Technical Sales Manager at Old Mutual International
You can run, but you can’t hide
The Organization of Economic Cooperation and Development’s (OECD) Common Reporting Standards (CRS) - also known as Automatic Exchange of Information - is gathering pace post FATCA. For decades, developed economies have wrestled with the notion that wealth overseas, whilst not illegal, can help facilitate the evasion of tax. Where self-assessment can fail, the CRS will fill in the gaps.
Just five years ago, the suggestion that more than half the countries in the world, representing significantly more than that in terms of investible wealth, would be systematically sharing client information might have been seen as a fantasy. With the infrastructure established through FATCA, and a widespread growing frustration with the hidden economy, compounded by the significant public sector debt post the banking crisis, the OECD has galvanised almost 100 countries into action. As of 11 December 2015, this comprises 56 ‘early adopters’, with a further 41 counties following suit just a year later, and another three waiting in the wings. See: http://www.oecd.org/tax/transparency/AEOI-commitments.pdf
Surprising to some will be the inclusion of the likes of Switzerland, Singapore, the UAE, China and Russia, and the exclusion currently of the USA. Within Europe the EU is fully committed, as are the UK Crown Dependencies, namely Guernsey, Jersey and the Isle of Man. Specifically, the EU has transposed the CRS through a directive on ‘Administrative Co-operation’, so as to regulate member states as between themselves, and at the time of writing, most participants are busily translating into domestic law the appropriate bilateral taxation treaties or Tax Information Exchange Agreements (TIEAs) as a necessary precursor.
Like FATCA, the detail is fiendishly complicated, with over 300 pages of commentary and 200 pages of implementation notes contained with the OECD CRS portal http://www.oecd.org/tax/automatic-exchange/. Although not all countries have finalised their domestic requirements or published guidance, from the currently available information, who will this impact, how and when?
Unlike the drawn out and often unachievable process of exchange of information upon request, the CRS represents a quantum advance by providing an automatic exchange of information. Not, of course, all information to all participating Governments, but information based upon tax residency. Whereas FATCA provides data to the IRS on US ‘persons’ (citizens and green card holders) with wealth outside the US, the CRS operates on a tax residency basis (with disregard for nationality, domicile or citizenship). In other words, the CRS provides that a UK domicile, tax resident in France, with wealth in Singapore, will have data on them and their relevant assets in Singapore made available by the Singapore financial institution annually to the French tax authority (albeit through the Singapore tax authority). Like FATCA, the reporting of assets will depend on the information held by financial institutions on account holders and the self-certification made by them to the institution.
The CRS prescribes due diligence procedures to be adhered to by financial institutions to identify reportable accounts, which are defined in order to avoid an abusive interpretation of the rules. Reportable information includes information on the account holder, the relevant account number, the account balance or value, all types of investment income, and sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account.
Reporting institutions do not only include banks, but also custodians, certain brokers, collective investment vehicles and insurance companies where contracts have redeemable cash values.
Reportable accounts include those held by individuals, trusts and foundations, with a look through to passive entities to report on the individuals that ultimately own or control them.
The CRS intentionally does not restrict other types or categories of automatic exchange of information; rather it provides a minimum standard in the field of information exchange where some jurisdictions may agree to exchange information beyond the minimum prescription.
In terms of timing, without slippage and subject to domestic arrangements being in place, the first information from the 56 early adopters will be available for exchange in September 2017, for the calendar year 2016, and annually thereafter, with a rapidly growing number of participants. We should remember that holding wealth overseas is often perfectly legal. It is the non-disclosure of wealth where obliged to do so that is illegal and this is what CRS is aiming to address.
There may be other non-tax benefits too, such as the availability of the type of investment, currencies and administrative features. Just as the use of trusts allows the owner to choose in confidence from family and friends who will benefit, by how much and when, wealth offshore will continue to meet, legally, various financial planning needs, well beyond the introduction of the CRS.
David Denton is Technical Sales Manager at Old Mutual International, part of Old Mutual Wealth.