Is the CRS outrageous?
Only time will tell whether the benefit of enhanced compliance and effective enforcement will outweigh the costs.
The Common Reporting Standard (CRS) is a new international system for the automatic exchange of tax information promoted by the Organisation for Economic Cooperation and Development (OECD) and modelled on the United States’ Foreign Account Tax Compliance Act (FATCA). It will affect almost all of Maitland’s administered entities and clients, because most countries with which Maitland deals (apart from the United States) have signed up as “Participating Jurisdictions”.
There are two groups of countries that are “Participating Jurisdictions” for CRS purposes and they are adopting CRS one year apart from each other. For the “early adopters”, information starts to be collected on January 1, 2016, and exchange starts in the first half of 2017. For the “late adopters” the collection process begins a year later, on January 1, 2017, and exchange starts in the first half of 2018. The full list of the jurisdictions which have signed up to the CRS can be found on the OECD website.
What information is reported?
The information to be collected and exchanged relates to the international financial accounts of taxpayers. This does not just include reports on the taxpayer’s bank or custodial accounts and life insurance products, but also reports regarding:
- shares in and loans to international companies owned directly or indirectly by the taxpayer;
- trusts of which the taxpayer is a settlor or beneficiary or to which the taxpayer has made loans; and
- the financial accounts of certain trusts or companies where the taxpayer is a “controlling person”, including as a settlor, beneficiary or protector of a trust.
The information reported includes full details of the taxpayer, of the financial institution filing the report, and account details, including the account balance or value at the end of the year, movement on the account and the fact of any account closure.
CRS reporting is in addition to the reporting required under FATCA and the version of FATCA imposed by the UK on its Crown Dependencies and Overseas Territories (CDOT).
How is the information collected?
All Participating Jurisdictions are introducing laws requiring financial institutions to identify and review “financial accounts” and check whether they are reportable. For this purpose, many trusts and companies are financial institutions, as well as banks, insurance companies and investment funds. Accordingly each financial institution must do “due diligence” as it did for FATCA and CDOT, but on a new, comprehensive basis. Information regarding reportable accounts then has to be collected and submitted at the appropriate time. The work which trusts, companies and investment funds have to undertake to comply with this obligation is significant. Maitland will be offering a compliance service to financial institutions to discharge these new obligations.
What can clients expect?
Over the next two years, clients must expect enquiries from all international financial institutions, including trusts and companies, where they are direct or indirect settlors, beneficiaries, protectors, shareholders or have made loans. The enquiries will be made to assemble or clarify information required for CRS but which is not already held, including details of tax residence, tax identification numbers, and place of birth. A client who is reportable should also in due course receive a notification to the effect that a report has been or will be filed regarding him or her. Such notifications are likely to be generic, rather than specific. Clients can also expect to notice an impact on the cost of running international entities which will rise to accommodate the expense of compliance with CRS.
Clients who are UK residents but non-domiciled will also note the withdrawal of the “alternative reporting regime” previously available as part of the UK’s automatic exchange of information arrangements with its Crown Dependencies and Overseas Territories.
Is the CRS an outrageous and expensive invasion of privacy, or can it be justified?
The case for the CRS is made by government on grounds of fairness. The evasion of tax by some increases the burden on honest taxpayers. Governments also see a more comprehensive and secure tax base as an uncontroversial way of raising additional revenue. They expect it to result in enhanced compliance and more effective enforcement of revenue laws. The CRS may be expected to be popular with electorates for the most part unaffected by it.
There is no doubt that the CRS will increase the costs associated with structuring wealth through international financial centres. These centres are vital parts of the international financial system, channelling resources effectively and in a tax neutral manner into investment in both developed and developing economics and thriving industries. The CRS will clog and may harm this essential mechanism.
Only time will tell whether the benefit of enhanced compliance and effective enforcement will outweigh the costs. The costs are not borne by those who reap the benefits and are easily dismissed as unimportant by legislators who will not have to fund the expense. The benefits may well be less than anticipated, perhaps very significantly less.
It is rather more outrageous that the information collected by the CRS includes information that is frequently not required to as part of the tax collection and enforcement process. For example, comprehensive information will be collected regarding balances on accounts by countries that do not impose wealth taxes. This even includes information regarding accounts specifically exempted from taxation, such as the international accounts of UK residents relying on non-domiciled status. Governments will, for the first time in many cases, have greater oversight of the balance sheets of taxpayers, including those of international trusts and companies. This will give rise to “data mining” opportunities which, in the long run, may be more significant than the immediate consequences of enhanced compliance and effective enforcement.
- The CRS will enable revenue authorities to review structures which are currently tax neutral or receiving favourable tax treatment, perhaps resulting in a reassessment of the structure or a change in the law to increase revenues.
- It will enable governments to establish new taxation strategies targeting previously untaxed resources.
Furthermore, the very considerable amounts of data collected will increase the vulnerability of taxpayers. How soon will it be before an unscrupulous or oppressive government uses information collected to the disadvantage of its subjects or of a particular group? How soon will it be before some of the information collected and transmitted around the world appears on Wikileaks, or is used to inspire kidnapping or blackmail?
Insofar as the CRS is a “fishing exercise” conducted at the expense of the international financial community, its legitimacy is not just a matter of a cost/benefit exercise. It could fundamentally prejudice basic human rights or freedoms, or affect the safety and privacy of us all.
Is there room for transparency planning?
Maitland believes that its clients are entitled to know what will be reported about them. Clients may be legitimately concerned about the effects of the reports filed upon their privacy, and even on their personal security.
In some circumstances, structures may give rise to surprising or unnecessary reporting; for example reports that may be filed regarding protectors. Moreover, the precise reports to be filed are affected by numerous technical matters, such as the classification applicable to entities. Classifications may, for example, be affected by the way and by whom entities are managed or operate. The responsibility for reporting is a consequence of the application of the rules to the structure and there may be room for choice about how the rules apply. A family structure may prefer to assume responsibility for its own reporting rather than leaving other financial institutions like banks, with which the family is less closely connected. Structures that close before reporting commences will not be subject to reporting. Moreover, the date when reporting commences depends upon the jurisdiction of entities; and this is something that can be reviewed.
