Update On The Common Reporting Standard

Expat Briefing Editorial Team, 29 March, 2018

Not only is it becoming easier for people to move around the world to live and to work, it is becoming easier to move money and investments across national borders too. According to the OECD, this makes things a lot easier for people who want to hide their money abroad in order to evade tax. But with the new Common Reporting Standard (CRS), it hopes that it will be much harder for people to fly under the radar.

"Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdiction," the OECD observes.

"Countries have a shared interest in maintaining the integrity of their tax systems. Cooperation between tax administrations is critical in the fight against tax evasion and in protecting the integrity of tax systems. A key aspect of that cooperation is exchange of information."

Numerous legal mechanisms have been put in place for tax authorities to exchange information with each other. These include bilateral double taxation avoidance agreements, regional initiatives like the European Savings Tax Directive and its successor the Administrative Cooperation Directive, and international agreements such as the OECD Convention on Mutual Administrative Assistance in Tax Matters. The CRS effectively standardizes these separate regimes, at the same time lowering administrative costs, according to the OECD

"A proliferation of different and inconsistent models would potentially impose significant costs on both government and business to collect the necessary information and operate the different models," the OECD states.

The CRS Basics

The CRS was endorsed by G20 finance ministers in February 2014 and the final version was approved by the OECD Council in July that year. The Standard sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Automatic Exchange

Countries that have signed up to the CRS will exchange information "automatically" with one another. This represents something of a step change in international tax enforcement.

Traditionally, information about an individual or business has been sent from one tax authority to another on request, based on evidence that tax fraud or some other crime has taken place. However, the OECD, which is driving new international standards in taxation, has long called for such information to exchanged automatically, and slowly, this has concept has come to be accepted as the norm rather than the exception; the EU could be said to have led the way with the Savings Tax Directive, followed by the United States with FATCA.

In summary, "automatic" exchange of information will entail the systematic and periodic transmission of "bulk" taxpayer information by the source country of income to the country of residence of the taxpayer concerning various categories of income or asset information.  The information exchanged is normally collected in the source country on a routine basis, generally through reporting of the payments by financial institutions and other payers.

From FATCA To "GATCA"

While there are technical similarities between the CRS and FATCA, there are some key differences, mainly that US-specific rules have been removed from the CRS. For instance, FATCA is based on US citizenship, a concept fundamental to the US tax system, whereas the CRS is based on residence. Also, unlike FATCA, the CRS does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. Additionally, the CRS has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in automatic exchange under the standard.

What Information Will Be Exchanged?

The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, 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.

Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement that financial institutions "look through" passive entities to report on the relevant controlling persons.

The financial institutions covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they present a low risk of being used for evading tax and are excluded from reporting.

Will My Information Be Kept Private?

In theory, yes. The standard contains specific rules on the confidentiality of the information exchanged and that the underlying international legal exchange instruments already contain safeguards in this regard. Where these standards are not met (whether in law or in practice), countries will not exchange information automatically.

Time will tell how watertight the system is in practice, however.

Which Countries Have Signed Up To The Standard?

Over 100 jurisdictions have either begun exchanging information under the CRS, or have committed to do so. All bilateral exchange relationships in place as of December 21, 2017, can be viewed on the OECD's Automatic Exchange Portal.

Policing The Standard

The OECD recently launched a consultation on tackling the circumvention of the Common Reporting Standard, through the use by individuals of residency by investment (RBI), or citizenship by investment (CBI) schemes.

These schemes typically entitle individuals to reside or gain citizenship through making an investment in a territory. They are particularly prevalent in Caribbean territories but similar schemes are offered in the EU, such as in Malta.

Launching its consultation, the OECD said: "Individuals may be interested in these schemes for a number of legitimate reasons, including greater mobility thanks to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability. At the same time, information released in the market place and obtained through the OECD's CRS public disclosure facility, highlights the misuse of RBI and CBI schemes to circumvent reporting under the Common Reporting Standard.

On March 9, 2018, the OECD issued new model disclosure rules targeting those attempting to avoid their reporting obligations. These require lawyers, accountants, financial advisors, banks, and other service providers to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the CRS or prevent the identification of the beneficial owners of entities or trusts. The new rules also require the reporting of structures that hide beneficial owners of offshore assets, companies, and trusts.

Tags: agreements | business | interest | dividends | Tax | Expats | FATCA | individuals | investment | Malta | Russia | standards | trusts | enforcement | law | offshore | tax authority | G20 | insurance | education | tax |

 




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