The OECD has recently updated the CRS FAQs page 14, FAQ 9 makes clear that in the OECD’s view indirect payments to custodians or investment entities should be taken into account when applying the relevant Financial Institution income test.
This is welcome guidance. It had become a matter of debate whether (for instance) a custodian is required to be paid directly in providing its services to qualify for Financial Institution status, with some arguing that if payment was instead made to a group, parent or affiliate company or simply “lost” in an overall administration service fee that this would neatly avoid CRS Custodial Institution status, and the associated trouble and expense of reporting. FAQ 9 makes clear that this is not the correct analysis.
Affected service providers are encouraged to make immediate corrective reporting to their local tax authorities, and inform any chain financial institutions that their self certificates are invalid. Note: as the peer review process commences next year Financial Institutions can expect CRS specific audits to become common.