The UK economy loses £69.9 billion on a yearly basis through tax avoidance and tax evasion in what the Tax Justice Network call the “shadow economy.”
To put that figure in perspective:
- This figure is more than two-thirds of the UK pension bill (£92.1 billion in 2015/16)
- More than the combined total of both the Disability Benefit and the Housing Benefit (£62.7 billion in 2015/16)
- Almost £10 billion more than is spent on defence (£61.8 billion in 2014/15)
Given these rather shocking figures (and other countries fair no better in many cases), it stands to reason that the international community has worked together to develop a reciprocal exchange of financial information. In today’s world, international trade barriers have been reduced, and in some cases, are now non-existent. To name one, the European Union has become far more mobile.
Therefore, an automatic procedure designed to exchange information between HMRC and tax departments in other territories is an essential tool in enabling authorities to administer and enforce their own taxes and to tackle tax avoidance and evasion.
The OECD’s Solution
To combat the issue of tax avoidance and evasion in an international trading climate, the Organization for Economic Cooperation and Development (OECD) and the G20, in close cooperation with the European Union, created the Common Reporting Standard (CRS) in early 2014.
Under the CRS, jurisdictions obtain financial information from local financial institutions and automatically exchange that information with other countries on an annual basis.
The CRS requires banks, custodians and other financial institutions, such as brokers, certain collective investment vehicles and insurance companies to automatically transfer ‘bulk’ (without a request being made per the previous regulations) taxpayer information on “reportable accounts” from the country of source to the country of residence, if the country they reside in is one of the signatories to the CRS.
Reportable accounts include accounts held by individuals and entities (and includes trusts and foundations). The CRSincludes a requirement to look through passive entities to report on the individuals that ultimately control them.
The overall standard now consists of three components:
- The CRS, which contains the reporting and due diligence rules
- The Model Competent Authority Agreement (Model CAA), which contains the detailed rules on the exchange of information
- The OECD Commentaries, which provides additional guidance on local implementation of the CAA and CRS
So far 97 countries, including the UK have stated their intention to adopt the legislation. Early adopters will begin the first stage of the process in January 2016. By the end of 2018, 91 jurisdictions will exchange the information on financial accounts.
Inspired by the CRS and following recent agreement at the Economic and Financial Affairs Council of the EU (Ecofin) on the revision of the Directive on Administrative Cooperation (regarding mandatory automatic exchange of information in the field of taxation – DAC), the first automatic exchanges of financial information within the EU will take place from September 2017.
The Benefits of the CRS
The biggest benefit of the CRS is the transparency it provides to adopting countries. The process will allow those nations to gain a clear picture of companies and individuals who are evading domestic tax via sheltered funds contained offshore. If funds are held in an adopting country, then any moves to avoid or evade tax will be picked up by the governing jurisdiction.
In a press release announcing the development of the CRS, the Secretary-General of the OECD, Angel Gurría said: “This is a real game changer. Globalisation of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence. This new standard on automatic exchange of information will ramp up international tax co-operation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”
However, for corporations, there is considerable concern over the level of protection and confidentiality surrounding the data exchanged.
Concerns Surrounding the CRS
At present there are a number of issues concerning both corporations and individuals regarding the CRS including:
The CRS casts a wider net than Foreign Account Tax Compliance Act (FATCA), requiring due diligence and reporting for all account holders (whether direct or indirect (in the case of Controlling Persons of Passive NFFEs)) resident in the different adopting jurisdictions, not just instances where an account is a reportable account. The burden on financial institutions will be far greater, and therefore, potentially open to more errors.
- At present there is no global reporting template available. Therefore, individual jurisdictions will have to create their own This could be problematic and certainly inconsistent.
- The European Banking Federation, European Commission’s Expert Group and the Article 29 Data Protection Working Party have raised concerns about data protection. In a document issued in September 2014, the Working Party states; “The WP29 wishes to first point out that while the exchange of information is legitimately regarded as an essential tool in the fight against tax evasion, it is nevertheless necessary to ensure that such an objective of general interest is pursued with full respect for individuals’ fundamental rights, in particular, the right to private life and the protection of personal data as required by European and international legal instruments”.
Options for Maintaining Privacy Within Legal Limits
Companies, financial institutions and individuals in the UK will need to prepare themselves for the CRS and DAC requirements.
It is imperative to review commercial contracts to ensure they are compliant with the new reporting standards. Corporations also need to review and consider the potential impact of CRS and DAC on their businesses and adapt systems and practices with the aim to minimise cost and disruption whilst achieving compliance.
If you are exploring options which allow you to minimise your disclosure requirements whilst remaining compliant, trust arrangements may be the answer. Although, be warned, as mentioned above, trust accounts are subject to the CRS.
It is imperative to seek experienced legal advice when considering trust arrangements and to what extent you can use such arrangements to minimise your reporting requirements under the CRS and DAC. Saracens Solicitors has a strong reputation as having a strong corporate legal team. We have experience in both domestic and international trust and corporation law to provide you with the advice you need to legitimately manage your reporting compliance issues.
To make an appointment with one of our corporate law team, please phone our office on 020 3588 3500.
Do you have any comments to make on the CRS or DAC? Please feel free to add your thoughts in the comments section below.