Additional reporting requirements brings headaches to banks and their clients

By Howard Bilton
May – 2016

The US Foreign Account Tax Compliance Act (FATCA) is now in force and primarily effects US tax payers. That means anybody who is resident in the US for tax purposes or who holds a US passport or green card. Readers are probably aware that US citizens and green card holders have the misfortune to be subject to US tax on their worldwide income wherever they live. This is a shame for US citizens as many of them live in low tax countries such as Hong Kong or the Middle East but still end up paying full US taxes on their earnings and wealth so can’t take advantage of the normal benefits of moving from home i.e. the ability to accumulate wealth because there is no or low taxes.

The way FATCA works is complicated but in simple terms means that any financial institution anywhere in the world that has dealings with US persons or the US itself must register with the IRS and then automatically report details of its dealings with any US persons. FATCA was designed to stop US persons illegally evading taxes by failing to report non-US bank accounts and non-US earnings. But it has proved such a headache for the financial institutions that many have decided they will no longer accept US clients and told any existing US clients to take their business elsewhere. Financial institution is broadly defined so covers virtually any provider of financial related services. FATCA is very effective and means that it is impossible for any US person to keep their affairs hidden from the IRS. For US persons there is no confidentiality whatsoever anywhere in the world any more.

The OECD have long desired something similar for the rest of the world and soon they will have it. The Common Reporting Standard (CRS) is scheduled to come into effect by the end of 2017 and will impose similar obligations to FATCA on all financial institutions anywhere in the world. Details have yet to be made entirely clear but the likely effect is that the financial institutions will have to report details of their dealings to the home country of everybody they deal with. 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. At the moment it appears as though exemption from the effects of the Act will only be given to those who bank and do all their financial dealings in the country where they are resident – presumably because the tax authorities think they can get any and all information about those dealings easily enough as long as everything takes place within its jurisdiction and within its borders.

UK expats are going to be effected because many of them, quite reasonably and to some advantage, choose to bank in offshore financial centres such as Jersey, Guernsey, Isle of Man etc when they move away from the UK. There are very good reasons for doing this. And those islands have made a business out of attracting UK expats to bank with them. The expats get their interest paid gross rather than having interest deducted at source which would happen if they banked in the UK but they can still take advantage of the relative stability and familiarity of a jurisdiction governed by UK law and subject to UK regulations or similar. For example, an UK citizen who moves to Dubai might well decide that it is better for him to bank in the Isle of Man rather than find a bank in Dubai. In fact there is a great shortage of banks offering retail services in Dubai but in any event the UK expat is likely to feel more comfortable with his assets with a UK institution governed by UK law in a jurisdiction in which the UK has great influence. It may well be that he can continue banking in the Isle of Man without difficulty but the Isle of Man bank is going to report his dealings to his country of residence – Dubai and to the UK if he moves back there. This may not be a worry but will bring about additional costs for the bank which are likely to be passed on to the consumer. Or, worse case scenario, is that the bank decides to stop providing services for non-residents. Unlikely when their sole rationale is built around that service but possible.

:: Also read FATCA & The OECD’s Common Reporting Standard – Q&A here.

CRS certainly presents a problem for any UK residents who are banking outside the UK and are not making the proper 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. CRS is not a drastic change. Most OFC’s have already signed Tax Information Exchange Agreements (TIEAs) with the OECD countries and there have been various other reporting initiatives such as the EU savings directive around for quite a while. However CRS does mean that there is nowhere to run and nowhere to hide for those who are relying on confidentiality to avoid or evade taxes. Now any offshore planning must be compliant. Offshore tax planning can substantially reduce taxes but it must be done right. If anybody has any doubt about the legitimacy of their arrangements they would be wise to seek professional advice immediately.

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