We are entering a new era for international tax planning. Financial privacy is no more. 2013 saw unprecedented support for global automatic exchange of information and a pivotal move to multilateral tax agreements. Now, in a concrete step forward, the Organisation for Economic Cooperation and Development (OECD) has released the new global standard for the automatic exchange of financial information. It will apply from the end of next year.
The Common Reporting Standard (CRS) was developed with G20 countries and in close cooperation with the EU. Released in February, OECD secretary-general, Angel Gurría, described it as a “real game changer”.
It is expected to be adopted by all G20 countries as well as many other financial centres. So far 42 jurisdictions have committed to the new standard, from as far afield as Argentina and South Africa and including Spain, France, Portugal, Cyprus, Malta, UK, Jersey, Guernsey, Isle of Man and all the UK’s Overseas Territories.
A joint statement from the 42 countries explained that "tax evasion is a global problem and requires a global solution, removing the hiding places for those who would seek to evade their legal obligations”. They believe the single worldwide standard for automatic exchange of information between tax authorities will provide a step change in their ability to clamp down on tax evasion.
They committed to the early adoption of the Common Reporting Standard, and called on other countries and jurisdictions to commit to join at the earliest. They warned that only those financial centres which embrace the new tax transparency and work in close cooperation to tackle cross border tax evasion will prosper in future.
After G20 Finance Ministers met in Sydney later in February, a communique confirmed that they will begin to exchange information by the end of 2015.
The new standard sets out the type of financial information to be exchanged, the institutions that need to report, the various types of accounts and taxpayers covered. It also includes common due diligence procedures which financial institutions will need to follow.
Each country and jurisdiction will have to obtain information from financial institutions on their clients, and forward this to the clients’ local tax authority on an annual basis. This will happen automatically, for all clients, and not just on request.
Institutions will be obliged to review and collect information to identify where the account holder is resident for tax purposes, so that information can be provided to the relevant tax authority.
The standard has been designed with a very wide scope, to catch a range of income. It includes all types of investment income, including interest, dividends, insurance policy pay-outs and similar income. Notably it also covers account balances and the proceeds made on selling assets.
The financial institutions required to report do not only include banks and custodians, but also brokers, certain collective investment vehicles and certain insurance companies.
Reportable accounts include those held by individuals and entities such as trusts and foundations.
Countries will have some leeway to exempt certain types of low risk institutions. For example, the UK’s HM Revenue & Customs (HMRC) said it will use domestic legislation to exclude UK registered pension schemes.
The OECD is developing commentary to accompany the Common Reporting Standard. This is expected to be published in June and will explain how the standard will be implemented. The final common standard is expected to be published when G20 finance ministers meet in September.
The OECD explained that its new standard draws extensively on its earlier work in this area, as well as on progress made within the EU and globally. It noted that the recent intergovernmental implementation of the US Foreign Account Tax Compliance Act (FATCA) “acted as a catalyst for the move towards automatic exchange of information in a multilateral context”.
Although the Common Reporting Standard is based on FATCA, there are a few differences. It is designed for information exchange between any two countries, and is based on residence – where the individual pays tax – rather than citizenship. It also removes thresholds which limit the number of accounts to be reviewed, and the definition of “financial account” has been changed in certain circumstances.
It is important for everyone to consider how the loss of financial privacy could affect you, and ensure your tax planning is fully compliant with the tax legislation in your country of residence. You also need to consider any country where you have assets or an interest. For example, if you leave an inheritance to children in the UK, your tax mitigation arrangements and estate planning need to pass scrutiny by HMRC, as well as by your local tax authority.
Cross border tax planning can be a minefield at the best of times, it is now even more critical that you get it right. It is a new world. Are you prepared?
Written by Gavin Scott, Senior Partner, Blevins Franks
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