Cross-border tax planning – Over 100 countries are now automatically sharing information on taxpayers to expose tax evasion, and local tax offices are starting to benefit.
There has never been more tax transparency than today. With the ‘Common Reporting Standard’ (CRS) global initiative now in full flow, tax offices across the world are keeping track of taxpayers’ offshore assets and accounts through the automatic exchange of information. And they are increasingly starting to follow up on discrepancies.
In the case of HMRC (Her Majesty’s Revenue & Customs), where UK tax declarations do not match offshore information received under CRS, they have been sending out ‘nudge letters’. These are prompting taxpayers to check and correct details of overseas income and gains on their UK tax records or potentially face a tax investigation.
Legitimate cross-border tax planning has always been crucial, but with such heightened worldwide scrutiny, it is more important than ever to ensure you are paying the right taxes, in the right place, at the right time. If you get it wrong – even unintentionally – the penalties can be severe.
What is the Common Reporting Standard?
The CRS came into effect in 2016, when the early adopters began collecting information on financial accounts held by non-residents. The first actual exchange took place in 2017 between 49 jurisdictions, including the UK, Spain, France, Portugal, Cyprus and Malta. Today, over 100 countries are co-operating; in 2019 alone, they shared details on 84 million offshore accounts covering total assets of €10 trillion.
The financial institutions obligated to report information each year include banks, custodians, certain investment entities and insurance companies, trusts and foundations. Besides basic contact details, country of tax residence and tax identification number, the focus is on financial assets owned outside the country of residence. This includes investment income (interest, dividends, income from certain insurance contracts, annuities etc.), account balances and gross proceeds from the sale of financial assets.
When local tax offices receive CRS information, they can easily verify whether taxpayers have accurately reported their worldwide income on their income tax and, where relevant, wealth tax returns.
The Portuguese authorities have now started sending enquiry letters to follow up on discrepancies in foreign income declared by taxpayers.
A tax avoidance bill that came into force in Portugal in 2019 – obliging banks to inform the tax office of any accounts valued over €50,000 – means transparency here has never been greater.
In Spain, the authorities have been following up on discrepancies after comparing data to residents’ declarations.
Remember: Spanish residents are also required to submit a Modelo 720 form each year to list overseas assets exceeding €50,000 in certain categories, with severe penalties for discrepancies or failure to comply.
The French tax office is also following up on undeclared foreign income. Note that residents must include all inactive accounts when declaring non-French bank accounts and insurance policies each year, even if you have not deposited any funds, earned any interest/gains or made any withdrawals.
Beware that penalties for non-compliance are more severe following France’s 2018 anti-fraud act.
The UK’s clampdown on tax evasion
In the last decade, the UK government has introduced over 100 measures and 200 task forces targeting tax avoidance.
Today, the CRS plays a key ongoing part in HMRC’s strategy. Using its ‘Connect’ analysis programme, it can cross-check data received from abroad with its own (including details on salaries, bank accounts, loans, property, car ownership etc.). In 2018/19, HMRC received £560 million from offshore tax investigations – 72% more than the year before CRS data collection began. Recent tougher penalties for undeclared offshore income and gains include an unlimited fine and up to six months in prison.
The March 2020 UK budget allocated extra funding, staff and resources to further scale up its tax evasion scrutiny.
New EU law to share cross-border tax information
To deter aggressive tax planning and uncover information not usually captured through the CRS, the EU has brought in new reporting obligations for cross-border tax arrangements by advisers, accountants and other third-party professionals.
While the EU directive, known as DAC6, has been passed into UK law and was supposed to come into force on 1 July 2020, the EU delayed it by up to six months due to the coronavirus pandemic.
When it does begin in 2021, relevant cross-border activity going back to 25 June 2018 – including certain arrangements using companies and trusts – must be declared by intermediaries across the EU. Despite Brexit, the UK will likely retain its obligations to gather and share relevant information under DAC6 as part of its commitment to tackle tax evasion.
The importance of getting it right
If you are tax resident in one country and have assets or earn income in another, take extreme care. You need to follow the local tax rules, the UK tax rules and also the relevant double tax treaty to make sure you are correctly declaring income and paying tax where you should be.
While cross-border taxation is highly complex, getting it wrong – for any reason – can have serious consequences. Remember, ignorance is no defence; it is your responsibility to check you have declared all your worldwide tax liabilities and bring your tax situation up-to-date if necessary.
Beware too that many UK-based banks, advisers and financial providers are set to lose their licence to operate in the EU once the Brexit transition period ends, so be sure to check if your planning needs to change before 1 January.
There are tax planning arrangements available in your country of residence that can help you legitimately reduce your tax liabilities, particularly on your investment capital, so take advice for the best results. Our locally-based advisers, with their cross-border expertise, can help you enjoy favourable tax treatment while offering peace of mind that you are meeting your tax obligations, there and in the UK.
Contact your local Blevins Franks adviser for tax planning advice
Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals are advised to seek personalised advice.