Offshore accounts: automatic exchange of tax information is coming

Background

In recent years governments and tax authorities around the world have become increasingly concerned that certain taxpayers may have evaded tax by holding funds outside of their home jurisdiction.

In an attempt to prevent this, the Common Reporting Standard (CRS) was developed by the Organisation for Economic Co-operation and Development (OECD) working with the G20 countries and the European Union. The CRS is based broadly on the US Foreign Account Tax Compliance Act (FATCA) which is already in force.

The governments of 51 jurisdictions signed a multilateral agreement on 29 October 2014, to automatically and systematically exchange tax information. Previous agreements concerning the exchange of tax information required the information to be formally requested and be pursuant to a tax investigation; this new agreement will be the first to exchange such information automatically.

Nearly 100 jurisdictions have now committed to automatic information exchange, and of those, 56 jurisdictions (including the UK) have committed to commence automatic information exchange by September 2017. It is thought that 35 more will join them by September 2018.

Financial Institutions Required to Report

Some financial institutions that may have a duty to report include:

• Banks (including local banks)
• Custodial institutions
• Trust companies
• Brokers
• Insurance companies
• Collective investment vehicles
• Investment managers and funds.

It should be noted that certain non-reporting financial institutions under FATCA are reporting institutions under CRS.

Accounts That Are Reportable

The accounts that are reportable include accounts held by individuals and entities, such as trusts and foundations.

An account held by an individual (and entities in some cases) would usually be a reportable account if the account holder is tax resident in a reportable jurisdiction. There will be special rules for ‘passive non-financial entities’.

Details and Information to be Reported

The following account holder details will be reported:

• Name
• Address
• Taxpayer identification number (e.g. UTR number in the UK)
• Jurisdiction of residence
• For individuals – date and place of birth
• For entities – the above for each controlling person
• The account details
• The financial institution’s details.

The following financial information will be reported:

• The account balance
• Interest, dividends, and sales proceeds from financial assets
• The applicable currency.

Financial institutions need to be able to identify the tax residence of each and every one of its account holders, and have the ability to report the necessary information to the relevant tax authority.

HM Revenue & Customs (HMRC) and other tax authorities around the world will now have access to a vast amount of data, so it is becoming increasingly important for account holders to regularise their affairs at the earliest opportunity, as the penalty and disclosure regime will become much less favourable going forwards.

Risk

Alongside the introduction of the CRS in the UK in 2017, the latest HMRC consultation document has proposed increased penalties for offshore tax evaders.

Penalties are calculated in relation to the jurisdiction applicable and that jurisdiction’s level of tax transparency, between 100% and 200% of the tax due. There may also be a new ‘aggravated penalty’ for moving proceeds around jurisdictions to evade tax, this could be a further 50% penalty. Offshore penalties will also take Inheritance Tax (IHT) into account.

In addition to these new civil penalties, HMRC has announced that they will make the criminal prosecution of tax evaders easier and they will also face the risk of being publicly ‘named and shamed’.

HMRC has also stated that an ‘enabler’ who provides services which assist a UK taxpayer to evade tax may also face penalties. Such ‘enablers’ include:

• Providers of planning or bespoke advice to tax evaders
• Those who set up or manage companies, trusts, foundations etc. for tax evaders
• Those who open or manage bank accounts, or provide legal services to tax evaders
• Those who provide financial advice or financial assistance to tax evaders
• Those who fail to fulfil their reporting, regulatory or legal obligations in respect of tax evaders
• ‘Middlemen’ who introduce tax evaders to some of the above ‘enablers’.

The proposed penalties to be levied upon ‘enablers’ will be 30% to 100% of the revenue lost (with a minimum of £1,000), per enabler.

It has also been announced that there will be a new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion.

Key Dates

• 31 December 2015 – due diligence cut-off date for pre-existing accounts; financial institutions will be required to capture information for accounts in existence at this date, as well as any accounts created after
• 1 January 2016 – the first (2016) period relating to automatic information exchange under CRS begins for the early-adopter jurisdictions
• 1 January 2017 – the 2017 period relating to automatic information exchange under CRS begins
• September 2017 – the first automatic information exchanges (for the 2016 period) by the 56 early-adopter jurisdictions, including the UK
• September 2018 – a further 35 jurisdictions likely to join the automatic information exchanges (for the 2017 period).

Early-adopter jurisdictions exchanging 2016 information in September 2017

Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Cayman Islands, Chile, Colombia, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea (Republic of), Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovakia, Slovenia, South Africa, Spain, Sweden, Trinidad & Tobago, Turks & Caicos Islands, United Kingdom, Uruguay.

Jurisdictions proposing to exchange 2017 information in September 2018

Albania, Andorra, Antigua & Barbuda, Aruba, Australia, Austria, Bahamas, Belize, Brazil, Brunei, Canada, China, Costa Rica, Grenada, Hong Kong, Indonesia, Israel, Japan, Macau, Malaysia, Marshall Islands, Monaco, New Zealand, Qatar, Russian Federation, Saint Kitts & Nevis, Saint Lucia, Saint Vincent & The Grenadines, Samoa, Saudi Arabia, Singapore, Sint Maarten (Dutch), Switzerland, Turkey, United Arab Emirates.

Jurisdictions that have not set a date

Bahrain, Cook Islands, Nauru, Panama, Vanuatu.

Note: there is already an automatic information exchange regime in place for the USA, being FATCA.

For further information or if you have any questions in relation to this matter, please feel free to contact any member of the Tax Services team.

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