What do the main initiatives look like?
The well documented and widely adopted Automatic Exchange of Information (AEOI), known as the Common Reporting Standards (CRS), born out of preparatory work in 2014 by the Organisation for Economic Co-operation and Development (OECD), is likely to make the biggest impact. Although the first data was not exchanged under this initiative until late 2017, the impact of the impending threat of AEOI was quickly felt, brought about by amnesties, disclosure initiatives, and similar measures put in place prior to the start of automatic exchange where approximately 500,000 individuals disclosed offshore assets worldwide, and some EUR 93 billion in additional tax revenue has been collected as at June 2018*.
How are the reporting changes being received?
The pre-CRS gains have been publicly reported by the governments around the world, including those in France, Sweden and Australia.
The CRS has, surprisingly for some, gathered significant momentum. As of September 2017, 49 jurisdictions had undertaken exchanges, followed by 51 additional jurisdictions by September 2018. As of 22 November 2018 a further eight jurisdictions had committed to exchange information by 2020. A number of other jurisdictions, totalling 154, have committed to Exchange Information On Request (EIOR).
The likes of Switzerland, South Africa, the UAE, China and Russia have already exchanged information, and will continue to do so. Within Europe, the EU is fully committed to CRS, as are the UK Crown Dependencies, namely Guernsey, Jersey, and the Isle of Man. You can find a list of jurisdictions committed to CRS here.
One of the first jurisdictions to indicate the possible efficacy of automatic exchange is Japan. The National Tax Agency of Japan has gathered details of over 400,000 offshore bank accounts held by Japanese nationals through information exchange in 2017, whereas only 9,000 citizens declared offshore accounts in 2016**.
What is reportable under the CRS?
It’s not just bank accounts that are reportable under the CRS; custodians, certain brokers, collective investment vehicles, and insurance companies where contracts have redeemable cash values, including those held in complex company and trust structures, all have to be reported.
The reporting of assets will depend on the information held by financial institutions on account holders. This explains why financial institutions have been busy writing to investors to confirm relevant information, including tax residency in cases where they haven’t held it in the past, often with the threat of account closure if the required information is implausible, inconsistent or isn’t forthcoming
Not all information is provided to all participating governments; just from where the wealth is situated to where the owner is tax resident. Reportable information is supplied annually from all countries that have subscribed to CRS to other CRS countries where an account holder is tax resident and includes:
- information on the account holder
- account number
- the account balance or value
- all types of investment income, and
- sales proceeds and other income generated, or payments made, with respect to the account.
However, there is significant scope for over-reporting, as anything that is jointly owned is attributed as if it is fully owned by each joint owner. Where information held by a financial institution could indicate tax residency in multiple jurisdictions, for example where telephone numbers, correspondence address and home addresses reflect different countries of residence, reporting of the same asset may be made to the tax authority in each jurisdiction.
The CRS is a requirement that is binding on financial institutions, not clients, although clients will, of course, have their own reporting obligations, so the information supplied by them and through the CRS should match up.
Confidentiality and personal data
Needless to say, the CRS involves the collection and distribution of large amounts of personal data and financial information. Unfortunately, research*** shows that in the first half of 2018, over 3.3 billion records suffered data breaches worldwide in 944 separate incidents. Most of these breaches were caused by malicious outsiders gaining access to the data, with some resulting from accidental loss of the data.
Because of the sensitivity and significance of the data that the CRS harvests and shares, legitimately shielding this information from the risk of a breach could be a good option for clients.
Those with complex financial affairs may choose to invest in structures that contain them in a single wrapper, for example an offshore portfolio bond. In such cases, the assets linked with the portfolio bond are not reported individually; instead the wrapper is reported as a single holding, consolidating all holdings within.
The report value of your clients’ holdings remains the same, but by cutting down the amount of data transmitted, the chances of personal data being exposed or misinterpreted are reduced.
Complexity – is it a kind of tax?
Expatriate, international clients and even those in their home jurisdiction with wealth abroad often face increasingly complex tax environments. Only approximately a third of the world’s 174 sovereign states do not tax residents at all, or do not tax overseas wealth. The remainder generally do, even if the profit on that wealth is not remitted to their country of tax residence. These nuances and complexities often leave individuals confused about their obligations, which may be considered illogical. The prospect of the inadvertent non-payment of tax for such clients invariably exists and this is where legitimate tax deferment products can come in to their own.
So should your clients sell all of their overseas assets?
Not necessarily. Investing overseas is a perfectly legitimate thing to do. It is the non-disclosure of those assets, where obliged to do so, that the CRS is aiming to address. It is extremely important to discuss this issue with clients to ensure they understand this and whether the financial product or investment they own, or are beneficially entitled to, is reportable or not, and what the legitimate tax consequences of ownership are.
After all, in a widely published advert in UK newsprint in 2016, HMRC advertised that “If you have money abroad, you could owe tax on it. From next year we will begin to receive offshore account and trust information from over 90 jurisdictions. If you have declared all of your income, you should have nothing to worry about. Come to us before we come for you.”
***Beach level index from Gemalto. Data Privacy and New Regulations Take Center Stage, 2018 first half review.