NFE; and 78 This expectatin is als reflected n page 211 (sectin 18) f the CRS cmmentary. The CRS cmmentary has, in turn, been incrprated int New Zealand law. 79 A further accunt pened by a pre-existing entity custmer n r after 1 July 2017 is treated as a preexisting entity accunt in the same circumstances utlined abve fr pre-existing individual accunts in sectin 5.3. IN CONFIDENCE Page 69 f 165

70 if the entity is a passive NFE, whether it has any cntrlling persns that are relevant freign tax residents. Hwever, there is a de minimis exceptin that applies here. If a pre-existing accunt has a balance r value that des nt exceed USD250,000 as f 30 June 2017 it will nt be subject t due diligence unless it exceeds USD250,000 n any subsequent 31 March. This de minimis exceptin is similar t the FATCA exclusins fr such accunts. A Reprting NZFI is able t chse t disregard this de minimis exceptin and review all f its pre-existing entity accunts (r a clearly identified grup f such accunts) irrespective f the balance r value f the accunt. The fllwing guidance applies t thse pre-existing accunts where the de minimis exceptin des nt apply (either because the accunt is abve the threshld r because the Reprting NZFI has chsen t disregard the threshld) Whether the entity is a relevant freign tax resident The Reprting NZFI first needs t determine whether the entity accunt hlder is a relevant freign tax resident. The Reprting NZFI culd determine this pint in either f the fllwing ways: Reasnably determining whether the entity accunt hlder is a relevant freign tax resident n the basis f infrmatin it maintains r that is publicly available; r Obtaining a self-certificatin frm the entity accunt hlder t determine whether it is a relevant freign tax resident. Reasnable determinatin whether the entity accunt hlder is a relevant freign tax resident The Reprting NZFI is required t review infrmatin it maintains fr regulatry r custmer relatinship purpses (including infrmatin cllected pursuant t AML/KYC prcedures) t determine the accunt hlder s tax residence. Fr these purpses, infrmatin indicating the accunt hlder s residence includes a place f incrpratin r rganisatin, r an address in a freign jurisdictin. 80 If the infrmatin indicates that the accunt hlder is a Reprtable Persn, the Reprting NZFI must treat the accunt as a reprtable accunt unless it btains a self-certificatin frm the accunt hlder r reasnably determines, based n infrmatin that is publicly available r is in their pssessin, that the accunt hlder is nt a Reprtable Persn. The relevant publicly available infrmatin that can be used t determine an accunt hlder s status is utlined n page 137 f the CRS Cmmentary. This includes infrmatin in a publicly accessible register maintained r authrised by an authrised gvernment bdy. The reader shuld refer t the CRS Cmmentary fr further cntext f the types f infrmatin that wuld cme within this categry. 80 Fr example, in the case f a trust accunt hlder, the address f the trustee in a freign jurisdictin will be relevant indicia. IN CONFIDENCE Page 70 f 165

71 A Reprting NZFI is als able t use as dcumentary evidence in its pssessin (t reasnably determine the accunt hlder s status) any classificatin in its recrds fr the accunt hlder that was determined based n a standardised industry cding system recrded cnsistent with its nrmal business practices fr purpses f AML/KYC prcedures r anther regulatry purpse (ther than fr tax purpses). This is prvided that it was implemented by the Reprting NZFI prir t the date used t classify the accunt. Page 204 f the CRS Cmmentary prvides further cntext t the circumstances when a Reprting NZFI will be able t rely n such infrmatin t determine the accunt hlder s status. If the Reprting NZFI determines that the entity accunt hlder is a relevant freign tax resident based n indicia/infrmatin in its pssessin (r infrmatin that is publicly available) it shuld (subject t the qualificatins/exceptins utlined further belw) cllect the accunt hlder s TIN (r functinal equivalent, in the absence f a TIN). 81 Seeking a self-certificatin whether the entity accunt hlder is a relevant freign tax resident Alternatively, a Reprting NZFI may chse t btain a self-certificatin frm the accunt hlder t determine whether the accunt hlder is a relevant freign tax resident. A self-certificatin f the accunt hlder s tax status wuld nly be valid if: it is signed (r therwise psitively affirmed) by the accunt hlder r persn with authrity t sign fr the accunt hlder; it is dated at the latest at the date f receipt; and it cntains each accunt hlder s: name (ie the name f the entity); address; jurisdictin(s) f residence fr tax purpses; and TIN (r functinal equivalent, in the absence f a TIN) with respect t each freign tax jurisdictin (subject t varius qualificatins/exceptins utlined belw). Qualificatins transitinal perid fr btaining TINs A Reprting NZFI that identifies that an accunt hlder is a relevant freign tax resident, and des nt therwise have either the accunt hlder s TIN (r functinal equivalent) in its recrds, will, subject t the fllwing exceptins, be required t use reasnable effrts t btain such infrmatin by the end f the secnd reprting perid fllwing the perid in which the accunt hlder is identified as being a Reprtable Persn. 81 It is assumed, fr the purpses f the fllwing, that the Reprting NZFI will already have the entity s name and address in its recrds. A full list f the infrmatin that a Reprting NZFI needs t cllect and (if the accunt is a reprtable accunt) reprt is set ut in sectin 6 f this guidance. IN CONFIDENCE Page 71 f 165

72 Exceptins where TINs are nt required t be btained The Reprting NZFI is nt required t btain the accunt hlder s TIN (r functinal equivalent) if either: the accunt hlder has nt been issued with a TIN (r a functinal equivalent). Fr example, if: the accunt hlder s jurisdictin f tax residence des nt issue TINs (r a functinal equivalent); r the accunt hlder s jurisdictin f tax residence has nt issued a TIN (r a functinal equivalent) t them; r the accunt hlder s jurisdictin f tax residence des nt require the cllectin f the TIN issued by that jurisdictin. OECD s AEOI prtal: validating TINs and determining whether TINs need t be btained The OECD s AEOI prtal 82 cntains the rules that jurisdictins adpt fr issuing TINs (r functinal equivalent, in the absence f a TIN) and the frmat f such TINs. The infrmatin n this prtal will assist Reprting NZFIs in carrying ut their due diligence and determining when they need t cllect TINs. If a Reprting NZFI identifies that an accunt hlder is a relevant freign tax resident and the accunt hlder claims 83 nt t have either a TIN (r functinal equivalent) the Reprting NZFI shuld refer t the AEOI prtal fr infrmatin abut whether the accunt hlder s jurisdictin(s) f tax residence wuld have issued a TIN (r functinal equivalent) t them. This will assist the Reprting NZFI t determine the reasnableness f the accunt hlder s claim. The Reprting NZFI may need t ask the accunt hlder further questins t determine the reasnableness f their claims. The Reprting NZFI is nt required t g beynd the infrmatin n the AEOI prtal in this regard. Fr example, the Reprting NZFI may check the infrmatin n the AEOI prtal and determine, based n this infrmatin, that the accunt hlder is frm a jurisdictin that always issues TINs t their residents. Therefre, the Reprting NZFI wuld reasnably determine that the accunt hlder has a TIN that they shuld be prviding (and that the Reprting NZFI is required t cllect). A Reprting NZFI is generally nt required t cnfirm the frmat and ther specificatins f a TIN with the infrmatin n the AEOI Prtal. Reprting NZFIs may nevertheless wish t d s t enhance the quality f the infrmatin cllected and minimise the administrative burden assciated with any fllw-up cncerning reprting f an incrrect TIN If an accunt hlder claims nt t have a TIN (r a functinal equivalent) this statement shuld be part f any self-certificatin cllected fr the accunt, unless the Reprting NZFI reasnably determines, based n infrmatin n the OECD s AEOI Prtal, that the persn wuld nt have either a TIN (r functinal equivalent) fr the relevant freign jurisdictin. IN CONFIDENCE Page 72 f 165

73 Ntwithstanding the general rule expressed abve, a Reprting NZFI shuld be familiar with, and check fr, the validity f TINs frm anther jurisdictin in which the Reprting NZFI r a related entity perates if: there are simple r standard rules fr TINs in that jurisdictin (such as the structure r number f digits). A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case; and the IT systems used acrss the jurisdictins are shared r sufficiently similar that the validatin task wuld nt be nerus. A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case. Inland Revenue will mnitr internatinal expectatins n the use f the TIN infrmatin n the OECD s AEOI prtal and update this guidance if necessary Whether the entity accunt hlder is a passive nn-financial entity A Reprting NZFI that maintains a pre-existing entity accunt is als required t determine: whether the accunt hlder is a passive NFE; and if the accunt hlder is a passive NFE, whether any f its cntrlling persns are relevant freign tax residents. The Reprting NZFI will need t carry ut these steps irrespective f whether the entity accunt hlder is a freign tax resident. Financial Institutin Nn-financial Entity (NFE) Passive NFE (subject t lk-thrugh requirements) Active NFE If an entity accunt hlder is nt a financial institutin it will (by default) be a NFE. There are als tw categries f NFE; active NFEs and passive NFEs. A NFE that is nt an active NFE will (by default) be a passive NFE. [The definitins f NFE, active NFE and passive NFE are utlined in full in Appendix 4.] 84 This pint applies t the guidance fr TIN cllectin fr all types f accunts. IN CONFIDENCE Page 73 f 165

74 The fllwing matters are relevant when determining whether a NFE is a passive NFE (and, therefre, subject t the abve lk-thrugh rule): In brad terms, a passive NFE will generally cver an entity that: is nt a financial institutin; and derives predminantly (50% r mre) passive incme and/r has assets that predminantly prduce, r are held fr, the prductin f passive incme. Hwever, there are sme exceptins t this. Fr example: a registered charity that is a NFE wuld generally be an active NFE even if it derives predminantly passive incme; a managed investment entity that is tax resident in a jurisdictin that is nt a Participating Jurisdictin is als deemed t be a passive NFE. A key element that feeds int whether an NFE is a passive NFE is the definitin f passive incme. Passive incme is defined fr CRS purpses in sectin 3(1) f the Tax Administratin Act 1994 as: passive incme, in the applicatin f the FATCA agreement r the CRS applied standard t a persn r entity fr a perid, means an amunt that is nt incme frm a transactin entered int in the rdinary curse f the business f a dealer in financial assets and that is a. a dividend; b. interest; c. incme equivalent t interest; d. rent r a ryalty, ther than rent r a ryalty derived in the active cnduct f a business cnducted, partly r whlly, by emplyees f the persn r entity; e. an annuity; f. fr financial assets that give rise t amunts included under sectins (a) t (e), the amunt by which gains frm the sales r exchanges f the financial assets in the perid exceed lsses frm the sales r exchanges; g. the amunt by which gains frm the transactins in financial assets in the perid exceed lsses frm the transactins; h. the amunt by which gains frm the freign currency transactins in the perid exceed lsses frm the transactins; i. the amunt by which gains frm the swaps in the perid exceed lsses frm the swaps; j. an amunt received under a cash value insurance cntract. (Emphasis added) IN CONFIDENCE Page 74 f 165

75 Fr these purpses, the definitin f incme in sectin BD 1(1) f the Incme Tax Act 2007 will apply t the extent that a type f passive incme is nt defined in the CRS. Fr example, passive incme fr CRS purpses includes a dividend. The expressin dividend is nt defined fr CRS purpses, s the dividend definitin in sectin CD 3 f the Incme Tax Act 2007 wuld apply. Fr sme entity accunt hlders the active/passive assessment may be straightfrward and be made n the basis f available infrmatin (in the Reprting NZFIs pssessin r that is publicly available). Hwever, the Reprting NZFI may smetimes need t btain a self-certificatin frm the accunt hlder (ie as t whether it is a passive NFE, as ppsed t an active NFE r financial institutin). The Reprting NZFI, when requesting such a self-certificatin, is expected t prvide the accunt hlder with the infrmatin that is relevant t them determining their status (fr example, the definitin f active NFE ) When an entity accunt hlder is a passive nn-financial entity identifying cntrlling persns If a Reprting NZFI has identified that a pre-existing entity accunt it maintains is held by a passive NFE it is then required t: identify the entity s cntrlling persns; and determine whether any f the entity s cntrlling persns are relevant freign tax residents. Sectin VIII(D)(6) f the CRS defines cntrlling persns as meaning the natural persns wh exercise cntrl ver the entity, with sme elabratin (utlined belw) n hw this wuld apply t trusts. The term cntrlling persns must be interpreted in a manner cnsistent with the Financial Actin Task Frce Recmmendatins. Fr the purpses f identifying the cntrlling persns f a passive NFE pre-existing accunt, a Reprting NZFI may rely n infrmatin cllected and maintained pursuant t AML/KYC Prcedures. This guidance explains belw hw these principles will apply t the fllwing types f passive NFEs: legal persns; and trusts and ther legal arrangements. Fr a passive NFE that is a legal persn, page 198 f the CRS Cmmentary prvides that the term cntrlling persn means the natural persn(s) wh exercise cntrl ver the entity. Cntrl ver an entity is generally exercised by the natural persn(s) wh ultimately has a cntrlling wnership interest in the entity. A cntrlling wnership interest, in turn, depends n the wnership structure f the legal persn and is usually identified n the basis f a threshld applying a risk-based apprach (fr example, any persn(s) wning mre than a certain percentage f the legal persn, such as 25%). Where n natural persn(s) exercises cntrl thrugh wnership interests, the cntrlling persn(s) f the entity will be the natural persn(s) wh exercise cntrl f the entity thrugh ther means. Where n natural persn(s) IN CONFIDENCE Page 75 f 165

76 is identified as exercising cntrl f the entity, the cntrlling persn(s) f the entity will be the natural persn(s) wh hlds the psitin f senir managing fficial. A Reprting NZFI may rely n infrmatin cllected and maintained pursuant t AML/KYC Prcedures t identify such persns. In the case f a passive NFE trust, the term cntrlling persns mean the settlr(s), the trustee(s), the prtectr(s) (if any), the beneficiary(ies) 85 r classes f beneficiaries and any ther natural persn(s) exercising ultimate effective cntrl ver the trust. In the case f legal arrangements ther than a trust, the term means persns in equivalent r similar psitins. The fllwing pints are relevant when determining whether persns cnnected with a preexisting accunt held by a passive NFE trust are cntrlling persns f the trust: The settlr(s), the trustee(s), the prtectr(s) (if any), the beneficiary(ies) 86 r classes f beneficiaries f a trust must (subject t the fllwing) always be treated as cntrlling persns f the trust, irrespective f whether any f them exercises cntrl ver the trust (see page 199 f the CRS Cmmentary). Furthermre, any ther natural persn that has ultimate effective cntrl ver the trust als needs t be treated as a cntrlling persn f the trust. This is a brad definitin f cntrlling persns fr trusts. Hwever, a Reprting NZFI can rely n the persns they have identified under AML/KYC prcedures t determine the cntrlling persns f a pre-existing accunt held by a passive NFE trust fr CRS purpses. This is an imprtant qualificatin t these bullet pints. A settlr is a cntrlling persn f a trust irrespective f whether the trust is a revcable trust r an irrevcable trust. If a persn cnnected t a trust (such as a trustee, settlr, r beneficiary) is an entity the Reprting NZFI will need t identify the natural persns that cntrl that entity. Fr beneficiaries that are designated by characteristics r by class (ie as ppsed t a specified/named beneficiary), a Reprting NZFI shuld btain sufficient infrmatin cncerning the beneficiary(ies) t satisfy it that it will be able t establish the identity f the beneficiary(ies) at the time f the pay-ut r when the beneficiary(ies) intends t exercise vested rights. Therefre, that ccasin will cnstitute a change in circumstances and will trigger the relevant prcedures (see page 199 f the CRS Cmmentary). This culd be relevant if, fr example, a trust has a children f the settlr class f beneficiaries. A child within that class wuld nt be a relevant cntrlling persn that needs t be identified until they receive a distributin frm the trust r intend t exercise vested rights. The Reprting NZFI shuld have prcedures in place t identify when smene within a class f discretinary beneficiaries 85 This is subject t the Reprting NZFI chsing t adpt the ptin set ut in sectin 185N(10) f the Tax Administratin Act 1994 t treat a discretinary beneficiary f a trust as nt being a cntrlling persn fr the trust until the beneficiary receives a distributin. A Reprting NZFI that chses t adpt this ptin must have reasnable safeguards and prcedures in place fr identifying when a distributin is made t the beneficiary. 86 This is subject t the Reprting NZFI chsing t adpt the ptin set ut in sectin 185N(10) f the Tax Administratin Act 1994 t treat a discretinary beneficiary f a trust as nt being a cntrlling persn fr the trust until the beneficiary receives a distributin. A Reprting NZFI that chses t adpt this ptin must have reasnable safeguards and prcedures in place fr identifying when a distributin is made t the beneficiary. IN CONFIDENCE Page 76 f 165

77 receives a distributin and, therefre, is a cntrlling persn. This culd include the Reprting NZFI having an arrangement 87 with the trustee (supprted by terms and cnditins, where pssible) that the trustee will ntify the Reprting NZFI when it has made such a distributin. A specified/named discretinary beneficiary f a passive NFE trust will generally be a cntrlling persn f the trust. Hwever, a Reprting NZFI has the ptin under sectin 185N(10) f the Tax Administratin Act 1994 f nly treating such a beneficiary as being a cntrlling persn f the trust if that persn receives (directly r indirectly) a distributin (see page 199 f the CRS Cmmentary). The meaning f receives a distributin in this cntext is when an amunt is paid r payable t the beneficiary (directly r indirectly). A Reprting NZFI that chses t adpt this ptin will need t have reasnable safeguards and prcedures 88 in place t determine when such a distributin has been made. This culd include the Reprting NZFI having an arrangement 89 with the trustee (supprted by terms and cnditins, where pssible) that the trustee will ntify the Reprting NZFI when it has made such a distributin. [There is n cmpulsin fr a Reprting NZFI t adpt this ptin regarding the timing f when it treats specified/named beneficiaries as being cntrlling persns. A Reprting NZFI culd simply chse t treat all specified/named beneficiaries as being cntrlling persns (in this cntext) if it cnsiders that this wuld be preferable frm an peratinal pint f view.] If a Reprting NZFI maintains an accunt held by a passive NFE, and has identified the cntrlling persns, they must then determine whether any f thse persns are relevant freign tax residents. The prcess that the Reprting NZFI needs t fllw (in this regard) depends n the balance r value f the accunt: The Reprting NZFI can, if the accunt has a balance r value that des nt exceed USD1,000,000 (which the Reprting NZFI can simply treat as NZD1,000,000), rely n infrmatin they have cllected and maintained pursuant t AML/KYC prcedures t determine whether any f the cntrlling persns are relevant freign tax residents. If the Reprting NZFI adpts these prcedures, and determines that a cntrlling persn is a relevant freign tax resident, they will need t cllect the passive NFE s TIN(s) (r functinal equivalent) 90 and the cntrlling persn s name, address, TIN(s) (r functinal equivalent), and date f birth. Hwever, this is subject t the qualificatins/exceptins utlined further belw fr cllectin f TINs and date f birth; r 87 This arrangement culd be: thrugh a service prvider r third party (ie the service prvider having such an arrangement with the trustee, with any infrmatin n distributins then being passed n t the Reprting NZFI) and/r; with an intermediary (ie the Reprting NZFI having such an arrangement with the intermediary with any infrmatin n distributins being btained thrugh the intermediary) if the Reprting NZFI des nt have a direct custmer relatinship with the trustee r therwise has sme practical difficulties with entering int such an arrangement directly with the trustee. 88 See page 17 f the OECD s CRS Implementatin Handbk. 89 This arrangement culd be: thrugh a service prvider r third party (ie the service prvider having such an arrangement with the trustee, with any infrmatin n distributins then being passed n t the Reprting NZFI) and/r; with an intermediary (ie the Reprting NZFI having such an arrangement with the intermediary with any infrmatin n distributins being btained thrugh the intermediary) if the Reprting NZFI des nt have a direct custmer relatinship with the trustee r therwise has sme practical difficulties with entering int such an arrangement directly with the trustee. 90 It is assumed, fr these purpses, that the Reprting NZFI wuld already have the passive NFE s name and address in its recrds, s wuld nt need t cllect this infrmatin as well. IN CONFIDENCE Page 77 f 165

78 The Reprting NZFI must therwise btain a self-certificatin frm the accunt hlder (r cntrlling persn) t determine whether any f the cntrlling persns are relevant freign tax residents (and, if s, cllect the same infrmatin set ut in the abve bullet pint in relatin t the accunt). If a self-certificatin is nt prvided, the Reprting NZFI shuld establish such residence by applying the pre-existing individual accunt indicia prcedures (see abve at sectin 5.3). If a Reprting NZFI has n such indicia in its recrds, n further actin will be required until there is a change in circumstances that results in ne r mre indicia with respect t the cntrlling persn being assciated with the accunt. With respect t pre-existing entity accunts held by a passive NFE, a self-certificatin f the cntrlling persn s tax residence wuld nly be valid if: it is signed (r therwise psitively affirmed) by the accunt hlder (r cntrlling persn) with authrity t sign; it is dated at the latest at the date f receipt; and it cntains each cntrlling persn s: name; address; jurisdictin(s) f residence fr tax purpses; TIN (r a functinal equivalent, in the absence f a TIN) with respect t each freign tax jurisdictin (subject t varius qualificatins/exceptins utlined belw); 91 and date f birth (subject t the qualificatins utlined belw). Qualificatins: transitinal perid fr the cllectin f TIN and date f birth infrmatin If a Reprting NZFI des nt therwise have the cntrlling persn s TIN (r functinal equivalent) r date f birth in its recrds, it will (subject t the fllwing exceptins fr TIN cllectin) be required t use reasnable effrts t btain such infrmatin by the end f the secnd reprting perid fllwing the perid in which the persn is identified as being a Reprtable Persn. Exceptins: where TIN infrmatin des nt need t be btained The Reprting NZFI is nt required t btain the cntrlling persn s TIN (r functinal equivalent) if either: the cntrlling persn has nt been issued with a TIN (r functinal equivalent). Fr example, if: the cntrlling persn s jurisdictin f tax residence des nt issue TINs (r a functinal equivalent); r 91 The Reprting NZFI wuld als need t cllect the passive NFE s TIN(s) (r functinal equivalent, in the absence f a TIN). IN CONFIDENCE Page 78 f 165

79 the cntrlling persn s jurisdictin f tax residence has nt issued a TIN (r a functinal equivalent) t them. Fr example, the cntrlling persn may be a child that has nt been issued with a TIN; r the cntrlling persn s jurisdictin f tax des nt require the cllectin f the TIN issued by such jurisdictin. OECD s AEOI prtal: validating TINs and determining whether TINs need t be btained The OECD s AEOI prtal 92 cntains the rules that jurisdictins adpt fr issuing TINs (r functinal equivalent, in the absence f a TIN) and the frmat f such TINs. The infrmatin n this prtal will assist Reprting NZFIs in carrying ut their due diligence and determining when they need t cllect TINs. If the accunt hlder r cntrlling persn claims that a cntrlling persn des nt t have a TIN (r functinal equivalent) the Reprting NZFI shuld refer t the AEOI prtal fr infrmatin abut whether the cntrlling persn s jurisdictin(s) f tax residence wuld have issued either a TIN (r functinal equivalent) t the cntrlling persn. This will assist the Reprting NZFI t determine the reasnableness f the claim. The Reprting NZFI may need t ask further questins t determine the reasnableness f the claims. The Reprting NZFI is nt required t g beynd the infrmatin n the AEOI prtal in this regard. Fr example, the Reprting NZFI may check the infrmatin n the AEOI prtal and determine, based n this infrmatin, that the cntrlling persn is frm a jurisdictin that always issues TINs t their residents. Therefre, the Reprting NZFI wuld reasnably determine that the cntrlling persn has a TIN that they shuld be prviding (and that the Reprting NZFI is required t cllect). A Reprting NZFI is generally nt required t cnfirm the frmat and ther specificatins f a TIN with the infrmatin n the AEOI Prtal. Reprting NZFIs may nevertheless wish t d s t enhance the quality f the infrmatin cllected and minimise the administrative burden assciated with any fllw-up cncerning reprting f an incrrect TIN. Ntwithstanding the general rule expressed abve, a Reprting NZFI shuld be familiar with, and check fr, the validity f TINs frm anther jurisdictin in which the Reprting NZFI r a related entity perates if: there are simple r standard rules fr TINs in that jurisdictin (such as the structure r number f digits). A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case; and the IT systems used acrss the jurisdictins are shared r sufficiently similar that the validatin task wuld nt be nerus. A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case IN CONFIDENCE Page 79 f 165

80 Inland Revenue will mnitr internatinal expectatins n the use f the TIN infrmatin n the OECD s AEOI prtal and update this guidance if necessary Timeframe fr cmpletin f initial due diligence and reprting Reprting NZFIs will need t cmplete their initial review and any reprting (if the accunts are identified as reprtable) f pre-existing entity accunts by 30 June Reprting NZFIs will have the ptin f taking advantage f the whle perid up t 30 June 2019 t cmplete their due diligence n such accunts. Hwever, this is prvided that the accunt is reprted by 30 June 2019 (if indeed it is identified as being reprtable) Recrd-keeping requirements Fr recrd-keeping purpses, a Reprting NZFI will als need t keep a recrd f any selfcertificatins btained, the prcess they fllwed t btain such certificatins and a recrd f any failure t btain a self-certificatin (fr example, when an accunt hlder r cntrlling persn des nt prvide a self-certificatin n request) Change in circumstances If there is a change f circumstances with respect t such a pre-existing entity accunt that causes the Reprting NZFI t knw, r have reasn t knw, that the self-certificatin r ther dcumentatin assciated with an accunt is incrrect r unreliable, the Reprting NZFI must redetermine the status f the accunt. The Reprting NZFI must adpt the fllwing prcedures by the later f the last day f the relevant reprting perid r 90 calendar days fllwing the ntice r discvery f the change in circumstances: 94 with respect t the determinatin whether the accunt hlder is a relevant freign tax resident, the Reprting NZFI must btain either (i) a self-certificatin, r (ii) a reasnable explanatin and dcumentatin (as apprpriate) supprting the reasnableness f the riginal self-certificatin r dcumentatin (and retain a cpy r a ntatin f that explanatin and dcumentatin). If the Reprting NZFI fails t either btain a self-certificatin r cnfirm the reasnableness f the riginal self-certificatin r dcumentatin, it must treat the accunt hlder as being a Reprtable Persn with respect t bth jurisdictins. with respect t the determinatin f whether the accunt hlder is a financial institutin, 95 active NFE r passive NFE, a Reprting NZFI must btain additinal dcumentatin r a self-certificatin (as apprpriate) t establish the status f the accunt hlder. If the Reprting NZFI fails t d s, it must treat the accunt as a passive NFE. with respect t determining whether a cntrlling persn is a relevant freign tax resident, the Reprting NZFI must btain either (i) a self-certificatin, r (ii) a 93 This pint applies t the CRS guidance fr TIN cllectin fr all types f accunts. 94 See page 142 f the CRS Cmmentary. 95 As nted at sectins 1.9 and f this guidance, freign financial institutins will nt be relevant freign tax residents (ptentially subject t reprting) unless they are managed investment entities that are tax residents in jurisdictins that are nt Participating Jurisdictins, and, therefre, are deemed t be passive NFEs. IN CONFIDENCE Page 80 f 165

81 reasnable explanatin and dcumentatin (as apprpriate) supprting the reasnableness f the riginal self-certificatin r dcumentatin (and retain a cpy r a ntatin f that explanatin and dcumentatin). If a Reprting NZFI fails t btain either a self-certificatin r cnfirm the reasnableness f a previusly cllected selfcertificatin r dcumentatin, it must rely n indicia f freign tax residence in its recrds. 5.6 New entity accunts 96 A new entity accunt is an accunt pened by a Reprting NZFI n r after 1 July 2017 that is held by an entity (fr example, held by a trust, cmpany, r partnership). Reprting NZFIs are required t cnduct due diligence n new entity accunts t determine: whether the entity is a relevant freign tax resident; whether the entity is a passive NFE; and if the entity is a passive NFE, whether it has any cntrlling persns that are relevant freign tax residents. There is n de minimis threshld exemptin frm these prcedures Whether the entity is a relevant freign tax resident The Reprting NZFI first needs t determine whether the entity is a freign tax resident. The Reprting NZFI needs t btain a self-certificatin, which may be part f the accunt pening dcumentatin, that allws it t determine the accunt hlder s residence fr tax purpses and t cnfirm the reasnableness f that self-certificatin based n the infrmatin it btained in cnnectin with the pening f the accunt (including any dcumentatin it has cllected pursuant t AML/KYC prcedures). If the self-certificatin indicates that the accunt hlder is resident in a Reprtable Jurisdictin, the Reprting NZFI must treat the accunt as being a reprtable accunt unless 97 it reasnably determines, based n infrmatin in its pssessin r that is publicly available (see abve with regards t pre-existing entity accunts), that the accunt hlder is nt a Reprtable Persn. The frm, prcedures, and timeframes that a Reprting NZFI wuld need t adpt fr btaining and validating such self-certificatins are the same as thse utlined abve fr new individual accunts. A self-certificatin f the accunt hlder s tax status wuld nly be valid if: 96 A Reprting NZFI is als able t chse t adpt these prcedures fr pre-existing entity accunts. 97 Please nte that a Reprting NZFI is able t apply these due diligence steps in the rder that is mst apprpriate in the circumstances. Fr example, in sme circumstances a Reprting NZFI may be able t reasnably determine up frnt (based n infrmatin in its pssessin r that is publicly available) that the entity is nt a Reprtable Persn. In such circumstances, the Reprting NZFI wuld nt be required t btain a self-certificatin frm the accunt hlder. IN CONFIDENCE Page 81 f 165

82 it is signed (r therwise psitively affirmed) by the accunt hlder r persn with authrity t sign fr the accunt hlder; it is dated at the latest at the date f receipt; and it cntains each accunt hlder s: name (ie the name f the entity); address; jurisdictin(s) f residence fr tax purpses; 98 and TIN (r a functinal equivalent, in the absence f a TIN) fr each freign tax jurisdictin (subject t varius exceptins utlined belw). Exceptins where TINs d nt need t be btained The Reprting NZFI is nt required t btain the freign tax resident accunt hlder s TIN (r functinal equivalent) if: the accunt hlder has nt been issued with a TIN (r functinal equivalent). Fr example, if: the accunt hlder s jurisdictin f tax residence des nt issue TINs (r a functinal equivalent); r the accunt hlder s jurisdictin f tax residence has nt issued a TIN (r a functinal equivalent) t them. Fr example, the accunt hlder may be a child that has nt been issued a TIN; r the accunt hlder s jurisdictin f tax residence des nt require the cllectin f the TIN issued by such jurisdictin. OECD s AEOI prtal validating TINs and determining whether TINs need t be btained The OECD s AEOI prtal 99 cntains the rules that jurisdictins adpt fr issuing TINs (r functinal equivalent, in the absence f a TIN) and the frmat f such TINs. The infrmatin n this prtal will assist Reprting NZFIs in carrying ut their due diligence and determining when they need t cllect TINs. If an accunt hlder claims nt t have a TIN (r a functinal equivalent) this statement shuld be part f any self-certificatin cllected fr the accunt, unless the Reprting NZFI reasnably determines, based n infrmatin n the OECD s AEOI Prtal, that the persn wuld nt have either a TIN (r a functinal equivalent) fr the relevant freign jurisdictin. 98 If the entity certifies that they have n residence fr tax purpses, the Reprting NZFI may rely n the address f the entity s principal ffice t determine its residency IN CONFIDENCE Page 82 f 165

83 If a Reprting NZFI identifies that an accunt hlder is a relevant freign tax resident and the accunt hlder claims 100 nt t have either a TIN (r functinal equivalent) the Reprting NZFI shuld refer t the AEOI prtal fr infrmatin abut whether the accunt hlder s jurisdictin(s) f tax residence wuld have issued a TIN (r functinal equivalent) t them. This will assist the Reprting NZFI t determine the reasnableness f the accunt hlder s claim. The Reprting NZFI may need t ask the accunt hlder further questins t determine the reasnableness f their claims. The Reprting NZFI is nt required t g beynd the infrmatin n the AEOI prtal in this regard. Fr example, the Reprting NZFI may check the infrmatin n the AEOI prtal and determine, based n this infrmatin, that the accunt hlder is frm a jurisdictin that always issues TINs t their residents. Therefre, the Reprting NZFI wuld reasnably determine that the accunt hlder has a TIN that they shuld be prviding (and that the Reprting NZFI is required t cllect). A Reprting NZFI is generally nt required t cnfirm the frmat and ther specificatins f a TIN with the infrmatin n the AEOI Prtal. Reprting NZFIs may nevertheless wish t d s t enhance the quality f the infrmatin cllected and minimise the administrative burden assciated with any fllw-up cncerning reprting f an incrrect TIN. Ntwithstanding the general rule expressed abve, a Reprting NZFI shuld be familiar with, and check fr, the validity f TINs frm anther jurisdictin in which the Reprting NZFI r a related entity perates if: there are simple r standard rules fr TINs in that jurisdictin (such as the structure r number f digits). A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case; and the IT systems used acrss the jurisdictins are shared r sufficiently similar that the validatin task wuld nt be nerus. A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case Inland Revenue will mnitr internatinal expectatins n the use f the TIN infrmatin n the OECD s AEOI prtal and update this guidance if necessary Whether the entity is a passive nn-financial entity A Reprting entity that maintains a new-existing entity accunt is als required t determine whether the accunt hlder is a passive NFE. The same prcedures utlined abve fr preexisting entity accunts (at sectin 5.5.2) apply equally here. 100 If an accunt hlder claims nt t have a TIN (r a functinal equivalent) this statement shuld be part f any self-certificatin cllected fr the accunt, unless the Reprting NZFI reasnably determines, based n infrmatin n the OECD s AEOI Prtal, that the persn wuld nt have either a TIN (r functinal equivalent) fr the relevant freign jurisdictin. 101 This pint applies t the guidance fr TIN cllectin fr all types f accunts. IN CONFIDENCE Page 83 f 165

84 5.6.3 When an entity accunt hlder is a passive nn-financial entity identifying cntrlling persns If a Reprting NZFI has identified that a new entity accunt is held by a passive NFE it is required t: identify the entity s cntrlling persns; and determine whether any f thse cntrlling persns are freign tax residents. Sectin VIII(D)(6) f the CRS defines cntrlling persns as meaning the natural persns wh exercise cntrl ver the entity, with sme elabratin (utlined belw) n hw this wuld apply t trusts. The term cntrlling persns must be interpreted in a manner cnsistent with the Financial Actin Task Frce Recmmendatins. Fr the purpses f identifying the cntrlling persns f a passive NFE, a Reprting NZFI may generally (subject t a rule that applies t trusts see further belw) rely n infrmatin cllected and maintained pursuant t AML/KYC Prcedures. This guidance explains belw hw these principles will apply t the fllwing types f passive NFEs: legal persns; and trusts and ther legal arrangements. Fr a passive NFE that is a legal persn, page 198 f the CRS Cmmentary prvides that the term cntrlling persn means the natural persn(s) wh exercise cntrl ver the entity. Cntrl ver an entity is generally exercised by the natural persn(s) wh ultimately has a cntrlling wnership interest in the entity. A cntrlling wnership interest, in turn, depends n the wnership structure f the legal persn and is usually identified n the basis f a threshld applying a risk-based apprach (fr example, any persn(s) wning mre than a certain percentage f the legal persn, such as 25%). Where n natural persn(s) exercises cntrl thrugh wnership interests, the cntrlling persn(s) f the entity will be the natural persn(s) wh exercise cntrl f the entity thrugh ther means. Where n natural persn(s) is identified as exercising cntrl f the entity, the cntrlling persn(s) f the entity will be the natural persn(s) wh hlds the psitin f senir managing fficial. A Reprting NZFI may rely n infrmatin they have cllected and maintained pursuant t AML/KYC Prcedures fr the purpses f identifying such cntrlling persns. In the case f a passive NFE trust, the term cntrlling persns mean the settlr(s), the trustee(s), the prtectr(s) (if any), the beneficiary(ies) 102 r classes f beneficiaries and any 102 This is subject t the Reprting NZFI chsing t adpt the ptin set ut in sectin 185N(10) f the Tax Administratin Act 1994 t treat a discretinary beneficiary f a trust as nt being a cntrlling persn fr the trust until the beneficiary receives a distributin. A Reprting NZFI that chses t adpt this ptin must have reasnable safeguards and prcedures in place fr identifying when a distributin is made t the beneficiary. IN CONFIDENCE Page 84 f 165

85 ther natural persn(s) exercising ultimate effective cntrl ver the trust. In the case f legal arrangements ther than a trust, the term means persns in equivalent r similar psitins. The fllwing pints are relevant when determining whether persns cnnected with a new passive NFE trust accunt are cntrlling persns f the trust: the settlr(s), the trustee(s), the prtectr(s) (if any), the beneficiary(ies) 103 r classes f beneficiaries f a trust must always be treated as cntrlling persns f the trust, irrespective f whether any f them exercises cntrl ver the trust (see page 199 f the CRS Cmmentary). Furthermre, any ther natural persn that has ultimate effective cntrl ver the trust als needs t be treated as a cntrlling persn f a trust. this is a brad definitin f cntrlling persns fr trusts. The CRS cmmentary is als clear (see page 199) that a higher standard f CRS due diligence is required t identify the cntrlling persns f a new trust accunt (cf fr pre-existing trust accunts where, as utlined abve, AML/KYC prcedures will be sufficient t identify CRS cntrlling persns). we understand that Reprting NZFIs will nt always identify such persns under AML/KYC prcedures. Therefre, the practical reality is that fr new passive NFE trust accunts, Reprting NZFIs will need t capture the fllwing infrmatin n their n-barding frms fr new passive NFE trust accunts (which will supplement the infrmatin they cllect fr AML/KYC prcedures) as part f a CRS selfcertificatin: Infrmatin abut the settlr(s), the trustee(s), the prtectr(s) (if any), the beneficiary(ies) 104 r classes f beneficiaries f a trust irrespective f whether any f them exercises cntrl ver the trust; and Infrmatin abut any ther natural persn(s) that exercise ultimate effective cntrl ver the trust. a settlr is a cntrlling persn f a trust irrespective f whether the trust is a revcable trust r an irrevcable trust. if a persn cnnected t a trust (such as a trustee, settlr, r beneficiary) is an entity the Reprting NZFI will need t identify the natural persns that cntrl that entity. fr beneficiaries that are designated by characteristics r by class (ie as ppsed t a specified/named beneficiary), a Reprting NZFI shuld btain sufficient infrmatin cncerning the beneficiary(ies) t satisfy it that it will be able t establish the identity f the beneficiary(ies) at the time f the pay-ut r when the beneficiary(ies) intends t exercise vested rights. Therefre, that ccasin will cnstitute a change in circumstances and will trigger the relevant prcedures (see page 103 This is subject t the Reprting NZFI chsing t adpt the ptin set ut in sectin 185N(10) f the Tax Administratin Act 1994 t treat a discretinary beneficiary f a trust as nt being a cntrlling persn fr the trust until the beneficiary receives a distributin. A Reprting NZFI that chses t adpt this ptin must have reasnable safeguards and prcedures in place fr identifying when a distributin is made t the beneficiary. 104 This is subject t the Reprting NZFI chsing t adpt the ptin set ut in sectin 185N(10) f the Tax Administratin Act 1994 t treat a discretinary beneficiary f a trust as nt being a cntrlling persn fr the trust until the beneficiary receives a distributin. A Reprting NZFI that chses t adpt this ptin must have reasnable safeguards and prcedures in place fr identifying when a distributin is made t the beneficiary. IN CONFIDENCE Page 85 f 165

86 199 f the CRS Cmmentary). This culd be relevant if, fr example, a trust has a children f the settlr class f beneficiaries. A child within that class wuld nt be a relevant cntrlling persn that needs t be identified until they receive a distributin frm the trust r intend t exercise vested rights. The Reprting NZFI shuld have reasnable safeguards and prcedures in place t identify when smene within a class f discretinary beneficiaries receives a distributin and, therefre, is a cntrlling persn. This culd include the Reprting NZFI having an arrangement 105 with the trustee that the trustee will ntify the Reprting NZFI when it has made such a distributin. This ntificatin requirement culd: be in the n-barding self-certificatin frm; and be supprted by terms and cnditins (where pssible) requiring the prvisin f such infrmatin. A specified/named discretinary beneficiary f a passive NFE trust will generally be a cntrlling persn f the trust. Hwever, a Reprting NZFI has the ptin under sectin 185N(10) f the Tax Administratin Act 1994 f nly treating such a beneficiary as being a cntrlling persn f the trust if that persn receives (directly r indirectly) a distributin (see page 199 f the CRS Cmmentary). The meaning f receives a distributin in this cntext is when an amunt is paid r payable (directly r indirectly) t the beneficiary. A Reprting NZFI that chses t adpt this ptin will need t have reasnable safeguards and prcedures 106 in place t determine when such a distributin has been made. This culd include the Reprting NZFI having an arrangement 107 with the trustee that the trustee will ntify the Reprting NZFI when it has made such a distributin. This ntificatin requirement culd: be in the n-barding self-certificatin frm; and be supprted by terms and cnditins (where pssible) requiring the prvisin f such infrmatin. [There is n cmpulsin fr a Reprting NZFI t adpt this ptin regarding the timing f when it treats specified/named beneficiaries as being cntrlling 105 This arrangement culd be: thrugh a service prvider r third party (ie the service prvider having such an arrangement with the trustee, with any infrmatin n distributins then being passed n t the Reprting NZFI) and/r; with an intermediary (ie the Reprting NZFI having such an arrangement with the intermediary with any infrmatin n distributins being btained thrugh the intermediary) if the Reprting NZFI des nt have a direct custmer relatinship with the trustee r therwise has sme practical difficulties with entering int such an arrangement directly with the trustee. 106 See page 17 f the OECD s CRS Implementatin Handbk. 107 This arrangement culd be: thrugh a service prvider r third party (ie the service prvider having such an arrangement with the trustee, with any infrmatin n distributins then being passed n t the Reprting NZFI) and/r; with an intermediary (ie the Reprting NZFI having such an arrangement with the intermediary with any infrmatin n distributins being btained thrugh the intermediary) if the Reprting NZFI des nt have a direct custmer relatinship with the trustee r therwise has sme practical difficulties with entering int such an arrangement directly with the trustee. IN CONFIDENCE Page 86 f 165

87 persns. A Reprting NZFI culd simply chse t treat all specified/named beneficiaries as being cntrlling persns (in this cntext) if it cnsiders that this wuld be preferable frm an peratinal pint f view.] If a Reprting NZFI maintains an accunt held by a passive NFE, and has identified the cntrlling persns, it must then determine whether any f thse persns are relevant freign tax residents by btaining a self-certificatin (frm the accunt hlder r such cntrlling persns) as t whether any f thse cntrlling persns are relevant freign tax residents. With respect t new entity accunts held by a passive NFE, a self-certificatin f the cntrlling persn s tax residence wuld nly be valid if: it is signed (r therwise psitively affirmed) by the accunt hlder (r cntrlling persn) with authrity t sign; it is dated at the latest at the date f receipt; and it cntains each cntrlling persn s: name; address; jurisdictin(s) f residence fr tax purpses; TIN (r functinal equivalent, in the absence f a TIN) with respect t each freign tax jurisdictin (subject t varius exceptins utlined belw); 108 and date f birth. Exceptins where TINs are nt required t be btained The Reprting NZFI is nt required t btain the cntrlling persn s TIN (r functinal equivalent) if: the cntrlling persn has nt been issued with a TIN (r functinal equivalent). Fr example, if: the cntrlling persn s jurisdictin f tax residence des nt issue TINs (r functinal equivalent); r the cntrlling persn s jurisdictin f tax residence has nt issued a TIN (r functinal equivalent) t them. Fr example, the persn may be a child that has nt been issued a TIN); r the cntrlling persn s jurisdictin f tax residence des nt require the cllectin f the TIN issued by that jurisdictin. 108 The Reprting NZFI wuld als need t cllect the passive NFE s TIN. IN CONFIDENCE Page 87 f 165

88 OECD s AEOI prtal validating TINs and determining whether TINs need t be btained The OECD s AEOI prtal 109 cntains the rules that jurisdictins adpt fr issuing TINs (r functinal equivalent, in the absence f a TIN) and the frmat f such TINs. The infrmatin n this prtal will assist Reprting NZFIs in carrying ut their due diligence and determining when they need t cllect TINs. If the accunt hlder r cntrlling persn claims that a cntrlling persn des nt t have a TIN (r functinal equivalent) this statement shuld be part f any self-certificatin cllected fr the accunt, unless the Reprting NZFI reasnably determines, based n infrmatin n the OECD s AEOI Prtal, that the persn wuld nt have either a TIN (r a functinal equivalent) fr the relevant freign jurisdictin. If the accunt hlder r cntrlling persn claims that a cntrlling persn des nt t have a TIN (r functinal equivalent) the Reprting NZFI shuld refer t the AEOI prtal fr infrmatin abut whether the cntrlling persn s jurisdictin(s) f tax residence wuld have issued either a TIN (r functinal equivalent) t the cntrlling persn. This will assist the Reprting NZFI t determine the reasnableness f the claim. The Reprting NZFI may need t ask further questins t determine the reasnableness f the claims. The Reprting NZFI is nt required t g beynd the infrmatin n the AEOI prtal in this regard. Fr example, the Reprting NZFI may check the infrmatin n the AEOI prtal and determine, based n this infrmatin, that the cntrlling persn is frm a jurisdictin that always issues TINs t their residents. Therefre, the Reprting NZFI wuld reasnably determine that the cntrlling persn has a TIN that they shuld be prviding (and that the Reprting NZFI is required t cllect). A Reprting NZFI is generally nt required t cnfirm the frmat and ther specificatins f a TIN with the infrmatin n the AEOI Prtal. Reprting NZFIs may nevertheless wish t d s t enhance the quality f the infrmatin cllected and minimise the administrative burden assciated with any fllw-up cncerning reprting f an incrrect TIN. Ntwithstanding the general rule expressed abve, a Reprting NZFI shuld be familiar with, and check fr, the validity f TINs frm anther jurisdictin in which the Reprting NZFI r a related entity perates if: there are simple r standard rules fr TINs in that jurisdictin (such as the structure r number f digits). A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case; and the IT systems used acrss the jurisdictins are shared r sufficiently similar that the validatin task wuld nt be nerus. A Reprting NZFI is able t take a reasnable interpretatin (taking int accunt their particular circumstances) f whether r nt this wuld be the case IN CONFIDENCE Page 88 f 165

89 Inland Revenue will mnitr internatinal expectatins n the use f the TIN infrmatin n the OECD s AEOI prtal and update this guidance if necessary Recrd-keeping requirements Fr recrd-keeping purpses, a Reprting NZFI will als need t keep a recrd f selfcertificatins btained, the prcess they fllwed t btain such certificatins, and a recrd f any failure t btain a self-certificatin (fr example, when an accunt hlder r cntrlling persn des nt prvide a self-certificatin n request) Change in circumstances Page 148 f the CRS Cmmentary prvides that if there is a change in circumstances with respect t a new entity accunt that causes the Reprting NZFI t knw, r have reasn t knw, that the self-certificatin r ther dcumentatin assciated with an accunt is incrrect r unreliable, the Reprting NZFI must re-determine the status f the accunt. The prcedures that the Reprting NZFI wuld need t fllw in this regard are the same as the prcedures when there is a change in circumstances fr pre-existing entity accunts (referred t abve at sectin 5.5.6). 6 Outline f the CRS infrmatin that needs t be reprted This guidance has s far utlined the fllwing pints: the circumstances when an entity will be a Reprting NZFI; and the due CRS diligence bligatins that Reprting NZFIs have t identify reprtable accunts and undcumented accunts. This then raises the questin f what infrmatin a Reprting NZFI will need t reprt t Inland Revenue if an accunt is reprtable. In brad terms, a Reprting NZFI will be required t reprt t Inland Revenue prescribed identity and financial accunt infrmatin abut a financial accunt it maintains in the fllwing circumstances: 111 the Reprting NZFI has identified that the accunt is held (and/r, in the case f a passive NFE, cntrlled) by a Reprtable Persn frm a Reprtable Jurisdictin; r the Reprting NZFI has decided t adpt the wider apprach t reprting and has identified that the accunt is held (and/r, in the case f a passive NFE, cntrlled) by a relevant freign tax resident. 110 This pint applies t the CRS guidance fr TIN cllectin fr all types f accunts. 111 Reprting NZFIs als need t reprt accunts that they have identified as being undcumented accunts. The circumstances when an accunt will be an undcumented accunt are utlined at sectins 1.6, and f this guidance. IN CONFIDENCE Page 89 f 165

90 Reprting NZFIs must reprt tw types f prescribed infrmatin abut such accunts: identity infrmatin abut the relevant freign tax resident accunt hlder (and freign tax-resident cntrlling persn in the case f accunts held by passive NFEs); and financial accunt infrmatin fr example, the accunt balance r value and varius amunts paid r credited t 112 the accunt. These reprting requirements will apply n an annual basis (ie by 30 June f the relevant year). In ther wrds, Reprting NZFIs that have identified an accunt as reprtable shuld cntinue t reprt the prescribed accunt infrmatin annually t Inland Revenue unless there is a change in circumstances that means that the accunt is nt reprtable. A Reprting NZFI that des nt have any accunts t reprt fr a particular reprting perid will als have the ptin f prviding a nil reprt. This guidance nw utlines in detail the prescribed identity and financial accunt infrmatin that Reprting NZFIs need t reprt annually abut any reprtable accunts it has identified. 6.1 Identity infrmatin that Reprting NZFIs will need t reprt fr a reprtable accunt Reprting NZFIs will generally need t annually reprt the fllwing identity infrmatin t Inland Revenue abut reprtable accunts: the name, address, jurisdictin(s) f residence, TIN(s) 113 and date f birth in the case f any individual accunt hlder that is a Reprtable Persn. (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting). the name, address, jurisdictin(s) f residence and TIN(s) f any entity accunt hlder that is a Reprtable Persn. (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting.) in the case f any passive NFE accunt hlder that is identified as having ne r mre cntrlling persns that is a Reprtable Persn: the name, address, jurisdictin(s) f residence, TIN(s) f the passive NFE; and the name, address, jurisdictin(s) f residence, TIN(s), and date f birth f the cntrlling persn (r persns). (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting.) the accunt number (r functinal equivalent in the absence f an accunt number). the name and identifying number (if any) f the Reprting NZFI. 112 As explained in detail further belw, this als smetimes cvers amunts paid r credited with respect t the accunt. 113 As nted abve, in the absence f a TIN, the functinal equivalent shuld be cllected and reprted. IN CONFIDENCE Page 90 f 165

91 If a Reprting NZFI has identified that a cntrlling persn is reprtable, and they als have infrmatin available that identifies the type f cntrlling persn (fr example, whether they are the settlr, trustee, prtectr, r beneficiary), this infrmatin is als expected t be reprted. Including this infrmatin in reprts will significantly increase the usefulness f the data t the receiving jurisdictin and benefit the cntrlling persns themselves due t the increased clarity in relatin t their status. With respect t new entity accunts, given that the 2012 Financial Actin Task Frce (FATF) Recmmendatins require the identificatin f the settlr, trustees, beneficiaries, prtectrs and any ther natural persn exercising ultimate effective cntrl f the trust, Reprting NZFIs shuld have this infrmatin available. 114 This guidance nw prvides sme further cntext t sme f the identificatin infrmatin that Reprting NZFIs need t prvide and the exceptins/qualificatins that apply. TIN A Reprting NZFI generally needs t reprt a TIN (r functinal equivalent, in the absence f a TIN) fr reprtable accunts (ie the TIN f the relevant freign tax resident accunt hlder r cntrlling persn). Hwever, there are sme imprtant exceptins and qualificatins t this. Exceptins: A TIN (r functinal equivalent) is nt required t be btained and reprted if: the persn has nt been issued with a TIN (r functinal equivalent). Fr example, if: the persn s jurisdictin f tax residence des nt issue TINs (r functinal equivalent); r the persn s jurisdictin f tax residence has nt issued a TIN (r functinal equivalent) t them; r the persn s jurisdictin f tax residence des nt require the cllectin f TINs issued by that jurisdictin. [Hwever, a Reprting NZFI is nt prevented frm asking fr, and cllecting, the persn s TIN fr reprting purpses if the persn chses t prvide it. In this case, the Reprting NZFI must reprt the TIN.] 115 Qualificatin: A Reprting NZFI that identifies that an accunt hlder (r cntrlling persn) f a reprtable pre-existing accunt is a relevant freign tax resident, and des nt therwise have the persn s TIN (r functinal equivalent) in its recrds, will be required t use reasnable effrts t btain and reprt the TIN (r functinal equivalent) by the end f the secnd reprting perid fllwing the perid in which the accunt is identified as being held (r cntrlled) by a Reprtable Persn. Date f birth A Reprting NZFI generally needs t reprt date f birth infrmatin f the relevant individual accunt hlder (r cntrlling persn) fr reprtable accunts (ie the date f birth infrmatin f the relevant freign tax resident accunt hlder r cntrlling persn). 114 See page 85f the OECD s CRS implementatin handbk. 115 See page 104 f the CRS cmmentary. IN CONFIDENCE Page 91 f 165

92 Qualificatin: A Reprting NZFI that identifies that an individual accunt hlder (r cntrlling persn) f a pre-existing accunt is a relevant freign tax resident, and des nt therwise have the persn s date f birth in their recrds, 116 will be required t use reasnable effrts t btain and reprt the date f birth by the end f secnd reprting perid fllwing the perid in which the accunt is identified as being held (r cntrlled) by a Reprtable Persn. It shuld be further nted that, while the date f birth must be reprted, the place f birth is nt required t be reprted, and shuld nt be reprted t Inland Revenue. 6.2 Financial accunt infrmatin that Reprting NZFIs will need t reprt fr a reprtable accunt Reprting NZFIs will als need t reprt the fllwing financial infrmatin abut reprtable accunts: the accunt balance r value as at the end f the reprting perid (ie 31 March) r, if the accunt was clsed during that perid, the clsure f the accunt. in the case f a custdial accunt: the ttal grss amunt f interest paid r credited t the accunt (r with respect t the accunt) during the relevant perid ending 31 March; the ttal grss amunt f dividends paid r credited t the accunt (r with respect t the accunt) during the relevant perid ending 31 March; the ttal grss amunt f ther incme generated with respect t the assets held in the accunt and paid r credited t the accunt (r with respect t the accunt) during the relevant perid ending 31 March; and the ttal grss prceeds frm the sale r redemptin f financial assets paid r credited t the accunt (r with respect t the accunt) during the relevant perid ending 31 March with respect t which the Reprting NZFI acted as a custdian, brker, nminee r therwise as an agent fr the accunt hlder. in the case f a depsitry accunt, the ttal grss amunt f interest paid r credited t the accunt during the relevant perid ending 31 March. in the case f any ther type f accunt, the ttal grss amunt paid r credited t the accunt hlder with respect t the accunt during the relevant perid ending 31 March with respect t which the Reprting NZFI is the bligr r debtr. This includes the aggregate amunt f any redemptin payments made t the accunt hlder during the reprting perid. 116 A Reprting NZFI may already have such date f birth infrmatin in its recrds because it has already cllected such infrmatin fr AML r ther regulatry purpses. This CRS transitinal perid fr cllecting date f birth infrmatin fr pre-existing accunts shuld be read as cvering thse instances where the Reprting NZFI des nt have such infrmatin in its recrds and they are nt therwise required t cllect the infrmatin. This principle fr the timing f the cllectin f date f birth infrmatin applies fr all pre-existing accunts (individual and entity). IN CONFIDENCE Page 92 f 165

93 Where an accunt is jintly held, each hlder f the accunt is attributed the entire balance r value f the jint accunt, as well as the entire amunts paid r credited t the jint accunt (r with respect t the jint accunt). This guidance nw prvides sme further cntext t the financial infrmatin that Reprting NZFIs need t reprt abut such reprtable accunts. Accunt balance r value Reprting NZFIs are (subject t the fllwing) required t reprt the accunt balance r value f a reprtable accunt as f the end f the relevant perid ending 31 March. [Hwever, if an accunt was clsed during that perid, the Reprting NZFI must reprt the clsure f the accunt. An accunt will be cnsidered t be clsed accrding t the Reprting NZFI s nrmal perating prcedures that are cnsistently maintained fr all accunts. In mst cases, it will be fairly self-explanatry as t whether an accunt has been clsed. An equity r debt interest accunt wuld generally be cnsidered t be clsed upn terminatin, transfer, surrender, redemptin, cancellatin r liquidatin. An accunt with a balance r value equal t zer r that is negative will nt be cnsidered t be clsed slely by reasn f having such a balance r value. 117 If the accunt was clsed during the perid, the Reprting NZFI must reprt that the accunt was clsed, but nt the accunt balance r value befre r at the time f clsure. This is a key difference between the CRS and FATCA. Fr FATCA, it is the balance immediately prir t clsure that needs t be reprted.] The fllwing pints are relevant when determining the accunt balance r value: In general, the balance r value f a financial accunt is the balance r value calculated by the Reprting NZFI fr purpses f reprting t the accunt hlder (see sectin 12 n page 98 f the CRS Cmmentary). Hwever, as explained belw, ther methds are permissible where the Reprting NZFI des nt reprt t the accunt hlder. The balance r value f depsitry financial accunts in a Reprting NZFI is selfexplanatry (ie it wuld simply be the funds held in the accunt). The balance r value f an equity interest financial accunt is the value calculated by the Reprting NZFI fr the purpse that requires the mst frequent determinatin f value (which may be fr reprting/investment purpses). If the Reprting NZFI has nt therwise recalculated the balance r value fr ther reasns (such as reprting/investment purpses), the balance r value will be the value f the interest upn acquisitin r therwise will be the ttal value f the Reprting NZFI s prperty (see page 82 f the OECD s CRS Implementatin Handbk). The balance r value f a debt interest financial accunt is its principal amunt. In the case f a cash value insurance cntract r an annuity cntract financial accunt, the accunt balance r value includes the cash value 118 r surrender value. 117 See page 99 f the CRS Cmmentary. 118 The meaning f cash value is utlined in detail in sectin f this guidance. IN CONFIDENCE Page 93 f 165

94 The balance r value f a financial accunt is nt t be reduced by any liabilities r bligatins incurred by an accunt hlder with respect t the accunt r any f the assets held in the accunt. Where a financial accunt is jintly held, each hlder f the accunt is attributed the entire balance r value f the jint accunt, as well as the entire amunts paid r credited t the jint accunt (r with respect t the jint accunt). A financial accunt 119 with a balance r value that is negative must be reprted as having an accunt balance r value equal t zer. 120 Where an accunt is held by a Passive NFE with mre than ne cntrlling persn that is a Reprtable Persn, each cntrlling persn is attributed the entire balance r value f the accunt held by the Passive NFE, as well as the entire amunts paid r credited t the accunt. (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting.) Where an accunt is held by an accunt hlder that is a Reprtable Persn wh is identified as having mre than ne jurisdictin f residence, the entire balance r value f the accunt, as well as the entire amunt paid r credited t the accunt, must be reprted with respect t each jurisdictin f residence f the accunt hlder. (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting.) Where an accunt is held by a Passive NFE with a cntrlling persn that is a Reprtable Persn and is identified as having mre than ne jurisdictin f residence, the entire balance r value f the accunt held by the Passive NFE, as well as the entire amunt paid r credited t the accunt, must be reprted with respect t each jurisdictin f residence f the cntrlling persn. (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting.) Where an accunt is held by a Passive NFE that is a Reprtable Persn with a cntrlling persn that is a Reprtable Persn, the entire balance r value f the accunt held by the Passive NFE, as well as the entire amunt paid r credited t the accunt, must be reprted with respect t bth the Passive NFE and the cntrlling persn. (This requirement wuld apply t all relevant freign tax residents if the Reprting NZFI adpted the wider apprach t reprting.) Grss prceeds A clearing r settlement rganisatin that maintains accunts, and settles sales and purchases may nt knw the grss prceeds frm sales and dispsitins. Where this is the case, grss prceeds are limited t the net amunt paid r credited t a member s accunt that is assciated with sales r ther dispsitins f financial assets by that member as f the time that the transactins are settled under the rganisatin s settlement prcedures (see sectin 18 n page 100 f the CRS Cmmentary). With respect t a sale that is effected by a brker that 119 This nly applies t financial accunts, as ppsed t prducts that are nt accunts in the first place. 120 Once an accunt is a Reprtable Accunt, it maintains its status until the date it ceases t be a Reprtable Accunt, even if the accunt balance r value is equal t zer r is negative (reprted as having an accunt balance r value equal t zer). An accunt with a balance r value equal t zer r that is negative will als nt be a clsed accunt slely by reasn f such balance r value. IN CONFIDENCE Page 94 f 165

95 results in a payment f grss prceeds, the date the grss prceeds are cnsidered paid is the date that the prceeds f sale are credited t the accunt f, r made available t, the persn entitled t the payment. Currency The infrmatin that a Reprting NZFI reprts abut an accunt must be reprted in the currency in which the accunt is denminated and the infrmatin reprted must identify the currency in which each amunt is denminated. In the case f an accunt denminated in mre than ne currency, the Reprting NZFI may elect t reprt the infrmatin in a currency in which the accunt is denminated and is required t identify the currency in which the accunt is reprted. If the balance r value f a financial accunt r ther amunt is denminated in a currency ther than the currency used by a Participating Jurisdictin when implementing the CRS (fr purpses f threshlds r limits), a Reprting NZFI must calculate the balance r value by applying a spt rate t translate such balance r value int the currency equivalent. Fr the purpse f a Reprting NZFI reprting an accunt, the spt rate must be determined as f the last day f the reprting perid fr which the accunt is being reprted Frmat that a Reprting NZFI can use fr reprting CRS infrmatin Infrmatin regarding hw t reprt yur CRS infrmatin will be made available frm the Inland Revenue website frm March 2018 in time fr the first CRS reprting perid. 8 CRS recrd-keeping bligatins 8.1 Obligatin t keep and retain recrds Reprting NZFIs will als (in additin t their ther CRS due diligence and reprting bligatins) be required t keep recrds f the steps they have taken and the evidence they have relied upn fr the perfrmance f their CRS bligatins. This includes a specific requirement fr these NZFIs t keep a recrd f any failure t btain a required self-certificatin. These specific CRS bligatins are set ut in sectins 22(2)(1d) and (1e) f the Tax Administratin Act 1994 and reflect the expectatins set ut in sectin IX(A)(1) f the CRS. These recrd-keeping requirements will als assist Inland Revenue in mnitring and verifying a Reprting NZFI s cmpliance with the CRS and addressing any nn-cmpliance (including cnsidering the applicatin f any penalties). In accrdance with sectin 25 f the Electrnic Transactins Act 2002 (r sectin 229 f the Cntract and Cmmercial Law Act 2017 frm 1 September 2017), Reprting NZFIs have the ptin f using technlgy t stre surce paper dcuments by electrnic means. The main 121 See page 102 f the CRS cmmentary. IN CONFIDENCE Page 95 f 165

96 requirements t retain recrds (in this way) under that Act, whether the recrds were riginally in paper frm r electrnic frm, are that: the integrity f the infrmatin cntained in the recrds is t be maintained; and the infrmatin is readily accessible s as t be usable fr future reference. Further cnditins fr legal requirements t retain recrds under the Inland Revenue Acts are prvided in schedule 1, clause 4 f the Electrnic Transactins Regulatins Accrdingly, a Reprting NZFI is able t hld its recrds in either paper-based frm r electrnic cpies. Recrds d nt need t be the riginal, and can encmpass certified cpies, r phtcpies (including by micrfiche, electrnic scan r similar means f electrnic strage). As explained further belw, there is als smetimes scpe fr a Reprting NZFI t keep a ntatin f infrmatin r dcumentatin reviewed in defined circumstances. Hwever, t the extent that infrmatin is held electrnically, Reprting NZFIs must be able t prduce t the Cmmissiner a paper cpy n request. Fr example, a NZFI that perates a dcument imaging system will nt need t retain riginal dcuments fr CRS purpses as lng as it can easily prduce an imaged cpy which can be cnverted int paper frm if requested by the Cmmissiner. Please nte that there is n requirement that such dcumentatin be stred in paper frm. Instead, a Reprting NZFI is merely required t stre such dcumentatin in a way that can be cnverted int paper frm if requested by the Cmmissiner. This is a requirement that is explicitly set ut at pages 131 and 205 f the CRS cmmentary Recrds t be in English and retained in New Zealand In accrdance with the general tax recrd-keeping requirements set ut in sectin 22(2BA) f the Tax Administratin Act 1994, a Reprting NZFI must als retain such recrds in English, in New Zealand. Recrds must be able t be prduced t the Cmmissiner, in English, when requested. Hwever, in accrdance with sectin 22(8)(a) f the Tax Administratin Act 1994, Reprting NZFIs may upn applicatin in writing t the Cmmissiner: t keep and retain a recrd r type f recrd: in a language ther than English: in a place utside New Zealand. If the Cmmissiner apprves the applicatin, she may impse any cnditins she thinks necessary, and may subsequently vary r withdraw the authrisatin. IN CONFIDENCE Page 96 f 165

97 8.1.2 Perid f retentin f recrds Reprting NZFIs will need t keep such recrds: fr seven years frm the end f the relevant reprting perid in accrdance with sectin 22(2) f the Tax Administratin Act This is in line with the FATCA recrd-keeping perid. This includes a specific requirement t keep a recrd f any failure t btain a self-certificatin. This will enable Inland Revenue t request a cpy f such recrds (if necessary) t determine whether the Reprting NZFI has cmplied with its due diligence and reprting bligatins. The guidance nw utlines hw these recrd-keeping requirements will apply in the fllwing circumstances: when a Reprting NZFI relies n publicly available infrmatin as part f CRS due diligence (ie what recrds des the NZFI need t keep abut the publicly available infrmatin it has relied n). when a Reprting NZFI relies n dcumentary evidence btained as part f CRS due diligence (ie what recrds des the NZFI need t keep abut the dcumentary evidence it has relied n). when a Reprting NZFI relies n a self-certificatin btained as part f CRS due diligence (ie what recrds des the NZFI need t keep abut a self-certificatin it btains). when a self-certificatin wuld therwise fail the reasnableness test and a Reprting NZFI gathers further infrmatin t determine the veracity f the self-certificatin (ie what recrds des the NZFI need t keep abut such infrmatin). when there has been a change in circumstances that calls int questin a selfcertificatin a Reprting NZFI has btained and it has gathered further infrmatin t determine the validity f the self-certificatin (ie what recrds des the NZFI need t keep abut such infrmatin?). the prcedures adpted by a Reprting NZFI as part f the requirement t use reasnable effrts t btain TINs fr pre-existing accunts held r cntrlled by Reprtable Persns (ie what recrds des the NZFI need t keep abut the steps that it fllws fr btaining TINs fr such accunts?). This is nt an exhaustive list f circumstances where a Reprting NZFI will have CRS recrdkeeping bligatins. Hwever, it des set ut sme f the key areas where a Reprting NZFI will have such bligatins. The reader shuld refer t the CRS Cmmentary fr further detail abut the range f circumstances where they will need t keep recrds f the steps that they have undertaken and the evidence they have relied upn in carrying ut their CRS due diligence and reprting Publicly available infrmatin The CRS prvides that, in certain defined circumstances, a Reprting NZFI is able t rely n publicly available infrmatin when carrying ut CRS due diligence. Fr example, by using infrmatin published by an authrised gvernment bdy, infrmatin in a publicly accessible register, infrmatin disclsed n an established securities market r any publicly accessible IN CONFIDENCE Page 97 f 165

98 classificatin determined n an industry cding system in rder t identify whether r nt an entity accunt hlder is a Reprtable Persn (see sectin V(C)(1)(b) and sectin VI(A)(1)(b)). If a Reprting NZFI relies upn publicly available infrmatin in carrying ut CRS due diligence, it must retain a ntatin f the type f infrmatin reviewed, and the date it was reviewed. 122 The ntatin will frm part f the recrds the Reprting NZFI is required t retain Due diligence dcumentary evidence The CRS als prvides scpe in certain defined circumstances fr a Reprting NZFI t rely n dcumentary evidence 123 when carrying ut CRS due diligence. The relevant types f dcumentary evidence are summarised in Appendix 3. If a Reprting NZFI has relied n such dcumentary evidence when carrying ut its CRS due diligence, it will need t keep a recrd f that evidence. A Reprting NZFI des nt need t retain riginal dcumentary evidence. The evidence may be a certified cpy, a phtcpy (including a micrfiche, electrnic scan, r similar means f electrnic strage), r at least a ntatin f the type f dcumentatin reviewed, the date the dcumentatin was reviewed, and the dcument s identificatin number (if any) (fr example, a passprt number). Any dcumentatin that is stred electrnically must be made available in hard cpy frm upn request. 124 A Reprting NZFI may als accept a cpy f dcumentary evidence electrnically if the electrnic system ensures that the infrmatin received is the infrmatin sent, and dcuments all ccasins f user access that result in the submissin, renewal r mdificatin f the dcumentary evidence (see page 205 at sectin 158 f the CRS Cmmentary). The system must als ensure that the persn accessing it and furnishing the dcumentary evidence is the persn named n the dcumentary evidence. Reprting NZFIs shuld keep a recrd f such steps, which must be able t be prvided t the Cmmissiner n request Self-certificatins Cpy f self-certificatin As nted abve, the CRS ften requires Reprting NZFIs t btain self-certificatins frm accunt hlders (and in certain circumstances cntrlling persns) as t whether r nt they are freign tax residents. The self-certificatin may be prvided in any matter and in any frm. A Reprting NZFI must retain a cpy f these self-certificatins. This may be an riginal, certified cpy r phtcpy (including a micrfiche, electrnic scan r similar means f electrnic strage). 122 See page 137, sectin 12 f the CRS Cmmentary. 123 In general, a Reprting NZFI must btain any relevant dcumentary evidence n an accunt-byaccunt basis. Hwever, a Reprting NZFI may rely upn the dcumentary evidence furnished by a custmer fr anther accunt if bth accunts are treated as a single accunt fr purpses f satisfying the standards f knwledge requirements in sectin A f sectin VII f the CRS (see page 205 f the CRS Cmmentary). 124 See page 205, sectin 157 f the CRS Cmmentary. IN CONFIDENCE Page 98 f 165

99 If the self-certificatin is prvided electrnically, the electrnic system must ensure that the infrmatin received is the infrmatin sent, and must dcument all ccasins f user access including the submissin, renewal r mdificatin f a self-certificatin. The system must als ensure that the persn accessing the system and furnishing the self-certificatin is the persn named in the self-certificatin. A Reprting NZFI must be able t prvide n request a hard cpy f all electrnic self-certificatins. 125 A self-certificatin may be signed (r therwise psitively affirmed) by any persn authrised t sign n behalf f the accunt hlder (r cntrlling persn) under dmestic law. The selfcertificatin, authrisatins t sign and details f user access must be able t be made available t the Cmmissiner in hard cpy upn request. These bligatins align with the requirement fr a Reprting NZFI t keep recrds (available fr request by the Cmmissiner) f the steps undertaken and evidence relied upn fr the purpses f undertaking due diligence. Reprting NZFIs are als required t keep a recrd f any failure t btain a self-certificatin. This will assist with mnitring and verifying cmpliance with CRS Psitive affirmatin As nted abve, fr a self-certificatin t be valid, the CRS requires that it must be signed r therwise psitively affirmed by the relevant accunt hlder r (if applicable) cntrlling persn. In additin t manually signed self-certificatins, this allws the self-certificatin t be cmpleted nline r rally, including ver the phne. In accrdance with an answer t a Frequently Asked Questin, the OECD has cnfirmed n the AEOI prtal 126 that a self-certificatin will be therwise psitively affirmed if the persn making the self-certificatin prvides the Reprting NZFI with an unambiguus acknwledgment that they agree with the representatins made thrugh the self-certificatin. In all cases, the psitive self-certificatin is expected t be captured by the Reprting NZFI in a manner such that it can credibly demnstrate that the self-certificatin was psitively affirmed (fr example, by vice recrding, digital ftprint etc) The apprach taken by the Reprting NZFI in btaining the self-certificatin is expected t be in a manner cnsistent with the prcedures they fllw fr the pening f the accunt. The Reprting NZFI will need t maintain a recrd f this prcess fr audit purpses, in additin t the self-certificatin itself. This aligns with the requirement that a Reprting NZFI keeps a recrd f bth the steps undertaken (which wuld cver such prcesses) and evidence that it has relied n (which wuld cver the selfcertificatin itself) in carrying ut CRS due diligence Incrrect r unreliable self-certificatins/change f circumstances As nted abve, a Reprting NZFI cannt rely upn a self-certificatin fr CRS due diligence purpses if it knws, r has reasn t knw, that the self-certificatin is incrrect r unreliable. If a Reprting NZFI has carried ut CRS due diligence n a financial accunt and, as part f that prcess, btained a self-certificatin abut the tax residence f an accunt hlder (r, if applicable, cntrlling persn), and there is a change f circumstances that causes a Reprting 125 See page 129, sectin 9 f the CRS Cmmentary IN CONFIDENCE Page 99 f 165

100 NZFI t knw that the riginal self-certificatin is incrrect r unreliable, the Reprting NZFI cannt rely upn the riginal self-certificatin. The Reprting NZFI wuld need t btain either a valid self-certificatin that establishes the residence fr the tax purpses f the accunt hlder (r, if applicable, cntrlling persn), r a reasnable explanatin and dcumentatin (as apprpriate) supprting the validity f the riginal self-certificatin. If the Reprting NZFI btains a new self-certificatin it wuld need t keep a recrd f that self-certificatin just like any ther self-certificatin it btains. If the Reprting NZFI relies n a reasnable explanatin and dcumentatin supprting the validity f the riginal self-certificatin it will be required t retain a cpy r a ntatin f the explanatin and dcumentatin. 127 This is in additin t the requirement t keep a recrd f the self-certificatin itself Reasnable effrts t btain a TIN As nted abve, if a Reprting NZFI maintains a pre-existing accunt that is held (and/r, in the case f a passive NFE, cntrlled) by a relevant freign tax resident, and it des nt have the persn s TIN (r functinal equivalent) in its recrds, it is required t use reasnable effrts t btain the persn s TIN by the end f the secnd reprting perid fllwing the perid in which the accunt is identified as being held (and/r cntrlled) by a Reprtable Persn. Reasnable effrts in this cntext means genuine attempts t btain the TIN, which must be made at least nce a year by, fr example, cntacting the accunt hlder by mail, in persn r by phne, including a request made as part f ther dcumentatin r electrnically (fr example, by facsimile r by ) and reviewing electrnically searchable infrmatin maintained by a related entity f the Reprting NZFI. 128 The nly exceptins t this are if either: the Reprtable Persn is tax-resident in a jurisdictin that des nt issue either TINs r a functinal equivalent (r has nt had either a TIN r a functinal equivalent issued t them); r the Reprtable Persn is tax-resident in a jurisdictin that des nt require the cllectin f TINs. It is expected that a Reprting NZFI wuld keep a recrd f the steps that it undertakes t btain TINs in such circumstances and the evidence f hw thse plicies and prcedures are fllwed. 129 This will assist Inland Revenue in mnitring cmpliance and, in particular, determining whether the Reprting NZFI has made reasnable effrts t btain TINs in such circumstances. A prcedural manual describing apprpriate reasnable effrts can be a recrd describing the steps undertaken prvided there is als evidence as t hw thse plicies and prcedures are fllwed. In the case f a mail merge, fr example, this wuld nt require a Reprting NZFI t keep actual cpies f the letters sent, but it must be able t prvide, upn request, the 127 See page 130 f the CRS Cmmentary. 128 See page 103 f the CRS Cmmentary. 129 See page 209 f the CRS Cmmentary. IN CONFIDENCE Page 100 f 165

101 dcument that cntains the infrmatin that is the same in each versin and the data file where the unique infrmatin is stred Penalties regime This guidance will nw, having utlined the bligatins Reprting NZFIs have t carry ut CRS due diligence (including recrd keeping) and reprting, set ut the penalties regime that will apply if there is nn-cmpliance. Sectin IX(A)(5) f the CRS prvides that implementing jurisdictins (such as New Zealand) are required t have rules and administrative prcedures in place t ensure effective implementatin f, and cmpliance with, the CRS due diligence and reprting prcedures. Therefre, a cmprehensive suite f bligatins and penalties have been intrduced t assist with achieving CRS cmpliance and t address nn-cmpliance. These bligatins cver: Reprting NZFIs; and accunt hlders (and ther persns cnnected with accunts such as intermediaries that hld funds fr ther persns, and cntrlling persns). The specific types f penalties are utlined in detail further belw. Sme f these penalties als apply fr the purpses f FATCA, where similar cmpliance issues arise. 9.1 Penalties regime financial institutins In brief terms, financial penalties will apply t Reprting NZFIs that fail t undertake their due diligence bligatins, fail t reprt the requisite infrmatin, reprt inaccurate r false infrmatin, r breach their recrd keeping bligatins. This includes: civil abslute liability penalties; civil penalties fr failing t take reasnable care; and criminal knwledge-based penalties. These penalties are all mutually exclusive. Fr example, if a penalty is impsed n a Reprting NZFI fr a failure t take reasnable care an additinal abslute liability penalty wuld nt be able t be impsed fr that same failure. This guidance nw utlines hw these financial institutin penalties wuld apply in practice Civil abslute liability penalties A Reprting NZFI that des nt cmply with its CRS bligatins culd (depending n the circumstances) be liable fr the fllwing abslute liability penalties: 130 See page 209, at sectin 9 f the CRS Cmmentary. IN CONFIDENCE Page 101 f 165

102 Sectin 142H(1) f the Tax Administratin Act 1994: $300 per failure (capped at $10,000 per reprting perid) t cmply with any CRS bligatin (ther than failing t btain a selfcertificatin fr a new accunt see belw). This will be subject t the fllwing defences: that the failure was due t circumstances beynd the Reprting NZFI s cntrl; and fr a transitinal perid ending 30 June 2019, that the Reprting NZFI made reasnable effrts t meet its CRS requirements (including making reasnable effrts t crrect any failure within a reasnable perid f time after becming aware f the failure). Sectin 142H(3) f the Tax Administratin Act 1994: $300 per accunt (capped at $10,000 per reprting perid) fr failure t btain a required self-certificatin n accunt pening. This will be subject t the fllwing defence: fr a transitinal perid ending 30 June 2019, that the Reprting NZFI made reasnable effrts t meet its CRS requirements (including making reasnable effrts t crrect any failure within a reasnable perid f time after becming aware f the failure). The expressins reasnable effrts and reasnable perid are nt explicitly defined in the CRS r dmestic tax legislatin. As a general guideline, reasnable is what is fair, prper r apprpriate in the circumstances. The reasnableness cncept can als be fund in the CRS due diligence prcedures as well as being a familiar legal cncept. Fr example, in the CRS a Reprting NZFI: cannt rely n dcumentary evidence r a self-certificatin that it has reasn t knw is incrrect r unreliable; 131 must undertake a reasnableness review f all new accunt self-certificatins; 132 and must make reasnable effrts t btain TINs (r functinal equivalent) 133 and date f birth infrmatin fr pre-existing accunts (ie f relevant freign tax residents that hld r cntrl such accunts) within tw years f the end f the reprting perid when an accunt is identified as being held r cntrlled by a Reprtable Persn. The CRS Cmmentary prvides guidance f what is reasnable in this cntext. 134 In simple terms, reasnable effrt and reasnable perid shuld be assessed in terms f what a prudent Reprting NZFI wuld cnsider apprpriate in the same r similar circumstances. As assessment f whether a Reprting NZFI has made reasnable effrts r rectified an errr within a reasnable perid f time will depend n matters such as the nature f the failure/errr (including whether reasnable prcedures were in place) and hw difficult it wuld be t rectify the errr. What may cnstitute reasnable effrts may als depend n the type f accunt (ie preexisting r new). Fr example, the CRS Cmmentary acknwledges (at page 103, sectin 28) 131 See pages 149 t 152 f the CRS Cmmentary. 132 See page 133 f the CRS Cmmentary. 133 This is subject t the varius exceptins utlined abve (fr example, the exceptins set ut at sectin ). 134 See pages 102 t104 f the CRS Cmmentary. IN CONFIDENCE Page 102 f 165

103 that reasnable effrts in the cntext f pre-existing individual accunt due diligence wuld nt necessarily invlve the Reprting NZFI clsing, blcking r transferring the accunt, nr cnditining r therwise limiting its use if the Reprting NZFI is unable t btain CRS infrmatin (such as an accunt hlder s TIN). Hwever, the CRS Cmmentary is als clear that a mre rigrus standard is required fr new accunt due diligence. Fr example, page 211 f the CRS Cmmentary sets ut the base expectatin that valid self-certificatins will always be btained fr new accunts. The meaning f reasnable effrts in the defence t the impsitin f penalties under sectin 142H(1) and (3) needs t be read in this cntext (ie a higher standard is required t meet this level f reasnable effrts fr new accunts). This reflects the fact that the Reprting NZFI has mre cntrl fr new accunts. Fr example, it culd simply nt pen an accunt if an accunt hlder fails t prvide a self-certificatin Failure t meet a CRS requirement (ther than btaining a self-certificatin) under sectin 142H(1) A penalty will (subject t the applicatin f the defences) be impsed under sectin 142H(1) f the Tax Administratin Act 1994 fr a failure t cmply with a CRS bligatin (ther than an bligatin t btain a self-certificatin fr a new accunt). The fllwing principles are relevant when determining what cnstitutes a failure in this regard: The CRS is cncerned with Reprting NZFIs btaining and (where relevant) reprting financial accunt infrmatin. In this cntext, a failure under sectin 142H(1) wuld generally be an errr that relates t a single accunt (ie failure t carry ut sufficient due diligence r reprting in relatin t a single accunt). If a Reprting NZFI fails t carry ut due diligence n a particular accunt and, as a result f that errr, des nt reprt the accunt this wuld generally als be cnsidered a single failure (as ppsed t tw failures). This is because the reprting errr is, essentially, a crllary f the due diligence failure. A systemic errr that merely incidentally affects a number f accunts wuld generally cnstitute a single failure. There is a $10,000 cap that will apply fr penalties in a particular perid under sectin 142H(1). Example 1: A Reprting NZFI fails t carry ut due diligence n ne f its pre-existing entity accunts by 30 June 2019 (the deadline fr carrying ut the initial review f such accunts). This wuld cnstitute a failure under sectin 142H(1). The issue f whether a penalty wuld be impsed under sectin 142H(1) wuld be a questin f fact and wuld depend n whether any f the defences apply. Example 2: On 20 June 2018 a Reprting NZFI reprts its CRS infrmatin fr the first reprting perid. The Reprting NZFI s cmputer system has a virus that crrupts 30 f the accunts that it reprts. This means that the Reprting NZFI s reprt cntains errrs related t 30 accunts. This wuld cnstitute a single failure under sectin 142H(1), nt 30 failures. The issue f whether a penalty wuld be impsed under sectin 142H(1) wuld be a questin f fact and wuld depend n whether any f the defences apply. IN CONFIDENCE Page 103 f 165

104 Failure t btain a self-certificatin under sectin 142H(3) A penalty will als be able t be impsed under sectin 142H(3) where a Reprting NZFI fails t btain a self-certificatin fr a new accunt, subject t the reasnable effrts defence ending n 30 June Sectin 142H(3) is specifically wrded s that the failure is n a per accunt basis (ie if there is failure t btain ne r a number f self-certificatins fr a particular accunt a penalty f $300 will apply). There is a $10,000 cap that culd apply fr penalties in a particular perid under sectin 142H(3). Example 1: On 1 September 2017 Bb attempts t pen a depsitry accunt with a Reprting NZFI bank. The Reprting NZFI seeks a self-certificatin frm Bb. Bb des nt prvide a self-certificatin. The Reprting NZFI cmpletes the accunt pening prcess even thugh Bb has nt prvided the required self-certificatin. This includes allwing Bb t depsit NZD 10,000 int the accunt. The CRS prvides (in this regard) that such self-certificatins must always be btained fr new accunts. As nted abve, the OECD has cnfirmed in an answer t a Frequently Asked Questin n the AEOI prtal 135 that self-certificatins must generally be btained at day ne f the accunt pening prcess. Reprting NZFI has failed t btain a self-certificatin frm Bb n his accunt pening (a failure under sectin 142H(3)). The Reprting NZFI culd have simply nt pened the accunt in the first place (ie made the pening f the accunt cntingent n btaining Bb s self-certificatin). The Reprting NZFI s decisin t pen the accunt withut first btaining Bb s self-certificatin was nt a reasnable step. Therefre, the Reprting NZFI has nt made reasnable effrts t btain a self-certificatin frm Bb n accunt pening. Accrdingly, a penalty f $300 culd be impsed n the Reprting NZFI under sectin 142H(3). 136 The Reprting NZFI wuld als be expected t take reasnable steps t cntinue t try t btain the required self-certificatin frm Bb. These reasnable steps culd, depending n the circumstances, invlve needing t clse the accunt if Bb cntinues t refuse t prvide the self-certificatin. This is cnsistent with the expectatin (as utlined abve) that a selfcertificatin will always be btained fr new accunts. The Reprting NZFI shuld als keep a recrd f its failure t btain a self-certificatin. Example 2: On 1 Octber 2017 Camern attempts t pen a depsitry accunt with a Reprting NZFI. The Reprting NZFI seeks a self-certificatin frm Camern. Camern advises that he cannt prvide a self-certificatin n that day because he des nt have all f the infrmatin with him t make the certificatin. The Reprting NZFI infrms Camern that it can undertake accunt pre-pening prcedures (including allcating a number t Camern fr administrative purpses), but that the accunt will nt be pened, and indeed, the accunt pening prcedures cannt be prgressed, until he prvides the self-certificatin (ie the Reprting NZFI infrms Camern that he will nt be able t depsit funds int the accunt This may als invlve a breach f sectin 142H(5), which is utlined belw. If that was the case, a penalty may, therefre, be impsed under sectin 142H(5), instead f sectin 142H(3). IN CONFIDENCE Page 104 f 165

105 and/r make transactins with respect t the accunt until he prvides the certificatin). Camern des nt prvide a self-certificatin. The Reprting NZFI keeps a recrd f Camern s failure t prvide the self-certificatin. The Reprting NZFI has nt btained a self-certificatin frm Camern. Hwever, the Reprting NZFI has nt prceeded with the accunt pening prcess in a material sense. The Reprting NZFI wuld nt be liable fr a penalty f $300 under sectin 142H(3) Civil penalties n financial institutins fr lack f reasnable care A Reprting NZFI that des nt cmply with its CRS bligatins culd (depending n the circumstances) be liable fr a penalty fr lack f reasnable care under sectin 142H(5) f $20,000 fr the first failure and $40,000 fr each further failure (capped at $100,000 per reprting perid). The cncept f reasnable care as applied under New Zealand law shuld be applied. What will amunt t taking reasnable care will be dependent upn the facts and circumstances f each case. As a general guide, it will be determined in the cntext f the degree f cautin and cncern which a prudent Reprting NZFI wuld use in similar circumstances. This is, essentially, the same pint made abve abut what wuld cnstitute reasnable effrts. Example 1: A Reprting NZFI sets up its CRS due diligence prcedures, but des nt build int these prcedures the fact that it is required t carry ut due diligence n its pre-existing entity accunts by 30 June 2019 (the deadline fr carrying ut the initial review and reprting f such accunts). As a result f this, the Reprting NZFI fails t carry ut due diligence n its preexisting accunts by 30 June The Reprting NZFI wuld be liable fr a penalty under sectin 142H(5). A prudent Reprting NZFI wuld have built int its due diligence prcedures the requirement t finish its pre-existing entity accunt due diligence by 30 June The Reprting NZFI wuld be liable fr a penalty f at least $20,000 fr this failure. It is likely that this wuld be cnsidered t be a systemic failure that simply incidentally affects multiple accunts. If this is the case, there wuld be a single failure and penalty (fr that failure) f $20,000. The maximum amunt f penalties that culd be impsed under sectin 142H(5) in a reprting perid is $100, Criminal knwledge-based penalties A Reprting NZFI that knwingly des nt cmply with its CRS bligatins culd (depending n the circumstances) be liable fr a penalty under sectin 143A f the Tax Administratin Act 1994 fr the fllwing types f ffences: knwingly nt keeping dcuments required t be kept by a tax law; knwingly nt prviding infrmatin t the Cmmissiner when required t d s by a tax law. This is subject t a defence that can apply if the persn the Reprting NZFI in this cntext des nt have the infrmatin in its knwledge, pssessin, r cntrl; r IN CONFIDENCE Page 105 f 165

106 knwingly prviding altered, false, incmplete r misleading infrmatin t the Cmmissiner in respect f its CRS bligatins. The penalties that apply fr such ffences, upn cnvictin, are $25,000 fr a first ffence, and up t $50,000 fr subsequent ffences. Example 1: A Reprting NZFI has in place enhanced due diligence prcedures fr pre-existing individual accunts, where the nly indicia is a hld mail instructin r in-care-f address and there is n ther address n file. The Reprting NZFI seeks t btain a self-certificatin frm the accunt hlder t determine their status. The accunt hlder des nt prvide a selfcertificatin. The Reprting NZFI is aware f its bligatins t keep a recrd f a failure t btain a self-certificatin (see sectin 22(2)(1c) f the Tax Administratin Act 1994). Hwever, it decides nt t keep a recrd f the failure. The Reprting NZFI wuld have knwingly failed t keep recrds f the steps it has undertaken, and any evidence it has relied upn, fr the purpses f undertaking its due diligence bligatins under the CRS set ut in part 11B f the Tax Administratin Act Therefre, the Reprting NZFI wuld have knwingly nt kept dcuments required t be kept by a tax law. Accrdingly, a penalty culd be impsed n the Reprting NZFI, upn cnvictin, under sectin 143A f the Tax Administratin Act Penalties regime infrmatin prviders As nted abve, Reprting NZFIs have bligatins t undertake due diligence n their accunts t identify accunts held (and/r, in the case f passive NFEs, cntrlled) by relevant freign tax residents, t cllect prescribed infrmatin abut such persns, and t reprt 137 prescribed identity and financial accunt infrmatin abut thse persns (and accunts) t Inland Revenue 138. Reprting NZFIs are ptentially subject t penalties if they d nt cmply with these bligatins. As part f this due diligence prcess, a Reprting NZFI may (depending n the type f accunt) be required t take the fllwing steps t identify relevant freign tax residents: request self-certificatins and ther infrmatin frm accunt hlders (including a passive NFE accunt hlder abut its status r the status f its cntrlling persns) ie abut whether such accunt hlders/cntrlling persns are relevant freign tax residents; request and btain infrmatin frm a persn acting n behalf f an accunt hlder (eg intermediary r nminee 139 that is nt the accunt hlder) abut the accunt hlder and (if the accunt hlder is a passive NFE) the accunt hlder s cntrlling persns ie abut whether such accunt hlders/cntrlling persns are relevant freign tax residents; and 137 As nted abve, this wuld apply if either the relevant freign tax resident is a Reprtable Persn frm a Reprtable Jurisdictin r the Reprting NZFI therwise chses t adpt the wider apprach t reprting. 138 Reprting NZFIs will als need t reprt undcumented accunts. 139 This wuld apply t thse intermediaries r nminees that are nt financial institutins. IN CONFIDENCE Page 106 f 165

107 request self-certificatins and ther infrmatin frm a cntrlling persn f a passive NFE ie abut whether the cntrlling persn is a relevant freign tax resident. The Reprting NZFI will request this infrmatin s it can determine whether the accunt is held (r cntrlled) by a relevant freign tax resident and btain infrmatin abut such accunts that it may need t reprt. [Inland Revenue has prduced tax residence guidance that may assist persns that are unsure as t where they are tax resident. This guidance can be fund at the fllwing link Please nte that a persn that is ptentially bth a New Zealand tax resident and a freign tax resident will need t cnsider whether any tie-breaker rules (in any relevant duble tax agreement) apply t determine whether r nt they are freign tax residents.] Therefre, accunt hlders, intermediaries/nminees, and cntrlling persns will smetimes be asked t btain and/r prvide infrmatin (generally abut whether they r the persns they hld funds fr are freign tax residents) t assist a Reprting NZFI t carry ut its due diligence. This will ften be by way f a self-certificatin (particularly fr new accunts). A selfcertificatin will generally invlve such persns signing r therwise affirming whether they (r persns that they hld funds fr) are relevant freign tax residents. The persns (wh will need t btain and/r prvide infrmatin - abut their tax residency and/r the tax residency f persns that they hld funds fr) will be referred t as infrmatin prviders fr the purpses f the fllwing guidance. Varius requirements have been intrduced int the Tax Administratin Act 1994 fr infrmatin prviders t btain and/r prvide such infrmatin. The plicy basis fr these requirements is as fllws: t require infrmatin prviders t btain and prvide such infrmatin t assist Reprting NZFIs t btain the infrmatin that they are required t reprt t Inland Revenue fr exchange; and these requirements are an acknwledgement f the fact infrmatin prviders ften cntrl the infrmatin (r at least can take reasnable steps t btain this infrmatin) that the Reprting NZFI is required t btain. These requirements n infrmatin prviders will apply fr the purpses f bth CRS and FATCA. The requirements are set ut in sectin 185P f the Tax Administratin Act 1994 as fllws: 1. This sectin applies t a persn r entity assciated with a financial accunt if the financial institutin that maintains the financial accunt is required under the FATCA agreement r CRS applied standard (the accunt requirements) t perfrm due diligence fr the financial accunt. 2. When a financial institutin requests a persn r entity (the institutin cntact) t prvide infrmatin r a self-certificatin that the financial institutin is required t btain under the accunt requirements fr the financial accunt, the institutin cntact must: a. prvide t the financial institutin the required infrmatin r self-certificatin fr the institutin cntact; and IN CONFIDENCE Page 107 f 165

108 b. make reasnable effrts t btain the required infrmatin r self-certificatin fr each ther persn r entity assciated with the financial accunt, and prvide the infrmatin and self-certificatins t the financial institutin. 3. When a persn r entity assciated with the financial accunt (the secndary cntact) is asked by an institutin cntact r ther persn r entity (the requesting persn) t prvide infrmatin r self-certificatins related t the financial accunt and referred t in subsectin (2)(b), the secndary cntact must: a. prvide the requesting persn with the required infrmatin r self-certificatin fr the secndary cntact; and b. make reasnable effrts t btain the required infrmatin r self-certificatin fr each ther persn r entity assciated with the financial accunt and the secndary cntact, and prvide the infrmatin and self-certificatins t the requesting persn. 4. If a persn r entity prvides infrmatin r a self-certificatin t anther persn r entity as required by this sectin, the persn r entity must infrm the ther persn r entity f any material change in circumstances affecting that infrmatin r selfcertificatin within a reasnable time f becming aware f the material change. Inland Revenue has prduced an accunt hlder brchure (IR1033) which summarises these requirements. This brchure can be fund at Civil penalties If an infrmatin prvider des nt cmply with these requirements they can be subject t a penalty under sectin 142I f the Tax Administratin Act 1994 f $1,000 (subject t varius defences, utlined belw) fr the fllwing ffences, which will apply fr bth CRS and FATCA purpses: prviding false infrmatin, ther than a self-certificatin, relating t the infrmatin prvider r t anther persn r entity; signing r therwise affirming a false self-certificatin fr the infrmatin prvider; prviding a false self-certificatin fr anther persn r entity; failing t prvide infrmatin, ther than a self-certificatin, relating t the infrmatin prvider within a reasnable time after receiving a request fr the infrmatin; failing t sign, r therwise affirm, and prvide a self-certificatin related t the infrmatin prvider within a reasnable time after receiving a request; failing t prvide infrmatin, ther than a self-certificatin, relating t anther persn r entity within a reasnable time after receiving a request; failing t prvide a self-certificatin relating t anther persn r entity within a reasnable time after receiving a request bliging the self-certificatin t be prvided; and IN CONFIDENCE Page 108 f 165

109 after prviding a persn r entity with a self-certificatin r ther infrmatin, failing t infrm the persn r entity f a material change in the circumstances relating t the selfcertificatin r infrmatin within a reasnable time after becming aware f the change. Defences The abve penalties are subject t the fllwing defences: a n fault defence where the infrmatin is within the cntrl f the infrmatin prvider, but where the infrmatin prvider is nt at fault; and a reasnable effrts defence where the infrmatin relates t anther persn r entity and is nt within the cntrl f the infrmatin prvider (eg an intermediary acting n behalf f an accunt hlder) and the infrmatin prvider has made reasnable effrts t btain and prvide the infrmatin. Example 1: A Reprting NZFI undertakes new entity accunt due diligence n a family trust accunt hlder and btains a self-certificatin frm the trust that it is a passive NFE. The Reprting NZFI then asks the trust t btain self-certificatins frm its cntrlling persns as t whether any such persns are relevant freign tax residents. In turn, the trust asks fr selfcertificatins frm its cntrlling persns as t their tax residency. One mandatry beneficiary (a cntrlling persn) des nt prvide a self-certificatin f their tax residency, even thugh they are able t prvide this infrmatin. The mandatry beneficiary will be subject t a penalty f $1,000 under sectin 142I(f) fr refusing t prvide a self-certificatin. The beneficiary has n defence as they are at fault. The passive NFE wuld nt be subject t such a penalty. This is because it has made reasnable effrts t btain the requisite self-certificatin frm the beneficiary. Example 2: A Reprting NZFI maintains a pre-existing entity accunt held by a trust. The Reprting NZFI tries t ring the trustee s New Zealand land line t btain a self-certificatin as t whether the trust is a passive NFE. The trustee is n a six-mnth hliday in Eurpe, s des nt respnd t the call, and has left n frwarding cntact details. The trustee is nt at fault and wuld nt be liable fr a penalty fr failing t prvide a selfcertificatin Criminal knwledge-based penalties Infrmatin prviders can als be subject t criminal penalties under sectin 143A f the Tax Administratin Act 1994 if they: knwingly fail t prvide infrmatin t anther persn when required t d s under Part 11B. (This is subject t a defence that wuld apply in certain circumstances where the persn des nt have the infrmatin in their knwledge, pssessin r cntrl); r knwingly prvide altered, false, incmplete r misleading infrmatin t anther persn in respect f a matter r thing relating t a requirement in Part 11B. The penalties that wuld apply fr such ffences, upn cnvictin, are $25,000 fr a first ffence, and up t $50,000 fr subsequent ffences if cnvicted f the ffences listed abve. These penalties apply fr bth CRS and FATCA purpses. IN CONFIDENCE Page 109 f 165

110 Example 1: A Reprting NZFI asks a passive NFE accunt hlder t cnfirm whether any f its cntrlling persns are relevant freign tax residents. The accunt hlder, in turn, asks its cntrlling persns t prvide such infrmatin t it. One f the cntrlling persns (fr example, a settlr) has this infrmatin but deliberately des nt respnd t the accunt hlder s request. The cntrlling persn wuld be guilty f a knwledge ffence under sectin 143A upn cnvictin. The penalties that wuld apply fr such ffences, upn cnvictin, are $25,000 fr a first ffence, and up t $50,000 fr subsequent ffences. 10 CRS requirement t have an avidance prvisin As nted abve, sectin IX(A)(1) f the CRS requires that implementing jurisdictins (such as New Zealand) have rules t prevent financial institutins, persns r intermediaries frm adpting practices intended t circumvent the CRS due diligence and reprting prcedures. The CRS Cmmentary n the applicatin f sectin IX states that the frm f the CRS antiavidance rule is nt imprtant as lng as the rule is effective t prevent circumventin f the CRS reprting requirements and the due diligence prcedures. 140 The CRS Cmmentary prvides that an implementing jurisdictin s anti-avidance rule needs t cver arrangements such as: 141 Example 1 (Shift maintenance f an accunt): A Reprting Financial Institutin advises a custmer t maintain an accunt with a related entity in a nn-participating jurisdictin that enables the Reprting Financial Institutin t avid reprting while ffering t prvide services and retain custmer relatins as if the accunt was maintained by the Reprting Financial Institutin itself. In such a case, the Reprting Financial Institutin shuld be cnsidered t maintain the accunt and have the resulting reprting and due diligence requirements. Example 2 (Year-end amunts): Financial Institutins, individuals, entities r intermediaries manipulate year-end amunts, such as accunt balances, t avid reprting r being reprted n. Example 3 (Park mney with qualified credit card issuers): Individuals r entities park balances frm ther reprtable accunts with qualified credit card issuers fr a shrt perid at the end f the year t avid reprting. Example 4 (Electrnic recrds and cmputer systems): A Reprting Financial Institutin deliberately des nt create any electrnic recrds (such that an electrnic recrd search wuld nt yield any results) r maintains cmputerised systems artificially dissciated (t avid the accunt aggregatin rules). The cmmn theme in each f these examples is that an arrangement has been entered int t circumvent the CRS due diligence and reprting bligatins. This is an imprtant part f the backgrund cntext t the fllwing guidance. 140 See page 208 f the CRS Cmmentary. 141 See page 208 f the CRS Cmmentary. IN CONFIDENCE Page 110 f 165

111 10.1 New Zealand s anti-avidance prvisin In rder t meet the OECD s expectatins set ut in sectin IX f the CRS, a specific antiavidance rule has been intrduced int sectin 185R f the Tax Administratin Act This prvisin will have applicatin fr bth CRS and FATCA purpses. Sectin 185R (1) prvides that if a main purpse f a persn in entering an arrangement is t avid a requirement under this part (Part 11B)), the arrangement is treated as having n effect in relatin t the persn s requirements under this part (Part 11B). Part 11B is the subpart f the Tax Administratin Act 1994 that cntains the fllwing requirements: the FATCA and CRS due diligence and reprting requirements f NZFIs; 142 and the infrmatin cllectin and prvisin requirements applicable t persns r entities cnnected with a financial accunt (infrmatin prviders), t assist NZFIs in carrying ut their FATCA and CRS due diligence and reprting bligatins. Sectin 185R(2) prvides that when an arrangement has been vided (as having n effect) under sectin 185R(1) (the anti-avidance rule discussed abve) the persn has the requirements under Part 11B that the Cmmissiner cnsiders apprpriate in the absence f the arrangement. This sectin allws the Cmmissiner t recnstruct the avidance arrangement t ensure that the CRS requirements are best cmplied with. This guidance nw utlines the fllwing matters that are relevant t sectin 185R(1): what cnstitutes an arrangement under sectin 185R(1); and what is meant under sectin 185R(1) by a main purpse f a persn (in entering int such an arrangement) being t avid a requirement that they have under Part 11B What cnstitutes an arrangement under sectin 185R(1) The term arrangement is bradly defined in the dmestic cntext 143 t mean an agreement, cntract, plan, r undertaking, whether enfrceable r unenfrceable, including all steps and transactins by which it is carried int effect. The sectin YA 1 arrangement definitin als applies t sectin BG 1 f the Incme Tax Act 2007, and the same definitin is used in sectin 76 f the Gds and Services Tax Act 1985 the general anti-avidance prvisins applying t incme tax and GST respectively. This brad definitin, as interpreted by New Zealand curts and in the avidance cntext, shuld be applied when applying sectin 185R(1) f the Tax Administratin Act 1994 as this prvisin des nt prvide a specific alternate definitin fr the term. 142 These bligatins are set ut in sectins 185E t185o f the Tax Administratin Act Refer t sectin YA 1 Incme Tax Act 2007 fr the definitin f the term arrangement. IN CONFIDENCE Page 111 f 165

112 10.3 What is meant by a main purpse f a persn in entering int such an arrangement being t avid a requirement under Part 11B Sectin 185R(1) f the Tax Administratin Act 1994 wuld apply if a persn (r entity) enters int such an arrangement with a main purpse f aviding a requirement under Part 11B. Such an arrangement wuld be treated as having n effect in relatin t the persn s requirements under Part 11B. As nted abve, Part 11B is the subpart f the Tax Administratin Act 1994 that cntains the fllwing requirements: the FATCA and CRS due diligence and reprting requirements f NZFIs 144 that have FATCA and CRS due diligence and reprting bligatins; and the infrmatin cllectin and prvisin requirements applicable t persns r entities cnnected with a financial accunt, t assist NZFIs in carrying ut their FATCA and CRS due diligence and reprting bligatins. Sectin 185R(1) wuld apply if a persn entered int an arrangement with a main purpse f aviding such a requirement. There are sme imprtant pints t highlight here: the avidance purpse need nly be a main purpse f a persn in entering int the arrangement. It des nt need t be the persn s nly purpse; and it is the avidance purpse f a persn in entering int the arrangement that is relevant, nt the purpse f the arrangement. Determining a main purpse f the arrangement If such a persn enters int an arrangement with a main purpse f aviding their requirements under part 11B f the Tax Administratin Act 1994 the arrangement wuld have n effect in relatin t thse requirements. Fr example, if a persn r entity 145 assciated with a financial accunt (such as the accunt hlder) entered int an arrangement with a main purpse f aviding a requirement t prvide required infrmatin abut the accunt t the Reprting NZFI, that arrangement wuld have n effect (wuld be vid) in relatin t that persn s requirements under Part 11B. The reference t a main purpse (in this cntext) wuld cver a substantial purpse. This wuld be a higher threshld than when such avidance is merely incidental (ie a mere result f due diligence and reprting nt applying wuld nt, in and f itself, be enugh fr sectin 185R(1) t apply). 144 These bligatins are set ut in sectins 185E t 185O f the Tax Administratin Act The prpsed sectin 185Q f the Tax Administratin Act 1994 wuld apply t the extent that the entity is nt a persn. IN CONFIDENCE Page 112 f 165

113 The avidance purpse need nly be a main purpse Sectin 185R(1) als refers t a main purpse f avidance, s that it is nt a requirement t the sectin applying that the avidance purpse be the sle purpse r the main purpse. An arrangement might be entered int with several main purpses. Prvided ne f thse main purpses is the avidance f a requirement, then sectin 185R(1) can apply t vid the arrangement in relatin t the persn s requirements The avidance purpse f a persn Sectin 185R(1) refers t a main purpse f a persn in entering int an arrangement (being t avid a requirement they have under Part 11B). This is a subjective test t be viewed frm the perspective f the persn entering int the arrangement. Hwever, the Cmmissiner is permitted t test the veracity f an asserted subjective purpse by cnsidering bjective evidence. Example 1: A Reprting NZFI bank maintains an accunt held by Tm. Tm wants t mve t Australia. Tm pens anther accunt in Australia. Tm calls the bank t clse the accunt and instructs the bank t transfer the funds t Australia. This arrangement, wuld n the face f the facts prvided, nt be avidance under sectin 185R(1). This is because the arrangement is clearly entered int because f Tm mving t Australia. It is nt an arrangement entered int with a main purpse f aviding CRS due diligence and reprting. The fact that the arrangement wuld mean that the Reprting NZFI wuld nt need t carry ut any nging due diligence in the future n the accunt wuld nt by itself cnstitute avidance under sectin 185R(1). Instead, any such avidance appears t merely be an incidental effect f the arrangement. This can be easily cntrasted with the fur examples f avidance set ut in the CRS Cmmentary (referred t abve), which clearly invlve arrangements entered int with a main purpse f aviding CRS and where such avidance is a driver f the arrangement. Example 2: A Reprting NZFI maintains an accunt held by Steve. Steve is a freign tax resident frm a Reprtable Jurisdictin. Steve des nt want t be reprted n fr CRS purpses because he has nt paid tax in his jurisdictin f tax residence n his freign investments. The Reprting NZFI ffers a service f relcating Steve s accunts t a related entity resident in a jurisdictin that is nt a Participating Jurisdictin, s that Steve will be able t avid being reprted n fr CRS purpses. Steve accepts the Reprting NZFI s ffer. He is nt mving t the jurisdictin that is nt a Participating Jurisdictin. Hwever, he wants t mve his accunts t that jurisdictin, s that he will nt be reprted fr CRS purpses. This arrangement wuld be avidance under sectin 185R(1). Clearly, a main purpse f Steve and the Reprting NZFI entering int the arrangement is t avid CRS reprting. This cnclusin is supprted by the backgrund cntext t sectin 185R(1). The arrangement is very similar t example 1 in the CRS Cmmentary (referred t abve). This is precisely the type f arrangement that is intended t be captured by this prvisin. Example 3: The same facts as example 2 abve. Hwever, the related entity in the jurisdictin that is nt a Participating Jurisdictin is able t prvide financial accunts which prvide a rate f return slightly higher than the New Zealand accunts wuld. Steve asserts that a main purpse fr relcating the accunts int a jurisdictin that is nt a Participating Jurisdictin was t derive a better rate f return. IN CONFIDENCE Page 113 f 165

114 Sectin 185R(1) wuld still be applicable because Steve and the Reprting NZFI still entered int an arrangement with a main purpse f aviding a CRS requirement. This is the case even thugh there is arguably a cmmercial purpse fr the decisin as well Recnstructin As nted abve, sectin 185R(2) f the Tax Administratin Act 1994 prvides that when an arrangement has been vided (as having n effect) under s185r(1) the persn has the requirements under Part 11B that the Cmmissiner cnsiders apprpriate in the absence f the arrangement. This sectin allws the Cmmissiner t recnstruct the avidance arrangement t ensure that the CRS requirements are best cmplied with. Example: A Reprting NZFI advises a custmer t shift an accunt t a related entity in a jurisdictin that is nt a Participating Jurisdictin with a main purpse f aviding the CRS due diligence and reprting bligatins. The Cmmissiner culd cnsider the Reprting NZFI as nnetheless maintaining the accunt and therefre cntinuing t have the resulting CRS reprting and due diligence bligatins. 11 Applicatin f CRS t particular types f entities and structures 11.1 Trusts Overview The fllwing guidance prvides a high-level summary f hw the CRS applies t trusts. A trust is a fiduciary relatinship where prperty is settled by a settlr n a trustee wh acts and hlds the prperty fr the benefit f specified beneficiaries (usually in terms f a trust deed). Such trusts are ften referred t as express trusts. A discretinary trust is a cmmn example f an express trust. A prtectr may als be appinted in cnnectin with a trust. A prtectr s rle is t ensure that the trustee acts in accrdance with their pwers as authrised in the trust deed. A trust is defined in sectin VIII(E)(3) f the CRS as being an entity. All trusts will be entities irrespective f whether they are revcable r irrevcable. The fact that a trust is an entity 146 fr CRS purpses means that a trust will either be a: financial institutin (cmmnly as an investment entity); r NFE (passive NFE r active NFE). If a trust is a Reprting NZFI (Reprting NZFI) it will have CRS due diligence and reprting bligatins in New Zealand. The Reprting NZFI trust 147 will ptentially be subject t penalties if it fails t cmply with these bligatins. 146 In cntrast, an individual cannt be a financial institutin. IN CONFIDENCE Page 114 f 165

115 If a trust is a NFE that hlds a financial accunt with a Reprting NZFI it will be subject t due diligence (and pssibly reprting) by that Reprting NZFI in New Zealand. The NFE trust will (as part f this prcess) have bligatins t prvide self-certificatins and ther infrmatin (n request) t the Reprting NZFI t assist the NZFI with its wn due diligence. If the NFE trust is a passive NFE, this will include prviding details f its cntrlling persns t the Reprting NZFI. The NFE trust 148 will ptentially be subject t penalties if it fails t prvide this infrmatin. A trust (is an "entity" under the CRS) Financial Institutin (cmmnly knwn as an Investment Entity) Nn-financial Entity (NFE) Passive NFE (subject t lkthrugh requirements) Active NFE This part f the guidance fcuses n three key areas. First, it utlines the circumstances when a trust will be a Reprting NZFI with due diligence and reprting bligatins in New Zealand. This part will address the fllwing pints: when will a trust be a financial institutin ; when will a trust be a New Zealand financial institutin (NZFI); when will a trust be a Reprting NZFI; and what will a Reprting NZFI trust s due diligence and reprting bligatins be? The secnd part f this guidance deals with the circumstances when a NFE trust hlds an accunt with a Reprting NZFI and is subject t due diligence (and ptentially reprting) by that 147 Sectin 185Q f the Tax Administratin Act 1994 sets ut hw penalties wuld apply fr thse entities that are nt persns. Fr a trust, such penalties will be impsed n each trustee. 148 Sectin 185Q f the Tax Administratin Act 1994 sets ut hw penalties wuld apply fr thse entities that are nt persns. Fr a trust, such penalties will be impsed n each trustee. IN CONFIDENCE Page 115 f 165

116 Reprting NZFI. This part f the guidance als utlines the bligatins that the trust (and smetimes cntrlling persns f the trust) will have t prvide self-certificatins and ther infrmatin t assist the Reprting NZFI in carrying ut this due diligence. The third part f the guidance prvides a high-level summary f hw the CRS will apply t the fllwing types f trusts: family trusts; charitable trusts; freign trusts; and slicitrs trust accunts When will a trust be a Reprting New Zealand Financial Institutin? A trust will be a Reprting NZFI if: it is a financial institutin ; it is a New Zealand financial institutin (NZFI); and it is a Reprting NZFI. This guidance nw explains all f these building blcks t set ut the circumstances when a trust will be Reprting NZFI When will a trust be a financial institutin? A financial institutin is defined in the CRS as cvering the fllwing types f entities: a depsitry institutin; a custdial institutin; an investment entity; r a specified insurance cmpany. These types f financial institutin are utlined in detail in sectin 3.1 f this guidance. They generally require that the entity carries n a particular type f business fr custmers (such as a bank depsitry business fr custmers). Hwever, as explained further belw, an entity (such as a trust) can be a managed investment entity even if it des nt carry n a business fr custmers. IN CONFIDENCE Page 116 f 165

117 The fllwing chart prvides a high-level summary f the circumstances when a trust will be a financial institutin: Step Yes N 1 Des the trust carry n a business G t step 2 G t Step 3 fr custmers? 2 Is the trust any f the fllwing financial institutins? an in business investment entity that is nt excluded frm the definitin f the investment entity ; r anther type f financial institutin? 3 Des the trust meet all f the fllwing: is it managed by a financial institutin; 149 is its grss incme primarily attributable t investing, reinvesting r trading in financial assets 150 ; and is it nt excluded frm the definitin f investment entity? The trust is an in business financial institutin The trust is a managed investment entity financial institutin G t Step 3 The trust is a NFE The type f financial institutin that is mst likely t apply t trusts is the investment entity categry. Therefre, the fllwing guidance fcuses n this categry. A trust will be an investment entity in the fllwing circumstances: 151 if it is an in business investment entity; r if it is a managed investment entity. When will a trust be an in business investment entity? A trust will be an "in business" investment entity if it primarily cnducts as a business the fllwing specified investment activities fr custmers: trading in mney market instruments, freign exchange, exchange, interest rate and index instruments, transferable securities, r cmmdities futures trading; individual and cllective prtfli management; r therwise investing, administering r managing financial assets r mney n behalf f persns. A trust will be treated as primarily cnducting as a business these specified investment activities fr custmers if its grss incme frm these activities equals r exceeds 50% f the trust s grss incme ver the fllwing specified perid: The shrter f: 149 Hwever, the managing financial institutin cannt itself be a managed investment entity. 150 The specified perid that is used t determine whether this grss incme test is satisfied is set ut at sectin Hwever, an active NFE cming within sectin VIII(D)(9)(d)-(g) f the CRS is excluded frm being an investment entity. This exclusin is unlikely t apply t trusts, s will nt be cnsidered here. Hwever, readers shuld refer t the definitin f active NFE in Appendix 4 fr further detail abut this exclusin. IN CONFIDENCE Page 117 f 165

118 the three-year perid ending n 31 March f the perid preceding the perid in which the determinatin is made; r the perid during which the entity has been in existence. The fllwing types f trusts wuld generally be in business investment entities: a unit trust; a cllective investment vehicle cnstituted as a trust; and a managed investment scheme (under the Financial Markets Cnduct Act 2013) cnstituted as a trust. Other cmmn frms f trusts, such as family trusts, wuld generally nt carry n a business fr custmers. Hwever, as explained belw, they culd still (depending n the circumstances) be managed investment entities. Example: Trevr Funds is a managed investment scheme that carries n as its business cllective prtfli activities fr custmers. It derived all f its incme frm such activities ver the specified perid. Is it an in business investment entity? Yes. Trevr Funds carried ut specified investment activities fr custmers (cllective prtfli management) and derived its incme primarily frm such activities ver the specified perid. Therefre, it is an in business investment entity. When will a trust be a managed investment entity? The secnd type f investment entity is a managed investment entity. A trust will be a managed investment entity if: it derives its incme primarily (50% r mre) frm investing, reinvesting r trading in financial assets ver the specified perid; and it is managed by a financial institutin (ther than a managed investment entity). This then raises the fllwing questins: what is a financial asset ; and what des managed mean? What is the meaning f financial asset? The term financial asset is generally intended t encmpass any asset that may be held in an accunt. Sme examples f assets that wuld be financial assets are: shares; bnds; IN CONFIDENCE Page 118 f 165

119 debentures; and mney. Hwever, the term financial asset des nt include a nn-debt direct interest in real prperty; r a cmmdity that is a physical gd, such as wheat. What is the meaning f being managed by a financial institutin? An entity will be regarded as managed by anther financial institutin (that perfrms specified investment activities fr it) where that financial institutin has discretinary authrity t manage the entity s assets (either in whle r in part.) A financial institutin trustee will generally manage a trust (in this regard). A trustee may als utsurce management f the trust s assets (either in whle r part). Fr example, where the trustee f a family trust sets the parameters within which a fund manager can invest sme r all f the trust s assets, but gives the fund manager full discretin t invest within thse parameters, the trust s assets will be managed by the fund manager. Hwever, where the trustee retains full cntrl ver the investment decisins and the fund manager simply acts n instructin frm the trustee withut discretin, the assets will nt be managed by the fund manager. Furthermre, if a financial institutin merely prvides advice t an entity, this will nt be sufficient by itself t mean that the financial institutin manages the entity. It is the discretinary authrity t manage the entity s assets (either in whle r in part) that is crucial. An entity may be managed by a mix f ther entities and individuals. If any f the persns invlved in the management f the entity is a financial institutin, then the entity will be regarded as managed by that financial institutin. The residence f the financial institutin manager is nt relevant in this regard. This part f the definitin f managed investment entity simply requires that the manager is a financial institutin (ie it des nt specify where that institutin needs t be resident). Example 1: 152 A trust set up in New Zealand has the fllwing investments: shares under discretinary investment with a financial institutin fund manager (a prvider f discretinary investment management services DIMS prvider); and a rental prperty. The trust derived 80% f its incme frm the shares (financial assets) ver the specified perid. The trust derived the ther 20% f its incme frm the rental prperty. Is the trust a managed investment entity? 152 It is assumed fr the purpses f this example that nne f the exceptins in the definitin f investment entity are applicable. These exceptins are referred t at sectin IN CONFIDENCE Page 119 f 165

120 Yes: The trust derived its incme primarily (50% r mre) frm financial assets (shares) ver the specified perid. The trust s assets are als managed (in part) by a financial institutin (the Reprting NZFI fund manager DIMS prvider). Therefre, the trust is a managed investment entity financial institutin. Example 2: The facts are the same as example 1. Hwever, the trust decides t acquire three mre rental prperties. The trust nw derives 60% f its incme frm rental prperties (and 40% frm the shares). Is the trust a managed investment entity? N: The trust derived its incme primarily frm direct interests in real prperty (nt financial assets). Therefre, the trust is nt a managed investment entity. Example 3: A trust has assets that cmprise a share prtfli and the family hme. The trust has tw individual trustees, ne f which has been empwered t manage the trust s assets. The trust des nt utsurce any management f its assets t any financial institutin. The trust derives its incme primarily frm the shares. Is the trust a managed investment entity? N: The trust is managed by an individual trustee an individual is nt an entity under the CRS. It fllws that the trustee cannt be a financial institutin under the CRS. The trustee als des nt utsurce any management t any financial institutin. Therefre, the trust is nt a managed investment entity. Example 4: 153 A trust hlds shares in varius prperty funds. The prperty funds, in turn, hld interests in real prperty lcated in Australia. The trust rganises fr a financial institutin prvider f discretinary investment management services (DIMS prvider) t have authrity t manage these shares. The trustee prvides that financial institutin DIMS prvider with discretinary authrity t buy and sell shares in such prperty funds subject t an agreed mandate. The trust earns all f its incme frm investing in such shares ver the specified perid (ie receiving dividends frm thse investments). Is the trust a managed investment entity? Yes. The trust s incme is primarily attributable t the shares (financial assets). The trust is als managed by the financial institutin DIMS prvider. Therefre, the trust is a managed investment entity financial institutin When will a trust be a New Zealand financial institutin? This guidance has utlined the circumstances when a trust will be a financial institutin. It nw sets ut the circumstances when a financial institutin trust will be a New Zealand financial institutin trust. 153 It is assumed fr the purpses f this example that nne f the exceptins in the definitin f investment entity are applicable. These exceptins are referred t at sectin IN CONFIDENCE Page 120 f 165

121 A financial institutin trust will generally be resident in New Zealand fr CRS purpses, and, therefre, a NZFI, if it has ne r mre trustees that are tax-resident in New Zealand. 154 Hwever, the exceptin t this is if the trust is tax resident in anther Participating Jurisdictin and reprts all the infrmatin required t be reprted under the CRS with respect t reprtable accunts maintained by the trust t that jurisdictin because it is a tax resident in that jurisdictin. Example 1: A financial institutin trust has a single trustee wh is tax-resident in New Zealand. Is the financial institutin trust a New Zealand financial institutin? Yes: The general rule is that a financial institutin trust will be resident in New Zealand fr CRS purpses if it has a trustee that is tax-resident in New Zealand. The general rule applies t these facts. Example 2: The facts are the same as example 1. Hwever, the financial institutin trust cntracts an verseas fund manager t manage sme f its assets. Is the financial institutin trust a New Zealand financial institutin? Yes: The fact that the trust has an verseas fund manager is irrelevant t whether r nt it is a New Zealand financial institutin. Instead, as nted abve, it is the trustee s jurisdictin f tax residence, which is the crucial pint. Example 3: The facts are the same as example 1 except fr the fllwing. The financial institutin trust als has a trustee in jurisdictin B (a Participating Jurisdictin). The trustee reprts all f the CRS infrmatin fr the trust in jurisdictin B because the trust is tax-resident in that jurisdictin. Is the financial institutin trust a New Zealand financial institutin? N: The exceptin applies here. The trust s cnnectin t New Zealand is negated by the reprting verseas (in jurisdictin B). This then raises the questin f when a NZFI trust will be a Reprting NZFI When will a trust be a Reprting NZFI? A NZFI trust will a Reprting NZFI (by default), unless it is a Nn-Reprting NZFI. The types f Nn-Reprting NZFI that culd (depending n the circumstances) apply t trusts are: a trustee dcumented trust; a brad participatin retirement fund (if cnstituted as a trust); 154 This CRS trust residency rule des nt apply t unit trusts. Unit trusts are treated as cmpanies fr New Zealand tax purpses. Therefre, New Zealand s tax residence rules that apply t cmpanies will determine when a financial institutin unit trust is resident in New Zealand fr CRS purpses. This is bradly in line with the apprach that applies fr FATCA purpses (see Appendix 1). Therefre, the fllwing guidance shuld be read as referring t thse trusts that are nt unit trusts. IN CONFIDENCE Page 121 f 165

122 a narrw participatin retirement fund (if cnstituted as a trust); a pensin fund f a Gvernment entity, internatinal rganisatin, r Central bank (if cnstituted as a trust); and an exempt cllective investment vehicle (if cnstituted as a trust). These types f Nn-Reprting NZFI are utlined in full in Appendix 6 f this guidance. Hwever, it is useful at this pint t prvide sme detail abut the applicatin f the trustee dcumented trust type, which is likely t be the mst relevant type f Nn-Reprting NZFI fr trusts. The trustee dcumented trust categry prvides that a NZFI trust will be a Nn-Reprting NZFI t the extent that the trustee f the trust is a Reprting Financial Institutin and reprts all f the infrmatin required t be reprted with respect t all reprtable accunts f the trust. Hwever, it is imprtant t nte that if the trustee f a trustee-dcumented trust des nt cmply with these bligatins the financial institutin trust will, therefre, nt be able t benefit frm this exclusin and will be a Reprting NZFI. In ther wrds, where a trustee fails t fulfil any f these bligatins, the trust will be respnsible fr cmpleting due diligence r reprting as a Reprting NZFI. Therefre, essentially, the trust will be reliant n the trustee cmplying with its bligatins (n behalf f the trust) in rder fr the trust itself t have cmplied with the CRS. These pints are further explained n at page 174 f the CRS Cmmentary What are the due diligence and reprting bligatins f Reprting NZFI trusts? This guidance has utlined the circumstances when a trust will be a Reprting NZFI. It nw sets ut the due diligence and reprting bligatins that such Reprting NZFI trusts will have. A Reprting NZFI trust will need t: carry ut due diligence n its financial accunts t identify accunts held (and/r, in the case f passive NFEs, cntrlled) by relevant freign tax residents; and reprt prescribed identity and financial accunt infrmatin t Inland Revenue abut reprtable accunts and undcumented accunts. The Reprting NZFI trust s financial accunts will include the fllwing (assuming that the trust is an investment entity the categry f financial institutin that is mst likely t apply t trusts): debt interests; and equity interests. A trust s debt interest accunt hlders wuld cver anyne that has prvided debt funding t the trust (including thrugh a current accunt held by a beneficiary r thrugh a third party advance). A trust s equity interest accunt hlders wuld cver: the trust s settlrs (irrespective f whether the trust is revcable); IN CONFIDENCE Page 122 f 165

123 the trust s beneficiaries (subject t a special rule fr discretinary beneficiaries utlined further belw); and any ther natural persn that exercises ultimate effective cntrl ver the trust (which wuld, at a minimum, cver the trustee). In brad terms, if these persns are entities the accunt hlders wuld be the natural persns that are cntrlling persns f the entity. A mere discretinary beneficiary will nly have an equity interest if they receive a distributin in a perid (ie this will be the pint when the beneficiary s equity interest accunt will be pened). 155 Similarly, a persn cming within a class f beneficiaries wuld nly have an equity interest if they receive a distributin r intend t exercise vested rights. Example 1: A Reprting NZFI investment entity trust has a settlr (Simn), trustee (Ruth), and discretinary beneficiary (Tm). 156 Tm has nt received a distributin frm the trust. Wh are the trust s equity interest accunt hlders? Simn the settlr; and Ruth the trustee (a natural persn that has ultimate effective cntrl f the trust). Tm is a discretinary beneficiary wh has nt received a distributin. Therefre, he is nt an equity interest accunt hlder. Example 2: The facts are the same as example 1. Hwever, the trustee is a crprate trustee that is cntrlled by Ruth. Wh are the trust s equity interest accunt hlders? The answer is the same as fr example 1. Ruth still hlds an equity interest accunt. This is because, as nted abve, it is necessary t trace thrugh entities cnnected with a financial institutin trust t identify the relevant equity interest accunt hlders f a trust. As nted abve, a Reprting NZFI trust will need t carry ut due diligence n its financial accunts (ie these debt and equity interests) t determine whether thse accunts are held (and/r, in the case f passive NFE accunt hlders, cntrlled) by relevant freign tax residents. The due diligence prcesses that a Reprting NZFI trust will need t adpt (in this regard) are set ut in detail in sectin 5 f this guidance and wuld depend n whether the accunt is a pre-existing accunt (pen n 30 June 2017) r a new accunt (pen n r after 1 July 2017). 155 The OECD has cnfirmed in an answer t a Frequently Asked Questin n the AEOI prtal ( that if a discretinary beneficiary receives a distributin in a given perid, but nt in a fllwing perid, the absence f a distributin in such fllwing perid shuld generally nt cnstitute an accunt clsure. Hwever, the exceptin t this is if the beneficiary is permanently excluded frm receiving future distributins frm the trust (ie that wuld cnstitute clsure f the accunt). 156 It is assumed fr the purpses f this example that Tm has n cnnectin with the trust ther than in his capacity as a discretinary beneficiary f the trust. IN CONFIDENCE Page 123 f 165

124 Hwever, at a high level: Pre-existing accunts: The Reprting NZFI trust will generally need t adpt a residential address test r a search fr freign indicia fr accunts held as f 30 June 2017 (fr example, if a settlr had an equity interest as f 30 June 2017); and New accunts: The Reprting NZFI trust will generally need t btain a self-certificatin fr accunts pened n r after 1 July 2017 (fr example, if a new mandatry beneficiary was added t the trust n 10 July 2017). The reader shuld carefully review the detailed utline f these due diligence prcesses in sectin 5 f this guidance. If a Reprting NZFI carries ut such due diligence n these accunts and identifies that they are held (and/r cntrlled) by relevant freign tax residents it will need t cllect the freign tax resident s name, address, jurisdictin(s) f residence, TIN(s) (r functinal equivalent) 157 and date f birth (subject t varius exceptins and qualificatins utlined in sectin 5 f this guidance). The Reprting NZFI will then need t reprt prescribed identity and financial infrmatin abut the accunt t Inland Revenue if either: 158 the Reprting NZFI has identified that the persn is a Reprtable Persn (ie frm a Reprtable Jurisdictin that New Zealand will be prviding CRS infrmatin t); r the Reprting NZFI has chsen t adpt the wider apprach t reprting. This prescribed identity infrmatin that the Reprting NZFI wuld need t reprt t Inland Revenue abut such accunts wuld include the relevant persn s name, address, jurisdictin f tax residence, and TIN 159 (r functinal equivalent) and date f birth (subject t varius exceptins and qualificatins fr TIN and date f birth cllectin utlined in sectin 5 f this guidance). The prescribed financial infrmatin that the Reprting NZFI wuld need t reprt wuld include the accunt balance r value and amunts paid r credited t (r with respect t) the accunt. The reader shuld refer t sectin 6 f this guidance fr further details abut the infrmatin they need t reprt fr such reprtable accunts Accunts held by nn-financial entity trusts This guidance will nw shift fcus t utline hw the CRS will affect NFE trusts that hld accunts with Reprting NZFIs. There are three key elements t this: 157 If a Reprting NZFI maintains an accunt held by a passive NFE with a cntrlling persn that is a relevant freign tax resident it wuld als need t cllect the passive NFE s name, address, jurisdictins(s) f tax residence, and TIN (r functinal equivalent). 158 The Reprting NZFI trust will als need t reprt undcumented accunts. The meaning f undcumented accunt is utlined in sectins 1.6, 5.3.2, and As nted abve, a persn may be identified as being tax resident in multiple jurisdictins. If this is the case, the persn s TIN (r TIN equivalent) shuld generally be cllected and reprted fr all f such jurisdictins. IN CONFIDENCE Page 124 f 165

125 the CRS is clear that a trust will be the relevant accunt hlder (rather than the trustees f the trust). the Reprting NZFI will have bligatins t carry ut due diligence n the NFE trust accunt t determine if it is held (and/r, if the trust is a passive NFE, cntrlled) by relevant freign tax residents. the NFE trust (and persns cnnected with the trust) will smetimes have bligatins t prvide self-certificatins and ther infrmatin t assist the Reprting NZFI in carrying ut its due diligence. The trust (and such persns) may be subject t penalties if they d nt prvide this infrmatin. This guidance nw prvides a high-level utline f the due diligence bligatins that a Reprting NZFI will have t review fr a NFE trust accunt. It als utlines what bligatins the NFE trust (and smetimes persns cnnected with the trust) will have t prvide in self-certificatins and ther infrmatin t the Reprting NZFI t assist it with its due diligence. The steps that the Reprting NZFI wuld need t carry ut when cnducting such due diligence are as fllws: determining whether the NFE trust accunt hlder is a relevant freign tax resident; determining whether the NFE trust is a passive NFE; and if the NFE trust is a passive NFE, identifying the trust s cntrlling persns and determining whether any f thse persns are relevant freign tax residents. (It is imprtant t nte that a Reprting NZFI will need t carry ut the last tw steps irrespective f whether the NFE trust accunt hlder is a relevant freign tax resident.) The Reprting NZFI will first need t determine whether the NFE trust is a relevant freign tax resident. The prcess that the Reprting NZFI will need t fllw in this regard will depend n whether the NFE accunt is a pre-existing accunt pen n 30 June 2017 r whether it is a new accunt pened n r after 1 July These prcesses are utlined in detail in sectin 5 f this guidance. Hwever, at a high level this wuld invlve: Pre-existing accunts: The Reprting NZFI generally relying n infrmatin in its pssessin r that is publicly available t determine whether the NFE trust is a relevant freign tax resident. Alternatively, the Reprting NZFI culd seek a self-certificatin. New accunts: The Reprting NZFI generally btaining a self-certificatin f whether the NFE trust is a relevant freign tax resident. Therefre, the Reprting NZFI may request self-certificatins r ther infrmatin t determine whether the NFE trust is a relevant freign tax resident. If the Reprting NZFI determines that the NFE trust is a relevant freign tax resident they will then ask fr the trust s name, address, jurisdictin(s) f tax residence and TIN(s)(r functinal equivalent),subject t varius exceptins and qualificatins fr TIN cllectin that are utlined in sectin 5 f this guidance. The NFE trust generally needs t prvide this infrmatin within a reasnable perid f time and is ptentially subject t a penalty if they fail t d s (see sectin 9). Hwever, as nted abve, IN CONFIDENCE Page 125 f 165

126 there are sme circumstances when an accunt hlder is nt required t prvide a TIN (ie when they d nt have either a TIN r functinal equivalent r where their jurisdictin f tax residence des nt require the cllectin f TINs). The Reprting NZFI will then need t determine whether the NFE trust is a passive NFE. The fllwing matters are relevant when determining whether a NFE is a passive NFE : in brad terms, a passive NFE will generally cver an entity that: is nt a financial institutin; and either derives predminantly (50% r mre) passive incme and / r has assets that predminantly prduce r are held fr the prductin f passive incme. hwever, there are sme exceptins t this. Fr example: if a registered charity is a NFE (as ppsed t a financial institutin) it wuld generally be an active NFE even if it derives predminantly passive incme. The definitins f NFE, active NFE, and passive NFE are utlined in full in Appendix 4; and A managed investment entity that is tax resident in a jurisdictin that is nt a Participating Jurisdictin is als deemed t be a passive NFE. Passive incme is, in turn, defined fr CRS purpses in sectin 3(1) f the Tax Administratin Act 1994 as: passive incme, in the applicatin f the FATCA agreement r the CRS applied standard t a persn r entity fr a perid, means an amunt that is nt incme frm a transactin entered int in the rdinary curse f the business f a dealer in financial assets and that is a. a dividend; b. interest; c. incme equivalent t interest; d. rent r a ryalty, ther than rent r a ryalty derived in the active cnduct f a business cnducted, partly r whlly, by emplyees f the persn r entity; e. an annuity; f. fr financial assets that give rise t amunts included under sectins (a) t (e), the amunt by which gains frm the sales r exchanges f the financial assets in the perid exceed lsses frm the sales r exchanges; g. the amunt by which gains frm the transactins in financial assets in the perid exceed lsses frm the transactins; h. the amunt by which gains frm the freign currency transactins in the perid exceed lsses frm the transactins; i. the amunt by which gains frm the swaps in the perid exceed lsses frm the swaps; r IN CONFIDENCE Page 126 f 165

127 j. an amunt received under a cash value insurance cntract. Fr these purpses, the definitin f incme in sectin BD 1(1) f the Incme Tax Act 2007 will apply t the extent that a type f passive incme is nt defined in the CRS. Fr example, passive incme fr CRS purpses includes a dividend. The expressin dividend is nt defined fr CRS purpses, s the dividend definitin in sectin CD 3 f the Incme Tax Act 2007 wuld apply. Fr sme NFE trust accunt hlders the active/passive assessment may be straightfrward and can be made n the basis f available infrmatin (in the Reprting NZFIs pssessin r that is publicly available). Hwever, the Reprting NZFI may smetimes need t btain a self-certificatin frm the accunt hlder (ie as t whether it is a passive NFE as ppsed t an active NFE r financial institutin). The Reprting NZFI, when requesting such a self-certificatin, is expected t prvide the accunt hlder with the infrmatin that is relevant t them determining their status (fr example, the definitin f active NFE ). Therefre, the Reprting NZFI may request self-certificatins r ther infrmatin t determine whether the trust is a passive NFE. The trust needs t prvide this infrmatin within a reasnable perid f time and is ptentially subject t a penalty 160 if it fails t d s (see sectin 9 f this guidance). If the Reprting NZFI determines that the trust is a passive NFE, it will then need t identify the trust s cntrlling persns and determine whether any f thse persns are relevant freign tax residents. This raises the fllwing questins: what des the Reprting NZFI need t d t identify the trust s cntrlling persns; and what des the Reprting NZFI need t d t determine whether any f the trust s cntrlling persns are relevant freign tax residents? What des a Reprting NZFI need t d t identify a passive NFE trust s cntrlling persns? Sectin VIII(D)(6) f the CRS defines cntrlling persns f an entity as meaning the natural persns wh exercise cntrl ver the entity, with sme elabratin (utlined belw) n hw this wuld apply t trusts. In the case f a Passive NFE trust, the term cntrlling persns mean the settlr(s), the trustee(s), the prtectr(s) (if any), the beneficiary(ies) r classes f beneficiaries, and any ther natural persn(s) exercising ultimate effective cntrl ver the trust. In the case f legal arrangements ther than a trust, the term means persns in equivalent r similar psitins. The term cntrlling persns must be interpreted in a manner cnsistent with the Financial Actin Task Frce Recmmendatins. 160 Sectin 185Q f the Tax Administratin Act 1994 sets ut hw penalties wuld apply fr thse entities that are nt persns. Fr a trust, such penalties will be impsed n each trustee. IN CONFIDENCE Page 127 f 165

128 The scpe f the definitin f cntrlling persns f a passive NFE trust and the prcesses that Reprting NZFIs can adpt t identify such cntrlling persns are utlined in detail abve at sectins 5.53 (fr pre-existing accunts pen as f 30 June 2017) and 5.63 (fr new accunts pened n r after 1 July 2017). What des the Reprting NZFI need t d t identify whether any f the passive NFE trust s cntrlling persns are relevant freign tax residents? Once the Reprting NZFI has identified a passive NFE trust s cntrlling persns, it will then need t determine whether any f thse persns are relevant freign tax residents. The prcess that a Reprting NZFI will need t fllw will depend n whether the trust accunt is a pre-existing accunt (pen n 30 June 2017) r a new accunt (pened n r after 1 July 2017). The detail f these prcesses is utlined in sectins 5.5 and 5.6 f this guidance. Hwever, at a high level this will generally invlve the fllwing: Pre-existing accunts: The Reprting NZFI relying n AML/KYC infrmatin that it has btained t determine whether any f the cntrlling persns are relevant freign tax residents. 161 New accunts: The Reprting NZFI btaining a self-certificatin (frm either the trust r the cntrlling persn) abut whether any f the cntrlling persns are relevant freign tax residents. If a Reprting NZFI identifies that a cntrlling persn is a relevant freign tax resident it will need t cllect: the passive NFE s name, address, jurisdictin(s) f tax residence and TIN(s)(r functinal equivalent) (subject t the exceptins/qualificatins utlined in sectins and 5.6.3); and the cntrlling persn s name, address, jurisdictin(s) f tax residence, TIN(s)(r functinal equivalent) and date f birth (subject t the exceptins/qualificatins utlined in sectins and 5.6.3). If a trust (r any f its cntrlling persns) is asked t prvide such a self-certificatin r ther infrmatin it will be required t prvide this infrmatin 162 within a reasnable perid f time after the request is made. If the trust (r the cntrlling persns) des nt respnd t such requests they may be subject t a penalty (see sectin 9). What wuld the Reprting NZFI need t reprt abut a trust accunt that is identified as being held r cntrlled by a relevant freign tax resident? The infrmatin that a Reprting NZFI wuld need t reprt abut a trust accunt that it has identified as being held and/r cntrlled by a relevant freign tax resident is summarised at sectin 6 f this guidance. 161 Hwever, the Reprting NZFI will need t btain a self-certificatin f the residency f the cntrlling persns (frm either the trust r the cntrlling persn) if the accunt has a balance r value f mre than USD1,000, Hwever, they wuld nt be required t prvide their TIN (r functinal equivalent) if either they d nt have a TIN (r functinal equivalent) r their jurisdictin f tax residence des nt require the cllectin f TINs. IN CONFIDENCE Page 128 f 165

129 11.2 Applicatin f CRS t specific types f trusts 163 This guidance nw utlines hw the abve principles apply t the fllwing types f trusts: Family trusts; Charitable trusts; Freign trusts; and Slicitrs trust accunts Family trusts A family trust is simply a trust that has a beneficiary class centred arund a family grup. There are n ther defining features in respect f the assets they hld r activities they carry ut that separates family trusts frm ther discretinary trusts. They perate in a spectrum frm simple trusts that hld ne asset (ie a family hme) thrugh t trusts that hld numerus cmplex assets and/r engage in cmplex financial dealings. As such, there is n ne size fits all apprach t the treatment f family trusts fr CRS purpses Family trusts that are financial institutins A family trust will either be a financial institutin r a NFE. A family trust will generally nt carry n a business fr custmers. This means that the nly categry f financial institutin which culd apply t family trusts is the managed investment entity categry. The key elements f this categry are that: The trust derives its incme primarily (50% r mre) frm investing, reinvesting r trading in financial assets ver the specified perid. The trust is managed by a financial institutin (ther than a managed investment entity). If a family trust is a financial institutin (ie a managed investment entity) and has nly 164 New Zealand trustees it will, therefre, be a New Zealand financial institutin. A New Zealand financial institutin family trust will be a Reprting NZFI with CRS due diligence and reprting bligatins, unless it is a Nn-Reprting NZFI. The categry f Nn-Reprting 163 It is assumed, fr the purpses f the fllwing, that the relevant trust is nt a unit trust. As nted abve, the tax residency rules that apply under New Zealand tax law t cmpanies shuld be applied when determining whether a financial institutin unit trust is resident in New Zealand fr CRS purpses. This is because a unit trust is treated as a cmpany fr New Zealand tax purpses. This bradly aligns with the apprach fr FATCA purpses. 164 As nted in sectin , there is a rule that culd ptentially negate the trust s residency cnnectin t New Zealand if the trust als had trustees in anther Participating Jurisdictin and reprted fr CRS purpses in that ther jurisdictin because it is tax-resident in that jurisdictin. This guidance will nt set ut this negatin rule in detail here because New Zealand family trusts will typically nly have trustees that are New Zealand tax residents. IN CONFIDENCE Page 129 f 165

130 NZFI that is mst likely t apply t such family trusts is the trustee dcumented trust categry and is utlined in detail in sectin 3.5. The due diligence and reprting bligatins that a Reprting NZFI family trust will have are utlined in sectin Example 1: A family trust has the fllwing assets: shares; bnds; a rental prperty; and units in varius Reprting NZFI unit trusts (that are managed investment schemes). The family trust derives 80% f its incme frm the shares, bnds and units ver the specified perid. The family trust derives the ther 20% f its incme frm its rental prperty. Is the family trust a financial institutin? N: The family trust is nt in business. Therefre, the nly way that it culd be a financial institutin is if it is a managed investment entity. The trust derives its incme primarily (50% r mre) frm financial assets (the shares, bnds and units) ver the specified perid. Hwever, the trust is nt managed by a financial institutin. It is imprtant t nte, in this regard, that the fact that the trust hlds units in varius Reprting NZFI unit trusts des nt mean that thse unit trusts manage the trust. Therefre, the trust is nt a managed investment entity. This means that it is nt a financial institutin. Example 2: 165 The facts are the same as example 1. Hwever, the trustee f the trust is cncerned that the trust is nt getting a gd return frm its investments in shares and bnds. Therefre, the trustee decides t engage a Reprting NZFI discretinary investment service prvider (DIMS prvider) t manage the trust s investments in shares and bnds. The trustee prvides the Reprting NZFI with discretinary authrity t buy and sell shares and bnds within the parameters f an agreed mandate. Is the family trust a financial institutin? Yes: The family trust derived its incme primarily frm financial assets (the shares, bnds and units) ver the specified perid. The trust s assets are als managed (in part) by the Reprting NZFI (the DIMS prvider). Therefre, the trust is a managed investment entity financial institutin Family trusts that are NFE accunt hlders If a family trust is nt a financial institutin it will be a NFE (by default). If a NFE family trust hlds an accunt with a Reprting NZFI they will be subject t due diligence by that NZFI. This means that they (alng with ther persns cnnected t the trust) may be asked t prvide a 165 It is assumed fr the purpses f this example that nne f the exceptins in the definitin f investment entity are applicable. These exceptins are referred t at sectin IN CONFIDENCE Page 130 f 165

131 self-certificatin and ther infrmatin abut whether they are a relevant freign tax resident (r whether any f the cntrlling persns are relevant freign tax residents) t assist the Reprting NZFI with its wn due diligence, and may be subject t penalties if they fail t prvide the infrmatin within a reasnable perid f time. This is utlined in detail in sectin Charitable trusts Charitable trusts that are financial institutins A charitable trust will either be a financial institutin r a NFE fr CRS purpses. [This is a different apprach than that which applies fr FATCA purpses. In brad terms, charitable entities are treated as active NFFEs fr FATCA purpses irrespective f 166 whether they wuld therwise cme within the definitin f financial institutin]. A charitable trust is unlikely t be carrying n a business fr custmers. Therefre, as is the case with respect t family trusts, the circumstances when a charitable trust will be a financial institutin are likely t be limited t when the charitable trust is a managed investment entity. Fr example where: the trust derives its incme primarily (50% r mre) frm investing, reinvesting, r trading in financial assets ver the specified perid; and the trust is managed by a financial institutin (ther than a managed investment entity). A charitable trust will be a managed investment entity in the same circumstances utlined abve fr family trusts (ie the examples wuld apply equally t charitable trusts). If a charitable trust is a financial institutin (ie a managed investment entity) and has nly 167 New Zealand trustees it will, therefre, be a New Zealand financial institutin. A New Zealand financial institutin charitable trust will be a Reprting NZFI with CRS due diligence and reprting bligatins, unless it is a Nn-Reprting NZFI. The categry f Nn- Reprting NZFI that is mst likely t apply t such charitable trusts is the trustee dcumented trust categry and is utlined in detail in sectin 3.5. The due diligence and reprting bligatins that a Reprting NZFI charitable trust will have are utlined in sectin This is because f the definitin f NFFE in Annex I Sectin VI(B)(2) f the FATCA IGA, which extends t cver certain charitable entities described in the definitin f active NFFE in Annex I Sectin VI(B)(4) f the IGA irrespective f whether thse entities wuld therwise cme within the definitin f financial institutin. 167 As nted in sectin , there is a rule that culd ptentially negate the trust s residency cnnectin t New Zealand if the trust als had trustees in anther Participating Jurisdictin and reprted fr CRS purpses in that ther jurisdictin because it is tax resident in that jurisdictin. This guidance will nt set ut this negatin rule in detail here because New Zealand charitable trusts will typically nly have trustees that are New Zealand tax residents. IN CONFIDENCE Page 131 f 165

132 Charitable trusts that are NFE accunt hlders A charitable trust that is nt a financial institutin will (by default) be a NFE. A NFE charitable trust may hld an accunt with a Reprting NZFI and be subject t due diligence by that NZFI. An NFE charitable trust will generally be an active NFE cming within sectin VIII(D)(9)(h) f the CRS. Hwever, the reader shuld refer t the definitin f active NFE in Appendix 4 when seeking t determine if a charitable trust is an active NFE. If a New Zealand charitable trust is an active NFE it will nt be reprtable fr CRS purpses (and there is n need t lk thrugh t cntrlling persns cmpared with passive NFEs). A charitable trust that hlds an accunt with a Reprting NZFI may be asked fr a selfcertificatin as t whether it is an active NFE (in this regard). The trust shuld, in these circumstances, cnsider whether they meet the definitin f active NFE and prvide a selfcertificatin within a reasnable perid f time f receiving the request Freign trusts Bradly, a freign trust is any trust where n settlr is r has been resident in New Zealand at any time. Freign trusts may have a New Zealand-resident trustee, ften a limited liability cmpany, which prvides prfessinal trustee services. It is nrmal fr all the beneficiaries f a freign trust t be resident ffshre but there is n prhibitin against having New Zealand beneficiaries. The CRS applies t freign trusts in the same way as any ther trust. This means that a freign trust will either be a financial institutin r a NFE. A freign trust is unlikely t be carrying n a business fr custmers (just like family trusts and charitable trusts). Therefre, the circumstances when a freign trust will be a financial institutin are likely t be limited t when it is a managed investment entity. That is: the trust derives its incme primarily (50% r mre) frm investing, reinvesting, r trading in financial assets ver the specified perid; and the trust is managed by a financial institutin (ther than a managed investment entity). If a freign trust is a financial institutin (ie a managed investment entity) and has nly New Zealand tax-resident trustees it will, therefre, be a New Zealand financial institutin. As nted abve, mst freign trusts have a trustee that is tax resident in New Zealand, ften a limited liability cmpany, which prvides prfessinal trustee services. Hwever, if such a financial institutin freign trust als has anther trustee in anther Participating Jurisdictin, is tax resident in that ther jurisdictin, and reprts fr CRS purpses in that jurisdictin because it is tax resident in that jurisdictin, the reprting verseas wuld negate the New Zealand CRS residency cnnectin that wuld therwise apply (ie the trust wuld nt be a New Zealand financial institutin). A New Zealand financial institutin freign trust will be a Reprting NZFI with CRS due diligence and reprting bligatins, unless it is a Nn-Reprting NZFI. IN CONFIDENCE Page 132 f 165

133 The categry f Nn-Reprting NZFI that is mst likely t apply t these financial institutin freign trusts is the trustee dcumented trust categry and is utlined in detail in sectin 3.5. The due diligence and reprting bligatins that a Reprting NZFI freign trust will have are utlined in sectin Example 1: A New Zealand freign trust is settled by a settlr frm jurisdictin A. The trust has a single New Zealand tax-resident trustee. The trust s beneficiaries are all lcated in jurisdictin A. The trust s nly assets are direct interests in varius investment prperties, which it rents. The trust s incme is derived slely frm rental incme ver the specified perid. Is the freign trust a financial institutin? N: The trust des nt carry n a business fr custmers. The trust als des nt derive its incme primarily (50% r mre) frm investing in financial assets. All f its incme is derived frm investing in direct interests in real prperty, which is nt a financial asset. Therefre, it is nt a managed investment entity. Example 2: 168 The freign trust in example 1 decides t rebalance its investments. It sells a number f its investment prperties. It then uses the prceeds t invest in a prtfli f debt and equity instruments. The trust engages a Reprting NZFI fund manager t manage the prtfli. The trustee gives the fund manager discretinary authrity t buy and sell debt and equity instruments within the parameters f an agreed mandate. The trust derives 60% f its incme frm the prtfli ver the specified perid. Is the freign trust a financial institutin? Yes: The trust derived its incme primarily frm financial assets (the prtfli f debt and equity instruments) ver the specified perid and is managed by a financial institutin (the Reprting NZFI fund manager). Therefre, it is a managed investment entity. Is the freign trust a New Zealand financial institutin? Yes: The freign trust is a financial institutin (a managed investment entity). The freign trust s sle trustee is als tax-resident in New Zealand. Therefre, the freign trust is a NZFI. This means that the freign trust will be a Reprting NZFI with CRS due diligence and reprting bligatins in New Zealand, unless it cmes within any f the categries f Nn-Reprting NZIFs. Example 3: The facts are the same as in example 2. Hwever, the freign trust adds a further trustee in jurisdictin B (a Participating Jurisdictin). The trust is tax-resident in jurisdictin B. The trustee reprts all f the CRS infrmatin fr the trust in jurisdictin B because the trust is tax-resident in jurisdictin B. Is the financial institutin trust still a New Zealand financial institutin? N: The exceptin applies here. The trust s New Zealand cnnectin is negated by the reprting verseas. 168 It is assumed fr the purpses f this example that nne f the exceptins in the definitin f investment entity are applicable. These exceptins are referred t at sectin IN CONFIDENCE Page 133 f 165

134 Freign trusts that are NFE accunt hlders If a freign trust is nt a financial institutin it will be a NFE (by default). If a NFE freign trust hlds an accunt with a Reprting NZFI it will be subject t due diligence by that NZFI. This means that the trust (alng with ther persns cnnected t the trust if the trust is a passive NFE) may be asked: t prvide a self-certificatin as t whether they (r any f the trust s cntrlling persns if the trust is a passive NFE) are relevant freign tax residents; and/r t prvide ther dcumentatin/infrmatin t assist the Reprting NZFI in carrying ut its due diligence (and any reprting) The trust may be subject t penalties if it fails t prvide the infrmatin within a reasnable perid f time. This is utlined in detail in sectin Slicitrs trust accunts The fllwing guidance utlines hw CRS due diligence and reprting applies t trust accunts that a Reprting NZFI bank maintains fr a law firm. The same analysis can be applied t ther prfessinals t the extent that the factual framewrk is materially the same. The same analysis can als be applied fr FATCA purpses Backgrund A law firm which hlds mneys n behalf f clients must pen a trust bank accunt, int which client funds are depsited. The trust bank accunt must be designated trust accunt and the bank and ther interested parties must be ntified that the mney in the trust accunt is trust mney. A law firm can pen mre than ne trust accunt. A law firm is under a duty t ensure whenever practicable that client mneys earn interest. It is pursuant t this duty that a law firm may advise a client that mneys held in a law firm s general trust accunt be placed int an Interest Bearing Depsit Accunt (IBDA). Accrding t the Lawyers Trust Accunting Guidelines the fllwing pints apply t IBDAs: each client must have its wn separate IBDA (the bank recrds must shw that there are separate client accunts, gruped s that it is clear that all f the IBDAs are within the cntrl and respnsibility f a law firm). sectin 9.4 f the guidelines describes hw a bank will administer the IBDA. Key pints are: the bank maintains separate accunts, interest and tax calculatins fr each client. the bank credits each IBDA with interest as it accrues. n 31 March each year, the bank will issue resident withhlding tax certificates. when the bank sends a RWT certificate, the law firm must send the certificate t the relevant clients fr actin by them in respect f their tax returns. IN CONFIDENCE Page 134 f 165

135 Mney in the general trust accunt A Reprting NZFI bank that maintains a law firm s general pled trust accunt may take the fllwing apprach when carrying ut due diligence n the accunt where funds are nt designated in the name f the clients (cmpared with IBDAs where there is a separate designated client accunt with the bank fr the purpse f allcating interest): The apprach is that where: the funds f underlying clients f the law firm are held n a pled basis with a bank; the nly persn identified in relatin t the bank accunt is the law firm; the law firm is nt required t disclse r pass its underlying client r clients infrmatin t the bank fr the purpses f AML/KYC r ther regulatry requirements; and the bank is required t undertake due diligence prcedures nly in respect f the law firm. Fr CRS purpses this means that a Reprting NZFI will need t determine the residency f the law firm and the status f the law firm, ie generally whether the law firm is a passive r active NFE (with active NFE classificatin mst cmmnly applying) Mney held n IBDA If a Reprting NZFI bank maintains IBDAs in the names f a law firm s clients it will have, therefre, identified the clients, and shuld treat each client IBDA as if it was a depsitry accunt directly made by the client. Each designated IBDA will be subject t the standard due CRS diligence prcedures utlined abve. Fr example, a Reprting NZFI that maintains a new IBDA accunt (pened n r after 1 July 2017) will need t btain a self-certificatin fr the law firm s client. 169 This is the client s selfcertificatin. Hwever, a Reprting NZFI is able t request the law firm t btain and prvide such client self-certificatins (as ppsed t seeking such self-certificatins directly frm thse clients) if they cnsider that this is mre efficient peratinally. The Reprting NZFI culd als chse t btain self-certificatins (in this way) fr all client IBDA accunts (irrespective f whether they are pre-existing r new) if they cnsider that this wuld be mre efficient peratinally Excluded accunts Sme funds held in a law firm s trust accunts (either in the general trust accunt r n IBDA) cntain escrw funds that are excluded accunts fr CRS purpses. Fr example, certain escrw funds relating t the sale and purchase f prperty are excluded accunts (see Appendices 1 and 5). If a Reprting NZFI reasnably determines that funds in such a trust 169 This is assuming that the law firm s client is an individual. If the client is an entity that is a passive NFE, it will als be necessary t btain self-certificatins abut the NFE s cntrlling persns. IN CONFIDENCE Page 135 f 165

136 accunt are excluded escrw funds it will nt be required t carry ut due diligence n thse funds ie the accunt will be an excluded accunt Applicatin f CRS t partnerships This guidance nw summarises hw the CRS applies t partnerships. A partnership is defined in sectin VIII(E)(3) f the CRS as being an entity. This is the case irrespective f whether it is structured as a legal persn r a legal arrangement. This is bradly similar t FATCA where a partnership is als defined as being an entity. All partnerships, including general partnerships, limited partnerships and limited liability partnerships r any similar legal arrangement will be entities fr CRS purpses. This wuld include a partnership as defined in the Partnership Act 1908 and a limited partnership as defined in the Limited Partnership Act The fact that a partnership is an entity fr CRS purpses means that a partnership will either be a: financial institutin; r NFE. This guidance nw utlines the circumstances when a partnership will be a Reprting NZFI with CRS due diligence and reprting bligatins in New Zealand. 170 This will address the fllwing pints: when will a partnership be a financial institutin ; when will a partnership be a New Zealand financial institutin; and when will a partnership be a Reprting New Zealand financial institutin with due diligence and reprting bligatins? When will a partnership be a financial institutin? As nted abve, a partnership can be a financial institutin. The categry f financial institutin that is mst likely t apply t partnerships is the investment entity categry. Fr example, a partnership culd (depending n the circumstances) be: an in business investment entity if it derives its incme primarily (50% r mre ver the specified perid) frm carrying ut specified investment activities fr custmers; r a managed investment entity if it derives its incme primarily (50% r mre ver the specified perid) frm investing, reinvesting r trading in financial assets and is managed by a relevant financial institutin. 170 This guidance will nt fcus n the circumstances when a partnership will be an NFE accunt hlder. The same analysis utlined abve at sectin fr NFE accunt hlder trusts wuld apply t partnerships in this cntext. IN CONFIDENCE Page 136 f 165

137 Example 1: 171 Partnership A invests in a prtfli f freign equities. It engages a Reprting NZFI discretinary investment services prvider (DIMS prvider) t manage these investments. The partnership has given the Reprting NZFI DIMS prvider discretinary authrity t buy and sell such equities within the parameters f an agreed mandate. The partnership derived all f its incme frm these equities ver the specified perid. Is the partnership an investment entity? Yes: The partnership derived its incme primarily (50% r mre) frm financial assets (freign equities) ver the specified perid. The partnership is als managed by a financial institutin (the Reprting NZFI DIMS prvider). Therefre, the partnership is a managed investment entity. A partnership culd als (depending n the circumstances) cme within ne f the ther categries f financial institutin. The reader shuld refer t sectin 3.1 f the guidance fr detail n the ptential applicatin f thse ther categries When will a partnership be a New Zealand financial institutin? This then raises the questin f when a financial institutin partnership (fr example, an investment entity partnership) will be a New Zealand Financial Institutin (NZFI). A financial institutin partnership will be a NZFI if: it is resident in New Zealand (excluding ffshre branches); r it has a branch lcated in New Zealand (in which case it wuld be a NZFI t the extent f the branch). The general rule is that a partnership will be cnsidered t be resident fr CRS purpses based n where it is tax-resident. Hwever, partnerships d nt always have a tax residence. Sme jurisdictins treat partnerships as taxable units, smetimes even as cmpanies. Hwever, ther jurisdictins such as New Zealand adpt a fiscally transparent apprach where the partnership is disregarded fr tax purpses. A partnership that des nt have a residence fr tax purpses will be cnsidered t be resident fr CRS purpses in a Participating Jurisdictin (such as New Zealand) if: it is incrprated under the laws f the Participating Jurisdictin; r it has its place f management (including effective management) 172 in the Participating Jurisdictin); r 171 It is assumed fr the purpses f this example that nne f the exceptins in the definitin f investment entity are applicable. These exceptins are referred t at sectin Page 192 f the CRS Cmmentary states that the "place f effective management" is the place where key management and cmmercial decisins that are necessary fr the cnduct f the entity s business as a whle are in substance made. All relevant facts and circumstances must be examined t determine the IN CONFIDENCE Page 137 f 165

138 it is subject t financial supervisin in the Participating Jurisdictin. It is imprtant t nte that these criteria fr determining the CRS residency f partnerships that d nt have a residence fr tax purpses have the ptential t link a financial institutin partnership t multiple jurisdictins. Where such a financial institutin is resident in tw r mre Participating Jurisdictins under these criteria, it will be subject t the reprting and due diligence bligatins f the jurisdictin in which it maintains the financial accunt. This is t avid duplicatin f bligatins. Example 2: Partnership A is a financial institutin that perates in New Zealand. Partnership A is nt tax resident in any jurisdictin, is unincrprated, and is nt subject t financial supervisin in any jurisdictin. Hwever, Partnership A is effectively managed in New Zealand. Partnership A is treated as a resident f New Zealand fr CRS purpses. This is because it is effectively managed in New Zealand. It will be a NZFI When will a partnership be a Reprting NZFI? A NZFI partnership will be a Reprting NZFI unless it cmes within any f the categries f Nn- Reprting NZFI. It is unlikely that any f these categries will apply t partnerships. Therefre, this guidance will prceed n the basis that the NZFI partnership being cnsidered is a Reprting NZFI. A Reprting NZFI partnership will need t carry ut due diligence n its financial accunts t identify accunts held (and/r, in the case f passive NFE accunt hlders, cntrlled) by relevant freign tax residents and, if s, cllect prescribed identity infrmatin abut such persns. The Reprting NZFI partnership s financial accunts (in this regard) wuld include: 173 equity interests: Persns that have a capital r prfit interest in the partnership; and debt interests: Persns that have prvided debt funding t the partnership. The Reprting NZFI partnership wuld need t carry ut due diligence n such accunts and reprt prescribed identity and financial accunt infrmatin abut reprtable accunts they identify What are the due diligence and reprting bligatins f a partnership? The due diligence and reprting bligatins f such a partnership are in line with thse referred t in sectin with respect t trusts. place f effective management. An entity may have mre than ne place f management, but it can have nly ne place f effective management at any ne time. 173 It is assumed fr these purpses that the Reprting NZFI partnership is an investment entity (the mst likely categry f financial institutin t apply t partnerships.) 174 The Reprting NZFI wuld als need t reprt undcumented accunts. IN CONFIDENCE Page 138 f 165

139 11.4 Applicatin f CRS t cllective investment vehicles The fllwing guidance nw prvides a high-level utline f hw the CRS applies t cllective investment vehicles (CIVs). This will cver the fllwing pints: an utline f what cnstitutes a CIV; an utline f the circumstances when a CIV will be a Reprting NZFI; and an utline f what due diligence and reprting a Reprting NZFI CIV will need t carry ut What is a cllective investment vehicle? A CIV is an entity that pls funds n behalf f investrs fr investment purpses. This wuld include the fllwing (nn-exhaustive) types f entities: unit trusts; managed funds; grup investment funds; superannuatin schemes; and entities prviding participating securities. A managed investment scheme subject t sectin 9 f the Financial Markets Cnduct Act 2013 (which wuld cver, fr example, entities such as unit trusts and superannuatin schemes) wuld als be a CIV. A CIV will be a Reprting NZFI if all f the fllwing are satisfied: the CIV wuld need t be a financial institutin ; the CIV wuld need t be a New Zealand financial institutin; and the CIV wuld need t be a Reprting NZFI (ie nt a Nn-Reprting NZFI). This guidance will nw explain these key building blcks t utline the circumstances where CIVs will be Reprting NZFIs with CRS due diligence and reprting bligatins When will a cllective investment vehicle be a financial institutin? A CIV will generally be an investment entity fr CRS purpses. It is als pssible, albeit less likely, that a CIV culd cme within anther categry f financial institutin (fr example, being a custdial institutin). IN CONFIDENCE Page 139 f 165

140 A CIV will be an investment entity fr CRS purpses if: 175 it primarily cnducts a financial services business (ie the cllective pling f funds and investing, administering, r managing f funds r mney n behalf f custmers). The CIV will be treated as primarily cnducting a financial services business where its financial services incme is 50% r mre f its ttal grss incme ver the specified perid; r it is managed 176 by anther financial institutin (eg a trustee r investment manager which is a financial institutin) and derives its incme primarily (50% r mre ver the specified perid) frm investing, reinvesting, r trading in financial assets (as distinct frm, fr example, frm direct interests in real prperty). 177 Example 1: Wide Trust is a New Zealand unit trust that carries n, as its business, cllective prtfli management activities fr custmers. Wide Trust derived 80% f its incme frm such activities ver the specified perid. Is the Wide Trust an in business investment entity? Yes: Wide Trust perfrmed specified investment activities (cllective prtfli management) fr custmers ver the specified perid. Wide Trust als derived its incme primarily (50% r mre) frm such activities ver that perid. Therefre, Wide Trust is an in business investment entity. This means that Wide Trust is a financial institutin When will a cllective investment vehicle be a NZFI? A CIV that is a financial institutin will be a NZFI if either: it is resident in New Zealand (excluding branches lcated ffshre); r it has a New Zealand branch (in which case it wuld be a NZFI t the extent f the branch). The residency rules that apply fr CRS purpses will depend n the type f entity that cnstitutes the CIV. These rules are summarised in sectin 3.2 f this guidance. Hwever, a number f CIVs will be unit trusts. Unit trusts are treated as cmpanies fr the purpses f New Zealand s tax residency rules. The New Zealand tax residency rules that apply t cmpanies shuld be used t determine whether a financial institutin CIV unit trust is resident in New Zealand fr CRS purpses. This is bradly in line with the apprach that applies fr FATCA purpses (see Appendix 1). 175 The ne exceptin t this is if the entity is an active NFE because it meets the criteria in subsectins D(9)(d) thrugh (g) f sectin VIII f the CRS. The definitin f active NFE is set ut in full in Appendix 4. It is assumed that this exceptin des nt apply fr the purpses f the examples set ut belw. The reader shuld refer t subsectins D(9)(d) thrugh (g) f sectin VIII f the CRS t determine whether this exceptin may apply t their circumstances. 176 The relevant manager in this cntext must be a financial institutin that is nt itself a managed investment entity. 177 Refer t Cmmentary n sectin VIII in sectin 17 f the CRS. IN CONFIDENCE Page 140 f 165

141 When will a NZFI cllective investment vehicle be a Reprting NZFI? A NZFI CIV will be a Reprting NZFI unless it is a Nn-Reprting NZFI. A CIV will be a Nn-Reprting NZFI under subsectin B(1) f sectin VIII f the CRS if it is: a brad participatin retirement fund; a narrw participatin retirement fund; a pensin fund f a Gvernment entity, internatinal rganisatin r Central bank; an exempt cllective investment vehicle; a trustee dcumented trust, where the trust is a CIV; r determined by the Cmmissiner t be a Nn-Reprting NZFI. These categries are utlined in detail in appendices 6 and 7 f this guidance. The reader shuld als refer t pages 166 t 174 f the CRS Cmmentary fr further detail What are the due diligence and reprting bligatins f a Reprting NZFI cllective investment vehicle? A Reprting NZFI CIV will need t carry ut due diligence n its financial accunts t identify accunts held (and/r, in the case f passive NFE accunt hlders, cntrlled) by relevant freign tax residents and, if s, cllect prescribed identity infrmatin abut such persns. The Reprting NZFI CIV s financial accunts (in this regard) wuld include: 178 Equity interests: The funds frm custmers that have invested in the CIV; and Debt interests: Amunts laned t the CIV r that are therwise debt interests in the CIV. The Reprting NZFI CIV wuld need t carry ut due diligence n such accunts and reprt prescribed identity and financial accunt infrmatin abut reprtable accunts it identifies. 179 The due diligence and reprting bligatins f such a CIV are in line with thse referred t in sectins with respect t trusts. Example: Fund B is a Reprting NZFI CIV investment entity unit trust. Fund B has a Reprting NZFI trustee and a Reprting NZFI fund manager (bth are investment entities that are Reprting NZFIs in their wn right). Fund B als has a Reprting NZFI custdian that hlds varius instruments n its behalf. Investrs receive units in Fund B in return fr their investments and Fund B uses the pled funds t invest in verseas shares and bnds. The custdian hlds these interests n behalf f 178 It is assumed fr these purpses that the Reprting NZFI CIV is an investment entity (the mst likely categry f financial institutin t apply t CIVs.) 179 The Reprting NZFI wuld als need t reprt undcumented accunts. IN CONFIDENCE Page 141 f 165

142 Fund B. The interests that the investrs have in Fund B are in scpe financial accunts (ie nt excluded accunts). Fund B will need t carry ut due diligence n: Equity interest accunt hlders: The persns that have placed amunts in the fund, including, if such persns are passive NFEs, any cntrlling persns; and Debt interest accunt hlders: The persns that have laned amunts t the fund r that therwise have debt interests in the fund, including, if such persns are passive NFEs, any cntrlling persns. Fund B wuld need t carry ut due diligence n such accunts (ie t identify accunts held and/r, in the case f passive NFEs, cntrlled by relevant freign tax residents), cllect prescribed identity infrmatin abut any relevant freign tax residents they identify, and reprt prescribed identity and financial accunt infrmatin abut any reprtable accunts. 180 Fund B s due diligence and reprting bligatins are in line with thse referred t in sectins with respect t trusts. It is imprtant t nte that the NZ fund manager, NZ trustee, and Custdian Ltd wuld nt be required t reprt n Fund B. This is because Fund B is a financial institutin frm a Participating Jurisdictin (New Zealand), s is excluded frm being reprtable (ie financial institutins are excluded frm the definitin f Reprtable Persn ). This is an anti-duplicative measure. NZ Fund Manager Reprting NZFI NZ Trustee Reprting NZFI Custdian Ltd Reprting NZFI: Hlds instruments n Trust fr Fund B Equity C 1 Debt C 1 Reprting NZFI Fund B (Unit trust) Investrs CRS due diligence and reprting bligatins 11.5 Deceased estates Fr the purpses f the fllwing, the reference t estate shuld be read as cvering New Zealand s particular rules n the transfer r inheritance f rights and bligatins in the event f death (fr example the rules f universal successin) The Reprting NZFI wuld als need t reprt undcumented accunts. 181 See page 186 f the CRS cmmentary (sectin 92). IN CONFIDENCE Page 142 f 165