Tax evader crackdown could reduce offshore banking options for expats

An initiative intended to catch tax dodgers could have a negative impact on those with perfectly legitimate bank accounts. Tax expert Howard Bilton offers advice

The draconian Foreign Account Tax Compliance Act (FATCA), introduced by the US Government to tackle tax evasion by its citizens, has already affected Britons living in the United States.

The Expat Channel reported last month how expats in America are being threatened with having their UK bank accounts shut down if they fail to return forms needed to satisfy the US Internal Revenue Service.

Some financial institutions, annoyed by the bureaucracy required to comply with FATCA, are reportedly pulling out of doing business with people with American connections, both US citizens and those living in the USA.

Those living elsewhere in the world should be aware that a global FATCA-style information exchange initiative is now in the pipeline, which will affect people of all nationalities.

The Common Reporting Standard, which is being driven by the Organisation for Economic Co-operation and Development, will impose similar obligations to FATCA on all foreign financial institutions (FFIs) around the world.

As with FATCA, the purpose of CRS is to prevent anybody evading tax by failing to make to make the proper declarations in their country of tax residence.

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The ambitious aim is to implement CRS globally by the end of 2017.

FFIs will be required to report financial information to their local tax authorities, which will then supply that information to the account holder’s country of tax residence.

UK expats are going to be affected because many of them, quite reasonably and to some advantage, choose to bank in offshore financial centres such as Jersey, Guernsey and the Isle of Man. Account holders in those island jurisdictions receive interest paid gross (without deduction of tax at source) and are able to enjoy the stability and familiarity of jurisdictions governed by UK law, within the UK banking system and subject to regulations as robust as those in the UK.

A UK expat working in Dubai might feel more comfortable banking in the Isle of Man, say, rather than in Dubai. There is a great shortage of banks offering retail services in Dubai. There are no tax issues here but under CRS the bank in the Isle of Man will have to report information on the expat’s bank account to the local Isle of Man tax authority and they must pass it to the tax department in Dubai (and to HM Revenue and Customs if the expat subsequently returns to the UK).

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The CRS reporting obligations will inevitably create additional costs for the bank, which they will almost certainly pass on to the customer. The worst case scenario, as has been the experience of US expats, is that banks will simply decide to stop providing services for non-residents. It would be strange, but not impossible, if all banks decided they would only let local residents use their services.

CRS certainly presents a problem for any UK residents who are banking outside the UK and are not compliant in their reporting to HMRC. An automatic report of their dealings will be given to HMRC and that is likely to trigger a tax investigation, fines and possibly criminal penalties.

The exchange of information by tax authorities is nothing new. Most countries, including offshore financial centres, have already signed tax information exchange agreements (TIEAs), another initiative driven by the OECD, and various other reporting initiatives such as the EU savings directive have been around for quite a while.

CRS will make the exchange of financial information automatic, which means that there is nowhere to run and nowhere to hide for those who rely on confidentiality and non-disclosure to unlawfully evade taxes. Lawful offshore tax avoidance or mitigation will still be alive and well but all planning will have to be legal and compliant and stand up to scrutiny. Expert advice is a good idea now and will be a necessity in the future. Anyone who doubts the legitimacy of their arrangements would be wise to seek professional advice immediately. Ignorance of the law is, and never will be, an excuse for failing to make the correct reports.