The ‘end’ of tax evasion

The UK is one of several countries to introduce voluntary disclosure schemes. More people are coming forward to regularise their affairs as they realise there is nowhere left to hide in this new world of tax transparency.

Tax authorities and financial institutions are gearing up for the new automatic exchange of tax information under the Common Reporting Standard, which goes live on January 1.

The Organisation for Economic Cooperation and Development (OECD), which developed the new standard, has warned that transgressors are facing “the last window of opportunity” to disclose previously hidden offshore assets and income.

Each participating country will receive much more information on their taxpayers’ overseas assets than ever before.

Until now, they only received information on request, based on evidence of tax fraud or another crime, so receiving information automatically, even on accounts they were not aware of, is a major change.

While there has been automatic exchange of information in Europe under the Savings Tax Directive, this only related to interest income. The new regime covers a much wider range of investment income, as well as account balances.

The definition of ‘financial institutions’ that need report is broad, and besides banks includes insurance companies, certain investment vehicles and trusts. The data they collect on their international clients will be passed on to the tax authorities of the clients’ country of residence.

In the UK, HM Revenue & Customs (HMRC) has published its draft guidance notes on how the Common Reporting Standard will be implemented.

Financial institutions are obliged to carry out due diligence to establish the tax residency of the account holder and keep the information for six years.

For existing accounts this needs to be done by December 31, and they start capturing the information for new accounts from January 1.

The guidance sets out the information that must be collected and disclosed: account holder’s name, address and taxpayer identification number; jurisdiction to which the information is reportable; account number (or similar); balance or value at end of calendar year or other appropriate period; and details of the financial institution. There are additional reporting requirements depending on the type of account that is being reported on.

Since the Common Reporting Standard is reciprocal, HMRC will benefit from information from all the other participating countries around the world.

Transgressors are facing ‘the last window of opportunity’ to disclose previously hidden offshore assets and income

It will receive the first data in 2017, relating to fiscal year 2016. It also has agreements with its Crown Dependencies (Channel Islands and Isle of Man) and, in this case, will receive information in September 2016 relating to accounts held in 2014 and 2015.

In preparation for obtaining all the data, the government has been investing in data analytics for HMRC and allocated an additional £4m in July’s budget. This will expose undeclared income and gains arising from overseas assets and investments.
The UK is one of several countries to introduce voluntary disclosure schemes. More people are coming forward to regularise their affairs as they realise there is nowhere left to hide in this new world of tax transparency. The OECD estimates that the amount received under these schemes totalled €37bn in the five years to 2014.

In the UK, the Liechtenstein Disclosure Facility and Crown Dependencies Disclosure Facilities close at the end of this year, several months earlier than planned.

The Liechtenstein facility is considered the most favourable route for UK residents to become compliant with HMRC; penalties are limited and it grants immunity from criminal prosecution.

The government has said that after this there will be one last opportunity for evaders to come clean, before it starts receiving information under the new regime.

This ‘last chance’ disclosure regime will be less generous than its predecessors. The penalties will be stricter (at least 30 per cent on top of the tax owed and interest), with no guarantee of immunity.

While much of this article uses the UK as an example, the new automatic exchange of information regime equally affects residents of Malta. This is a step change in the world of cross border taxation.

Everyone needs to ensure their tax planning is legal and compliant. Note that although the first reporting takes place in 2017, it is for calendar year 2016, so there is only a short amount of time before this new regime starts.

There are effective arrangements available here, but you should take personalised advice to ensure you get it right.