The New Zealand Law Society has sought and obtained from Inland Revenue an exemption for barristers' escrow arrangements for Common Reporting Standard (CRS) purposes.
The exemption is in the form of an IRD determination, which is available here and which will be published on the IRD website within the next 30 days.
The exemption which has been granted applies only to barristers' escrow arrangements under rule 14.10 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (which requires a barrister working under direct instructions to pay any fees in advance to a law firm or other approved person or entity under an escrow arrangement).
This exemption ensures that the obligations with respect to barristers' escrow arrangements are consistent between the CRS and FATCA (Foreign Account Tax Compliance Act) regimes. The position in relation to other fee arrangements remains unchanged and CRS due diligence obligations will apply to funds which are placed on Interest Bearing Deposit.
AEOI (Automatic Exchange of Information) is an information collection and reporting regime. Where applicable, information about foreign tax residents is collected in New Zealand by financial institutions and provided to the IRD. IRD can then exchange the information with New Zealand’s AEOI exchange partner countries in order to fulfil its international obligations. The scope and format of the information to be collected and shared is known as the Common Reporting Standard (CRS).
Information about lawyers’ obligations and the treatment of solicitor’s trust accounts under the CRS regime is available in the Law Society Practice Briefing Automatic Exchange of Information and Common Reporting Standard (AEOI/CRS).
IRD’s guidance provides that IBD accounts are to be treated as depository accounts directly made by the client and standard CRS due diligence procedures will apply. Accordingly, a law firm must ensure that the required due diligence information (including self-certifications) is provided to its bank before the client’s funds are placed on IBD.
Some client’s IBD accounts may in fact be excluded accounts for CRS purposes (see, for example, the escrow and deceased estate exclusions). No CRS due diligence or reporting obligations arise in respect of excluded accounts.
Why the Law Society sought the exemption
The Law Society has received inquiries from lawyers about the application of the 'escrow exemption' provisions in the CRS Section VIII(c)17(e)(ii).
The Law Society is liaising with IRD about providing guidance to lawyers on the escrow exemption provisions. As part of this work, the Law Society received confirmation from the IRD that the escrow exemption did not apply to barristers' fees held on an escrow basis in a solicitor's trust account under rule 14.10 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008. This has been identified as problematic because these arrangements are exempt from due dliligence and reporting obligations under FATCA, leading to inconsistencies between CRS and FATCA with respect to barristers' escrow arrangements.
The Law Society has therefore sought from IRD an exemption for barristers' escrow arrangements for CRS purposes.
The Law Society consulted with the New Zealand Bankers' Association in seeking the exemption. The basis for the exemption sought was that
- Barristers' escrow arrangements are substantially similar to escrow accounts under the relevant section of the CRS;
- They present a low risk of tax evasion; and
- It is desirable that the CRS and FATCA regimes align.
The IRD has issued determination CRS 2019/013 which grants the exemption.