We bring to your attention new developments for automatic exchange of financial account information in tax matters which have been published by the OECD known as the Common Reporting Standards (“CRS”). The CRS will have significant and wide reaching implications in relation to tax and banking transparency. The CRS will be relevant to you if, by way of example, you hold shares or interests in an off-shore company which (a) holds a bank account with assets outside your jurisdiction; or (b) acts as a lender to your on-shore business having advanced the loan from its bank account. Your interest will be capable of disclosure even if you are a discretionary beneficiary of a trust or foundation (or similar legal arrangement or entity) which in turn controls the relevant off-shore company. It is the case that the CRS will implement an automatic disclosure of the identity of the ultimate beneficial owners to your local taxing authority, without them having to demand the information to the tax authorities of the countries where the offshore company’s financial assets are held. The local tax authorities will receive information about their residents who are holding, directly or indirectly, assets abroad without having to identify these residents, their assets, the holding financial institutions nor the countries where the assets are held. CRS will therefore have serious and wide ranging implication for all off-shore structures which hold bank accounts.
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Korea, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovakia, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands and United Kingdom. It will be noted that many of the well-established off-shore jurisdictions have signed up to the CRS and are therefore participating jurisdictions.
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, Bahamas, Belize, Brazil, Brunei, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong, Indonesia, Israel, Japan, Malaysia, Marshall Islands, Mauritius, Monaco, Macao, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis (still unclear), Saint Lucia, Saint Vincent and the Grenadines, Samoa, Saudi Arabia, Singapore, Saint Maarten, Switzerland, Turkey, United Arab Emirates (still unclear) and Uruguay.
The countries listed in A and B above can vary as many of the traditional off-shore countries will have the difficult task to balance the risk of losing business on the one hand and the risk of being “blacklisted” on the other.
As it will be appreciated, there is significant international pressure for all countries to become part of the CRS and countries which do not do so over time may risk being “blacklisted” or denied access to international cross boarding financing to their detriment. Based on present discussion it would appear that a number of African jurisdictions will sign up to CRS in 2019 and soon thereafter.
The person who will be subject to reporting risk will be the resident persons (legal entities and natural persons) and the resident controlling natural persons, in the CRS Participating Countries, of the passive entities. Therefore, in the case of a trust the trustee, the settlor (even if “hidden” behind a company), the beneficiaries (including discretionary beneficiaries plus those “hidden” behind a company), the protectors and any person exercising any ultimate effective control like an enforcer or a shadow protector. Also included are any person (resident in the CRS participating countries) exercising any ultimate effective control / holding debt or equity interests / or exercising direct or indirect control through other means in some entities like private equity funds, foundations, partnerships, siftings and the like even if these entities are not resident in the CRS participating countries as long as they have financial assets held in the CRS Participating Countries. It should be noted that CRS includes broad “look through entities” rights with the aim of identifying the ultimate beneficial owners including those exercising the ultimate effective control through chains of control and ownership. An entity is characterized as a passive entity, by opposition to an active entity, when more than 50% of its income is a passive income and more than 50% of its assets produce or is in nature to produce passive income (for example, cash is such an asset in nature to produce passive income. Thus cash will be defined as a passive asset generating passive income even if it is not actually producing any income, i.e. by not being invested). The passive income is any investment income such as dividends, interests, royalties, cash value of insurance policies, investments’ income, proceeds from sale of financial assets (for example, derivatives, options and swaps).
These include custodian institutions, depository institutions, banks, insurance companies, trusts and private equity funds resident in reportable jurisdictions. The reportable institutions will be required to collect the financial accounts information (bank account balances, closure of accounts, gross proceeds from sale of financial assets, benefits from some life insurance policies used as investments wrappers and others) of the reportable persons in a calendar year and transmit them to the competent tax authorities of the countries of fiscal (tax) residence of these persons. A client could have more than one fiscal residency and thus the financial information could be transmitted to all these countries.
There are several ways to confirm residency including utility bills, a residency permit, mail sent to a PO BOX or a “care” of address, retained mail procedure, standing orders to a participating jurisdiction, countries of the phone numbers given to the RFI- and the RFI’s knowledge about the client’s residence status. Aggregation of accounts balances held, directly or indirectly, by natural persons or entities will also be implemented to determine whether a person is a high account holder. A client’s self-declaration by which the client will be confirming his tax residence (s) (a person could have more than one tax residency, an exhaustive list of all the tax residencies of the person must be provided) could also be utilized, and will automatically be so for all new bank account opening (these statements will be made under penalty of perjury).
It will be apparent that the ownership of an off-shore account or a lending entity owned directly or indirectly (including by utilizing trusts or foundations or similar structures) by a tax resident on one country will result in automatic disclosure to your tax authority without any need for the local tax authority to request for the information. It is also the case that tax payer will not be made aware of the fact that the disclosure is being made.
The levels of transparency will further be enhanced by the implementation of the Base Erosion Profit Shifting OECD Conventions. Base Erosion in essence also extends to non-passive companies (the active or trading cones) implementing stronger anti-avoidance rules. This is Daniel’s part. In this vein of transparency, Beneficial ownership registries in the countries of incorporation of the Offshore Companies (e.g. in BVI, Cayman…) will be created to identify the Beneficial owners of these offshore companies; making irrelevant in many instances the use of nominee shareholders and corporate directors. Finally the application of newly amended European Union Directives (EU Saving Directive and Mutual assistance in administrative matters) will consolidate in one register and make available the information about the owners of real estate held in the territory of the European Union. This information will be made available to non-European countries (e.g. African countries) through the recourse to the European Commission directly ( e.g. to avoid the tax authority of one African Country to question each single European country whether one of its resident holds immovable property in any of these countries).