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Time is fast running out for taxpayers who have not been reporting overseas accounts and investments to their home tax authorities. The new Common Reporting Standard (CRS) will introduce the automatic exchange of information on financial accounts that are beneficially owned or controlled by foreigners who are tax resident in other participating countries.
Over 50 signatory countries committed to adopt the CRS from 1 January 2016 and first reporting begins in 2017. Over 100 further countries have committed to start reporting in 2018. This OECD-led global initiative is forcing a decisive break with the longstanding commitment of many countries to protect the privacy of their citizens.
To satisfy CRS, financial institutions – including Sovereign – are obliged to collect certain data on clients in order to facilitate the reporting of accounts owned or controlled by those clients. This includes accounts in the names of companies, trusts and foundations. Reportable information will be transmitted to the local tax authority of the financial institution, which will then exchange the information with the tax authority of the controller’s or beneficial owner’s country of tax residence on an annual basis.
:: Also read how additional reporting requirements brings headaches to banks and their clients? here.
Generally, for each reportable account the financial institution will report the following information on each reportable person:
- name and address;
- country of citizenship and tax residency for the relevant year;
- tax identification number (TIN) or equivalent;
- account balance as at 31 December, or end of the chosen period in the relevant year;
- the total gross amount of income paid or credited in the year under review (including the aggregate amount of any redemption payments).
A reportable account is a financial account held by one or more reportable persons, or an account held by a “passive non-financial entity” (NFE) that has one or more controlling persons. As such, bank, custodian and investment accounts will all be reportable accounts, even if held indirectly through a corporate entity. Trusts are also regarded as entities for CRS purposes and a beneficial interest in a trust – known as an “equity interest” – will also be a financial account for reporting purposes.
Controlling persons for companies include individuals, such as directors and shareholders, who exercise control over the entity or ultimate beneficial owners who directly or indirectly own or control a certain percentage of the entity, typically 25%. Controlling persons for trusts include settlors, trustees, protectors and beneficiaries – including discretionary beneficiaries in the year that they receive a distribution.
Only those who have undertaken planning that relies in any way on non-disclosure should be concerned by the introduction of the CRS regime. The tax efficiency of particular structures should not be compromised by CRS and the reporting of information should not lead to new tax liabilities. However tax efficiency should never be confused with concealment. Every structure must be robust and capable of withstanding detailed scrutiny by the tax authorities.
All clients should ensure that they are in full compliance with their obligations to file full and complete tax returns in the countries in which they are tax resident. Those who are not compliant could face severe penalties so they need to get their affairs in order as a matter of urgency.
As part of the introduction of the CRS, the OECD recognised the importance of offering taxpayers the opportunity to become compliant. It encouraged governments to enable people who want to regularise their tax affairs to declare any income and wealth they may have concealed in the past through voluntary disclosure programmes.
Any client that is concerned about compliance should consult the tax or treasury website in their country of tax residence or seek advice from their tax adviser to establish whether there is a voluntary disclosure programme available to them. This will enable them to settle and rectify their tax affairs quickly and cost effectively in advance of the commencement of the automatic exchange of tax information.
:: Also read FATCA & The OECD’s Common Reporting Standard – Q&A here.
We would stress that the death of tax planning and offshore tax planning in particular has been widely and wildly exaggerated. Proper planning remains alive and well and can still be extremely effective. The possibilities available differ markedly depending on the tax residency and nationality of the client. Even those countries with the largest amount of anti-avoidance legislation still give substantial tax breaks to pensions, life insurance, charities etc. These statutory exceptions can be used very effectively to indefinitely defer or even avoid tax altogether with the full blessing of the relevant tax authority. In other countries, trusts or even simple corporate structures can achieve spectacular results. Doing nothing is rarely sensible.
The main costs faced by any business are normally rent, wages and tax. Failure to be efficient in any one of these areas would normally mean that a business cannot be competitive and could fail. We can assist.
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