The Common Reporting Standard: CRS brings the walls tumbling down
A country known for its clocks, chocolate and most importantly banks, the agreement by Switzerland’s government to share details of those super-secret bank accounts is one that will change the world at large. Gone are the days of the elusive Swiss bank account. The arrival of Common Reporting is upon us. What is CRS, you may ask? The Common Reporting Standard means a bit of trouble for anyone holding funds off-shore that have not been declared locally or to SARS. Coming into effect in 2017, Nel Schoeman discusses the context and implications of adoption of the Standard.- CH
By Nel Schoeman, Associate, Maitland
The final nail in the coffin of Swiss banking-secrecy was the Swiss government’s recent unveiling of draft legislation which will enable the automatic exchange of information regarding offshore accounts held in Switzerland. This marks the end of an era.
SA tax residents who have relied on offshore bank-secrecy rules to keep their financial affairs beyond SARS’s reach are left with a small window of opportunity to regularise their tax position before they receive a knock on the door.
This once sacred principle of bank-secrecy owes its demise to a wave of attacks on offshore tax-evasion.
The first wave came in the form of the US Foreign Account Tax Compliance Act (“US FATCA”) which has, after being followed by UK FATCA, culminated in a global FATCA-like regulation drawn up by the OECD, known as the Common Reporting Standard (“CRS”).
The US FACTA instigation was aimed at forcing non-US financial institutions (including banks, investment managers and even trusts) to report on US citizen account holders. The CRS is a ‘universal code’ of reporting aimed at incorporating as many jurisdictions possible on a mutually beneficial basis of “you show me yours and I will show you mine.” For example, if SA, France and the UK are all signed up to the CRS, the UK would have to report to SA or France on any accounts held by SA or French tax residents with financial institutions situated in the UK and vice-versa.
The CRS was eagerly anticipated and adopted by over 40 jurisdictions, known as the “Early Adopters”, shortly after its introduction. This, along with pressure from the international fiscal community, has led to virtually all banking centres (including Luxembourg, Switzerland and Liechtenstein) agreeing to automatic exchange of information demands and shedding the long standing tradition of bank-secrecy.
The Early Adopters group will start reporting in terms of the CRS in September 2017. SA is included in this group. Other jurisdictions which form part of this group include Luxembourg, Liechtenstein, Malta, Cyprus, the UK, the UK’s Crown Dependencies of Isle of Man, Guernsey and Jersey, the UK Overseas Territories, France, Germany, Greece, India, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden. The rest of the signatory states will start reporting in 2018. This second-phase group includes Switzerland, Hong Kong, Singapore, Macao, Monaco, Antigua and Barbuda, the Bahamas, as well as Australia, New Zealand and Canada.
The measurement date for the Early Adopters group is 1 January 2016 and for the other parties to the CRS, 1 January 2017.
Reportable information in relation to an offshore account under the CRS includes the personal details of the account holder, the year-end account balance as well as the interest, dividends and other income or proceeds from sales credited to the account.
The scope of ‘reportable accounts’ information extends beyond offshore bank or investment accounts and includes information relating to beneficiaries and settlors of offshore trusts.
Establishing a trust in a state which is not party to the CRS is also no guarantee of escape, since any account held by such trust with a bank situated in a CRS-signatory state, for example, will require the trustees to disclose the identity of the trust’s beneficiaries, settlors and protectors to the bank, which in turn will disclose the information under the CRS.
Unlike settlors, however, discretionary beneficiaries who have no further interest in the trust do not automatically fall into the reporting net. They would only be caught if a distribution was made to them within the relevant reporting calendar year. For the Early Adopters group, this is likely to mean the period from 1 January 2015 to 31 December 2015 i.e. it is “live” now. For the remaining group, this is likely to mean the period from 1 January 2017 to 31 December 2017.
The implementation of the CRS will have two major implications for SA tax residents. Firstly, SARS is likely to discover any undeclared offshore funds, which would normally result in criminal prosecution and understatement penalties of up to 200%. Application to SARS under the Voluntary Disclosure Program (“VDP”), prior the undeclared funds being discovered, however, would grant relief from criminal prosecution and reduce the understatement penalty to a maximum of 10%, depending on the circumstances. There will always be liability for interest. There may also be Exchange Control implications, but these would depend on the facts.
The second implication is that SARS will gain access to an unprecedented volume and degree of information relating to SA tax residents’ offshore dealings and their offshore structures. Residents with such structures would be well advised to ensure they are compliant.
