Worldwide: Tax Transparency – The New Global Reporting Standard

A COMMON REPORTING STANDARD ACROSS THE WORLD

The goalposts in international tax reporting are moving rapidly.

In conjunction with the G20, the OECD developed the Common Reporting Standard (CRS) as a global standard for the automatic exchange of information. This was approved by the OECD Council on 15 July 2014 and in October 2014 over 50 jurisdictions confirmed adoption of the CRS by signing a multilateral competent authority agreement. Nearly 60 jurisdictions have now committed to start exchanging data in September 2017: many others will begin participation in 2018.

How It Will Work

Financial Institutions (which include banks, insurance companies, trusts and TCSPs) will be compelled under domestic law to provide their local taxation authorities with financial data on relevant persons (ie the beneficial owners of bank accounts and those with an interest in trusts and other entities) who are resident in other participating countries. This data will be passed automatically to the relevant countries (within nine months of the end of the relevant calendar year) in a standard format that can easily be imported into the taxpayer databases of each country. The data will be analysed to identify those who have evaded or avoided tax and even those who may simply have made an error in their tax returns.

As with FATCA, the financial institutions that must provide data include banks, other depository and custodial institutions, investment entities and some insurance companies. However, unlike FATCA, there are fewer exempt institutions.

Local reporting Financial Institutions will have due diligence obligations which differ for new and existing accounts, high and low value accounts as well as individual and entity accounts. The obligation will include a review of electronic data for evidence of where each of their customers is resident (including PO boxes, ‘care-of’ addresses, ‘hold mail’ instructions and standing instructions to send funds to UK based accounts) but could also include a ‘paper search’ of existing documents, self-certification by the client and an ‘actual knowledge’ test for client relationship managers.

Whose Data Will Be Exchanged

Reporting is in respect of financial accounts, which includes bank accounts but also includes interests in trusts and other entities. Passive holding entities will be ‘looked through’ with reporting taking place in respect of the controlling persons of those entities. Note that the US$50,000 de minimis threshold for existing customers that applies under the FATCA is not replicated in the CRS so many more account holders will need to be identified and reported on.

Reportable Information

IMPLICATIONS FOR YOU AND YOUR CLIENTS

Implementing the CRS will place significant responsibilities on financial institutions.

With so many countries involved, such a wide range of assets covered and a very broad spectrum of owners and asset controllers to report on, even those already reporting under FATCA will see a step change in their compliance tasks.

Clearly, communicating effectively with clients will be key to managing these new responsibilities: all customers (including controllers of certain entities resident overseas) will have to be informed about the new reporting requirements for participating countries, and be asked to provide identifying information. An area of concern may be establishing the country or countries in which a taxpayer is tax resident. In many cases the taxpayer should be able to self-certify. However, in certain cases the situation may be complex. FIs and their clients need to ensure that the information held by the FI accurately reflects the true tax position.

Although it will be a difficult message to give to clients, it is vital that they are warned of potential tax consequences of reporting under the CRS. If the relevant income or gains that will be reported from 2017 have not previously been reported in their country of residence (even for legitimate reasons) they are likely to be investigated by the local tax authorities and could face a large tax bill or worse. No matter which country they live in, putting any tax irregularities right or simply explaining their overseas assets to the tax authorities before the new reporting starts is always likely to be the best option.

HELPING UK RESIDENT CLIENTS

The UK was the first jurisdiction to implement a FATCA agreement with the USA and used it as a template to collect data on its own citizens by striking similar inter-governmental agreements with the Crown Dependencies and the British Overseas Territories (CDOTs).

These agreements, also referred to as UK FATCA, took effect from 1 July 2014.

UK FATCA incorporates an alternative reporting regime that non- UK domiciliaries can opt into to preserve some privacy (although payments into and out of their accounts are reported). However, the CRS is a global standard and it does not reflect local reporting variations, such as the UK’s non-domicile regime. The CRS will supercede UK FATCA meaning that UK residents with accounts in CDOTs will fall under one reporting regime for the period 1 July 2014 to 31 December 2015 but will be subject to more detailed reporting from 1 January 2016 under the CRS.

In the UK, all data received by HMRC’s Offshore Co-ordination Unit will be fed into HMRC’s ground breaking data matching software ‘Connect’. This will allow HMRC to identify UK residents with overseas assets and quickly check that their UK tax returns (past and present) are correct. Where inconsistencies are spotted, HMRC has a wide range of investigatory powers to establish tax arrears and can charge penalties of up to 200% of the tax due or even prosecute deliberate tax evaders. It also profiles taxpayers and those who are identified as having significant offshore wealth will come under increased scrutiny from HMRC’s specialists teams. For example, it will take a close interest in individuals who are the settlors of offshore trusts, even if they are excluded from benefitting from the trust.

Achieving Certainty

If errors have been made, it will be the taxpayer’s job to persuade the tax authorities that the error was innocent, or at worst careless, rather than deliberate tax evasion. For example, non-UK domiciled individuals may have mistakenly remitted from mixed funds offshore or made other inadvertent remittances.

The best policy now is for taxpayers and their advisers to review all their overseas financial accounts to ensure there are no skeletons and, even where all is correct, what additional administrative burdens may be triggered in the UK as a result of this reporting. If there are any, the best way of dealing with them is to make a voluntary disclosure to the tax authorities.

Using the Liechtenstein Disclosure Facility (LDF) will often be the best route as it offers a partial amnesty, guaranteed immunity from prosecution, no ‘naming and shaming’ and lower penalties than other disclosure routes. However, both the LDF and the Crown Dependencies Disclosure Facilities are only open for registrations until 31 December 2015 – so the clock is ticking.

All existing UK disclosure amnesties are only open for registrations until 31 December 2015 – so the clock is ticking.