Like many tax professionals, it is not uncommon to meet
clients who honestly believe that they can beat the system. They use layering, nominees and even “other”
passports and believe that this may grant them privacy.
FATCA and CRS are real. They provide a framework for banks to automatically
share account holder information with other governments. But not only do they compel banks, but they
also apply to service providers including Trustees and Corporate Service
Providers (such as those that offer incorporations).
Read more here. I’ve included some of the articles we have previously written on FATCA / CRS and the services that our consultants provide –
https://htj.tax/2019/11/fatca-automatic-exchange-of-information/
But to be completely honest, certain structures do mitigate
FATCA and CRS reporting. That’s where some
other acronyms come in. Let’s talk about
MDR and DAC6.
Further measures on tax transparency
(a) Mandatory disclosure rules (“MDR”) for CRS avoidance
arrangements and opaque offshore structures
On
9 March 2018, the OECD issued disclosure rules which are in line with the
principles contained in its position countering Base Erosion and Profit Shifting
(“BEPS”), with a view to further enhancing tax transparency globally. In
principle, once implemented into domestic law in the participating
jurisdictions, an intermediary shall be required to provide tax authorities
with information on the steps and transactions that form part of an arrangement
that (purports to) circumvent the CRS (“CRS Avoidance Arrangement”) or a
structure that disguises the beneficial owners of assets held offshore (“Opaque
Offshore Structure”).
Intermediaries
refer to persons responsible for the design or marketing of such arrangement or
structure (“Promotors”) and also persons that provide assistance or advice with
respect to the design, marketing, implementation or organization of such
arrangement or structure and who can reasonably be expected to know it is a CRS
Avoidance Arrangement or Opaque Offshore Structure (“Service Providers”).
The
MDR shall apply to a broad range of intermediaries such as banks, trustees,
financial advisors, lawyers, tax advisors, accountants, and so forth, although
is not expected to diminish or require a solicitor, attorney or other admitted
legal representative to disclose information that is protected by legal
professional privilege or equivalent professional secrecy obligations insofar
that an information request for the same information could be denied under the
(exchange of information articles of the) OECD Model Tax Convention and the
Multilateral Convention on Mutual Administrative Assistance in Tax Matters,
respectively.
Penalties
and other mechanisms for non-compliance are recommended in the model rules. As
with the other requirements and obligations in the model rules, individual
jurisdictions will have to choose the nature and extent to which penalties
should apply for non-compliance.
(b) EU
Parallel
with the above, in May 2018, the EU issued Directive 2018/822 (known as “DAC6”)
regarding the mandatory automatic exchange of information in the field of
taxation in relation to reportable crossborder arrangements. In essence,
this framework is designed to require persons involved in either the promotion,
design, marketing, implementation or management of a relevant arrangement or
structure in the relevant jurisdiction, to be legally obligated to report the
existence of the arrangement or structure and the users of it to the relevant
tax authority which, in turn, shall exchange the relevant information to those
jurisdictions in which the users are resident, subject to the relevant
international exchange relationships being in place. Although there are
differences between the reporting requirements under the EU’s DAC6 and the
OECD’s MDR, particularly with respect to the circumstances where a requirement
to make a disclosure would be triggered, DAC6 seems to cover a part that is the
equivalent of the MDR published by the OECD.
The
EU Member States are working towards a 31 December 2019 timescale. For
non-EU jurisdictions in Europe, such as Guernsey, as at 31 October 2019, it is
intended to implement the MDR, which is also expected to be the preference of
the other Crown Dependencies. Although it remains to be seen we
understand there is a presumption that the United Kingdom will also adopt the
MDR rather than the DAC6 in light of Brexit.
Do note that our team offers FATCA / CRS consulting services
–
https://htj.tax/2019/11/fatca-automatic-exchange-of-information/
Be Cautious
Service Providers should also carefully consider the
implications of the CRS and the MDR, and seek advice from appropriate advisors
in the relevant jurisdictions on the implications for themselves and/or their
clients.
Given the exposure to penalties and possibly even criminal
prosecution in home jurisdictions, it is advisable that families and
individuals who have established or are users or beneficiaries of offshore
trust and/or company structures should evaluate the tax and legal implications
or their structures, preparing for the scrutiny that is expected to arise or
has already arisen in respect of themselves as individuals, entities and
controlling persons of certain entity accounts on an annual basis.
In essence, trusts remain as a useful instrument for reasons
including asset protection, succession planning and confidentiality, but in
particular settlors and beneficiaries of trust structures should seek advice
while establishing offshore trusts and any underlying holding companies so as
to be clear on the information that is likely to be made available to the tax
authorities of the jurisdiction(s) where they are resident, review whether
their tax matters are in order, and resolve issues in case there are any issues
to be resolved.
Likewise for offshore structures that no doubt continue to offer
advantages that retain their usefulness, but again, the need for a proper
review and analysis of the use of offshore structures in the new global
environment of tax transparency and fiscal responsibility cannot be
over-emphasized.
