The first exchange using CRS occurred in 2017 (49 countries), with a further 53 countries committed to exchange in 2018.
Alerting tax authorities
Financial institutions (FIs) in a jurisdiction that has agreed to exchange information with another jurisdiction using CRS are required to identify accounts that belong to people who are tax-resident that other jurisdiction.
The FIs must then send this information to their local tax authority.
The information includes name and address, tax number, date and place of birth, account number, FI details, account balance or value. The tax authority will then automatically share this information with the tax authority of the other jurisdiction (and vice versa).
Example one: Mr M, who is tax resident in Saudi Arabia, has an account in the UK with Bank Y. From this year (assuming all proceeds as planned), Bank Y must provide certain information about Mr M’s bank account to HM Revenue & Customs.
HMRC is then obliged to send this information to the Saudi Arabian tax authority.
The example indicates why some individuals are concerned about CRS.
Saudi Arabia has no income tax and no exchange controls. Why would they want such information and what will be done with it? There is particular concern about use of information and data security where individuals are resident in countries that have less than perfect rule of law or law enforcement.
Residents of Greenland may not be too worried but residents of Mexico, where there is a much higher kidnap risk, may be concerned about a summary of their private wealth ending in the wrong hands.
It is not only accounts belonging to individuals that are subject to CRS exchange. If an account belongs to an entity such as a company or a trust, it may also be reportable if its ‘controlling person’ is in a reportable jurisdiction.
In the case of a trust, the term “controlling persons” means the settlor, the trustees, the protector, the beneficiaries receiving distributions and any other natural persons exercising ultimate effective control over the trust.
Example two: Company A is incorporated in the British Virgin Islands. It is owned by a Jersey trust that was settled by Mrs P, a Russian tax resident, and the protector lives in Hungary. Company A has a bank account in Switzerland.
The trust’s beneficiaries are resident in Malaysia. CRS requires the Swiss bank to identify the Controlling Persons of Company A. The bank therefore looks through the ownership of Company A to the Jersey trust and may be required to treat Mrs P and the protector as the controlling persons of Company A.
If a beneficiary has received a distribution from the trust s/he will also be regarded as a controlling person. Information about Company A’s account will be passed to the Russian, Hungarian and, potentially, Malaysian tax authorities.
Can anything be done?
If Mr M or Mrs P and the trust beneficiaries have legitimate reasons for wishing to prevent information about their/company A’s accounts being sent to Saudi Arabia, Russia or Malaysia, what can they do?
The safest option is to cease their residence in those countries, which will then not automatically receive information.
If Mrs P has substantial business interest in Russia that she cannot simply abandon by leaving Russia, her options are very limited. It may be necessary to close the Jersey trust and transfer the funds outright to the beneficiaries. If the protector retires or is replaced by someone in another jurisdiction, then the automatic supply of information to Hungary may be halted.
All in all, investing across national border no longer offers privacy and in fact may open up personal affairs to a greater degree of transparency/nosiness (delete as applicable) than local ownership.