PWS: New Reporting Regulation Will Have Big Effect on Family Offices
A new agreement on international tax and financial information exchange aims to provide less opportunity to shelter wealth from taxation. Global wealth managers and advisors need to make sure they and their clients are in compliance.
CHARLOTTE, N.C. (PRWEB) JULY 18, 2018
The Common Reporting Standard (CRS) for the automatic exchange of tax and financial information went into full effect at the beginning of 2018. The CRS, which has been agreed to by 142 countries, requires financial institutions and wealth managers to provide, automatically and without having to be asked, detailed deposit and income data to the home governments of virtually every sizeable account holder.1 “CRS represents a major change in the information exchange landscape,” says Craig Pearson, CFA, CEO of Private Wealth Systems, Inc. Pearson, whose company is a world leader in consolidated multi-asset, multi-manager, multi-jurisdictional investment reporting, adds, “The new regulation will drive family offices to create complex multi-jurisdictional entity structures in order to remain private. The increase in complexity will require family offices, and their advisors, to have a reporting system that supports these complex structures in order to gain control and actionable oversight over their total wealth.”
The Common Reporting Standard was developed by the Organization for Economic Co-operation and Development at the request of the G8 and G20. Its purpose is to reduce tax evasion by individuals using offshore financial accounts, either directly under their own name or indirectly under a corporate cover name.2
Tax evasion, Pearson notes, is necessarily surrounded by secrecy and opaqueness, so there are no reliable statistics on just how big a problem CRS is trying to solve. A recent estimate by the National Bureau of Economic Research gives the total as at least 10% of the world’s GDP, and possibly a great deal more.3 With gross world product at about $80 trillion4, hidden wealth accounts for perhaps eight trillion dollars—which, if taxed at, say, 10%, would yield the world’s economies an additional $800 billion in revenue.
One name conspicuously missing from the list of signatories to CRS is that of the United States. The U.S. has said it doesn’t need to be a party to the standard because it already gets the information it needs through the Foreign Account Tax Compliance Act (FATCA) of 2010, which requires all non-U.S. financial institutions to report to the IRS about any accounts they have that belong to Americans. FATCA, however, does not supply automatic reporting of holdings in the US by citizens of other nations, which is regarded by CRS signatories as a significant problem—and possibly the emergence of the US as a tax haven for wealthy foreigners.5
The European Union, in fact, has recently threatened to put the U.S. on the European Union tax blacklist if it fails to agree by June 2019 to exchange the details of foreign bank account holders In the U.S. with tax authorities in their respective home jurisdictions.6
In reality, notes Pearson, the reasons countries do or don’t comply with international standards tend to be rooted in domestic politics. In the US, suggests one sympathetic observer, while the Treasury wants more data-swapping and corporate transparency, the Congress is in no hurry to enact the legislation this would require.7
Meanwhile, senior industry observers agree, the path forward for family offices and wealth managers is clear. No matter when or how the remaining procedural disputes are settled, the coming years will see increasing transparency of account holder information. Practical challenges will include filing multiple returns covering reportable accounts, managing relationships with multiple authorities and complying with data privacy laws, and ensuring that reports are filed in respect of all financial institutions and in the correct format.8
“CRS will increase complexity around ownership structures as family offices seek methods to remain private,” says Pearson.
Private Wealth Systems was purpose built to support the most complex portfolios and ownership structures, and the company is continuing to work with family offices around the world that need greater control and oversight over their sophisticated wealth.