Tax and regulatory compliance – FATCA, GATCA, CRS and more…
The use of structures located outside your home jurisdiction such as Trust, Foundations, Companies subject to privileged tax regime, Funds and Life insurance policies can provide useful tools for asset protection, succession planning and in certain circumstances tax efficient planning. They can also be used efficiently for international groups with trade in various jurisdictions.
A raft of new regulatory initiatives is expected to make the use of such entities more transparent in the country of residence (or even nationality) of the related parties. Individuals need to rapidly understand the implications of such legislation in all jurisdictions concerned and ensure that their tax planning is compliant in their home country.
As you will read below the regulations are complex. The cost-effectiveness of these data collection methods is disputable. The technical language used is often confusing, and their interpretation is still unclear in some circumstances. However despite that:
Automatic Exchange of Information on Tax Matters is coming soon.
This memorandum summarizes some of these important developments to help you better understand your personal situation. However each individual situation requires a detailed analysis of the personal circumstances, and the relevant legislation to understand the full implications.
We recommend individuals should review their affairs to ensure that their personal tax matters are in order, taking into consideration the implications of these new initiatives. This could also be the opportunity to make changes to existing structures to take account of changes in family circumstance and available tax and estate planning opportunities.
U.S. Foreign Account Tax Compliance Act (“FATCA”) [i]
As you may already be aware tax regulation adopted in the USA is already impacting all entities identified as Foreign Financial Institutions (“FI”) as from July 1st, 2014.
In short, FATCA mainly requires FIs to automatically exchange information on certain US taxpayers (“specified US persons”) with the U.S. Tax authority (“IRS”). Information to be reported mainly relates to investments in financial assets made by specified U.S. persons with an FI, either directly if the financial assets (shares, bonds, loans…) are held through a bank, an insurance company, an investment fund or another FI, or indirectly through investment into passive entities qualifying as Non Foreign Financial Entity (“passive NFFE”).
When this legislation started out as part of the US HIRE Act, it was intended mainly to obtain information from various forms of foreign investment entities. Through various interpretations of the legislation the position has evolved so that many private asset holding entities, including trusts, foundations and offshore companies are also included.
Subsequent legislation adopted by the UK, its dependent territories, the EU and the OECD has been based largely word for word on FATCA. FATCA was written by the IRS based on definitions in the US Tax Code, and specifically adapted for the US taxation system.
Due to political pressure for a quick implementation process adequate time has unfortunately not been given by the legislators to resolve some of the areas of uncertainty inherent in FATCA before adopting the new texts. At the same time some of the definitions, which are more relevant to the US tax system, have not been removed.
In February 2014, the Organisation for Economic Co-operation and Development (OECD) presented a common global standard for the automatic exchange of tax information between countries. The standard is officially called the Automatic Exchange of Information (AEOI), and was originally referred to as “GATCA”, or Global FATCA (the Foreign Account Tax Compliance Act), but is now more commonly called The Common Reporting Standard (CRS). We provide more detail about the application of CRS below, as it will have an effect almost worldwide.
At the same time the UK moved forward with implementing similar FATCA styled agreements which provide for automatic exchange of information about UK residents with 'reportable accounts' in the UK's Crown Dependencies and Overseas Territories. The UK tax authorities will start getting data about trusts and bank accounts held by UK residents in those countries by no later than 30 September 2016 for calendar years 2014 and 2015. Later periods will be reported under CRS which will supersede UK FATCA.
In the EU the CRS initiative will be implemented through a Council Directive on Administrative Cooperation (‘DAC’). Subject to implementation in each EU member country information will be exchanged between EU countries from 2017, with respect to account information for 2016.
The foundation for the CRS was laid in October 2014 when the international community took a significant step to increase international cooperation to reduce global tax evasion with the implementation of automatic exchange of information by 2017.
More details can be found at: http://www.rosemont-int.com/news/04-11-2014-automatic-exchange-of-information-for-tax-matters-from-2017/
There are some fundamental differences between FATCA and CRS, however the main objective is the same – the automatic exchange of “account” information between participating jurisdictions.
Differences to FATCA
CRS is wider than FATCA in that:
CRS reporting is based on the residence of the account holder, whereas FATCA was based on nationality. Residence is a much harder concept to determine precisely, and CRS provides limited guidance on this complex issue;
Under CRS there is no de minimis threshold for pre-existing individual accounts with different procedures applying to higher value and lower value accounts.
There is no standard reporting template for CRS, unlike the W8 Forms using for FATCA classification.
Under FATCA FIs register on the IRS portal to receive a Global Intermediary Identification Number (GIIN). There is no such facility under CRS as there is no requirement for FIs to register, which will make it difficult to identify reporting and non-reporting financial institutions easily.
The reporting obligations for accounts and entities will depend on many factors, depending on the nature of the account, the reporting entity, and the implementation of the relevant jurisdiction legislation. Reporting financial institutions may include, but are not limited to, banks, brokers, collective investment vehicles, custodians, trustees and insurance companies.
The first matter to determine is whether or not the entity or the account is a reportable account within the scope of any applicable CRS agreement?
Countries are intending to sign up to the CRS Agreements at differing paces.
Legislation will need to be adopted in each jurisdiction to allow the AEOI to take place, and it will be adopted with slightly differing versions across the globe to take account of local circumstances. CRS allows jurisdictions a small amount of flexibility with respect to some definitions, for example that of a “Controlling Person of a Trust” for Passive NFEs.
Bilateral Agreements will then need to be put in place to enable the procedures to be finalised. There will be a need to address confidentiality, data protection and procedural issues between states. Political and commercial interests will also dictate the timing of these agreements, some of which might also be made dependent on the simultaneous negotiation of Comprehensive Double Taxation Agreements (DTAs).
There will be different reporting timeframes adopted in each of these agreements.
Almost 100 countries are already signatories or are committed to implementing and applying this Standard. [ii]
For the 56 “early adopters”, Automatic Exchange of Financial Account Information will commence from 2017 on an annual basis between participating countries in respect to their tax residents. The first AEI of 2017 will relate to all account information of 1 January 2016. The reporting will be made via the local country tax office, which will in turn transmit the data in bulk to the resident’s home country tax office. An updated list can be found at: http://www.oecd.org/tax/transparency/AEOI-commitments.pdf
Early adopter countries – undertaking first AEI by 2017 in respect of 2016 information
Anguilla, Argentina, Austria, Barbados, Belgium, Bermuda, Bulgaria, British Virgin Islands, Cayman Islands, Chile, Colombia, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos, Uruguay, United Kingdom.
Late adopter countries – undertaking first AEI by 2018 in respect of 2017 information
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Costa Rica, China, Cook Islands, Grenada, Hong Kong, Indonesia, Israel, Japan, Macao, Malaysia, Marshall Islands, Monaco, New Zealand, Panama, Qatar, Russia, Saint Kitts & Nevis, Samoa, Saint Lucia, Saint Vincent, Saudi Arabia, Singapore, Saint Marten, Switzerland, Turkey, United Arab Emirates.
Who will be affected?
Reporting involves individuals who own or “control accounts” in financial institutions either directly or through companies, trusts, foundations and in certain cases insurance policies.
Financial institutions have already started to request information to identify the relevant reportable accounts held by persons or entities. They will need to update and amend existing client due diligence and new client on-boarding procedures by 2016.
In the case of a trust (and Entities equivalent to trusts), the term Controlling Persons is explicitly defined under CRS to include the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust. If the settlor, trustee, protector, or beneficiary is an Entity, the Reporting Financial Institution must identify the Controlling Persons in relation to that Entity. It will be relevant whether or not a beneficiary has a fixed interest in the trust assets or not. For discretionary trusts it may also be relevant whether or not a beneficiary has received a distribution or not. A person who qualifies as a Controlling Person in several instances (ie. both as settlor and beneficiary of a trust) will be reported as account holder more than once and treated as having two accounts with that trust.
There will be different reporting depending on whether a Trust is an FI or not. This may also affect which entity will be the reporting party. The jurisdiction of the reporting party will dictate the timing of the first information exchange.
What is the type of the entity?
It will be necessary to undertake a classification of all entities to determine what is their status under CRS, UK FATCA or DAC. The analysis will be required for all entities in a group. The classification will determine what information is reported and when.
The most relevant entity types are the Financial Institution, and the Non-Financial Entity (NFE). In general terms an FI is a Depository Institution (eg. banks), a Custodial Institution (eg custodial bank, broker), an Investment Entity (an Entity investing and trading financial assets) or Specified Insurance companies. An entity whose assets are managed by an FI may also be considered to be an FI itself as a result.
A trust can be an FI, but that will depend on whether the trustee is an FI or not, and whether assets are managed professionally.
An NFE is essentially any Entity that is not a Financial Institution. NFEs are then split into Passive NFEs or Active NFEs.
A Passive NFE is an NFE that is not an Active NFE. The definition of Active NFE essentially excludes Entities that primarily receive passive income or primarily[iii] hold assets that produce passive income (such as dividends, interest, rents etc.). Trading companies will generally be Active NFEs. Account information will not be reported for Active NFEs.
Account information to be reported
In summary the following details will be exchanged between tax authorities in relation to reportable accounts:
Name, address, date of birth, National Insurance number (and name and address of entity, if relevant).
Account number and details of financial institution.
Annually, the account balance or value, the total gross amount of funds paid or credited to the account (ie income) and the aggregate of any sale or redemption of assets.
Closure of an account held by a reportable person.
Challenging areas under CRS
There are various details of CRS reporting which are still unclear, and where the reporting may result in irrelevant information being reported to tax departments. We identify some of these below:
It is likely that the same balances may be reported more than once for the same individual, and also may be reported in to more than one jurisdiction unnecessarily;
Information will be reported to tax offices, where that information might not normally be available under local tax legislation. For example CRS ignores the distinction between “domicile” and residence;
The definition of trustees as professional asset managers or custodians, and their subsequent classification as FIs is debatable;
How should reporting be undertaken when beneficiaries comprise a discretionary class?
How should settlor’s interests be reported in the case of irrevocable settlements, if at all?
How should entities holding non-financial assets, such as real estate, artwork, or yachts be classified?
How will this vast accumulation of data that will be collected worldwide be protected against leaks, and who will be liable for any damages caused in the case of such a leak?
What will be the liability of FIs in the case of erroneous reporting?
What should I do?
To the extent that this is possible with the current state of the legislation and guidance, you should understand the reporting that will be made, to whom, and when;
Verify with the relevant Financial Institution what information is held on file, how they have identified and classified the relevant reportable personsand Controlling Persons, and what account balances will be reported prior to reporting taking place;
Take advice to ensure affairs are in order, so that when information is exchanged this will not cause any difficulty;
There are many reasons for holding assets outside your home jurisdiction, whether for commercial reasons, for asset protection, or succession planning. Review these structures to determine whether they are still relevant and whether any changes are necessary to take into account changing circumstances;
Consider the use of Voluntary Disclosure Schemes where appropriate.
For more information on this subject you should note that the OECD has now launched its portal on the automatic exchange of information. The portal includes information about the automatic exchange of information (‘AEOI’), the Common Reporting Standard (‘CRS’), implementation and monitoring. Further information, such as implementation by individual jurisdictions, will be added in due course.
You will also find a update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance at http://www.oecd.org/ctp/exchange-of-tax-information/update-on-voluntary-disclosure-programmes-a-pathwaypto-tax-compliance.htm
Rosemont Monaco SAM, Rosebank Limited and Monoeci Management SAM do not provide tax advice.
However their sister company, Rosemont Consulting Sarl in Monaco does provide tax and estate planning advice, and are available to assist individuals and their families in structuring and administering their assets in a tax efficient manner in compliance with international regulations.
[i] # - Originally discussed in a series of articles on the Rosemont International news website in 2013:
Tax transparency update – detailed international update - November, 2013 http://www.rosemont-int.com/news/04-12-2013-tax-transparency-update-detailed-international-update-november-2013/
Exchange of information and disclosure of beneficial ownership - various country actions http://www.rosemont-int.com/news/05-12-2013-exchange-of-information-and-disclosure-of-beneficial-ownership-various-country-actions/
US FATCA, UK FATCA, G5 Exchange of Information Forum http://www.rosemont-int.com/news/05-12-2013-us-fatca-uk-fatca-g5-exchange-of-information-forum/
[ii] NOTE: The USA is not a participating country on CRS but they have indicated that they will be undertaking automatic information exchanges pursuant to FATCA from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions to do so. The Model 1A IGAs entered into by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions.
[iii] Specifically if less than 50 percent of the NFE’s gross income for the preceding calendar year or other appropriate reporting period is Passive income and less than 50 percent of assets held by the NFFE during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of Passive income”.