Offshore tax planning and wealth management have become highly politicized as they have sometimes been used as means to evade taxes. As a result, tax regulators across the globe are implementing a new standard for the Automatic Exchange of Information called the Common Reporting Standard (CRS).
CRS was developed by the Organization for Economic Cooperation and Development in response to a G20 request. Its aim is to facilitate the exchange of financial account information among participating countries and is regarded as a critical tool to combat tax evasion.
At present, there are over a hundred countries which have committed to adopting the CRS, and the ambitious goal is to implement this worldwide by the end of 2018. The standard provides the criteria for reporting financial information of an account and does not include systems for tax collection.
A majority of the G20, OECD and EU member countries have adopted CRS since 2017, and this year, Asian countries such as China, Macau SAR, HK SAR, Japan, Singapore, Australia and New Zealand, will be included.
Generally, the CRS sets an information-sharing mechanism that requires financial institutions such as banks, funds and fund managers, trust companies, brokers, insurance companies, and custodial institutions to identify foreign tax resident account holders.
To be able to comply with this new standard, participating jurisdictions must obtain specific financial information of certain individuals from their financial institution and exchange that information on a yearly basis with other relevant participating jurisdictions.
Financial institutions are required to identify where the customer is a tax resident or simply where the individual is liable to pay taxes, be it income or corporate. So for individuals who are tax residents outside the CRS-participating country where they bank, they may be required to provide financial account information to the national tax authority in that jurisdiction where their accounts are held. The information may then be shared with the tax authority of the country where they are tax residents.
With this, opening a bank account or investing in new financial products within CRS-participating countries may require individuals to undergo self-certification which involves verifying several personal details. Some of the information that will be required to be reported include the holder’s name, address, place and date of birth, account number, dividend, interest, account balance, proceeds from a sale, and other relevant data.
Although high-profile individuals and those who own significant reportable financial assets offshore—including properties and foreign investments—are most likely the people who are affected by the implementation of this new standard, the average individual holding financial assets overseas, foreign tax residents living and working in CRS-participating countries, and expatriates are under the radar too. They must ensure that they make accurate tax declarations. Failing to comply will inevitably cause substantial financial and reputational risk.
The CRS is not intended to increase individuals’ tax burden but instead to improve the collection of taxes under the current laws. This new standard is intended to fight tax evasion and not lawful tax mitigation. There are still opportunities for tax planning, however, with the newly implemented standards, a tax expert may be required to ensure the measures comply with the tax laws. It is very important to know that failing to comply CRS will inevitably cause substantial financial risk.
Financial institutions, on the other hand, would also need to review their existing procedures and policies regarding information reporting to comply with the rules set by the CRS. This may include identifying entities that are within scope, assessing current customer due-diligence procedures, reviewing existing customer onboarding and self-certification forms, as well as modifying the overall system capability with regards to information gathering and reporting.
A major takeaway from the CRS implementation is that it will not create any new tax for the individual from their own tax jurisdiction although it may be the most significant international scale of financial information exchange. It is not about where the assets are held, but which is the tax jurisdiction of the beneficial owner of these assets. You are encouraged to learn more and to make sure that you and your financial or tax advisor fully comply with the new rules.