Global tax transparency through the new ‘automatic exchange of information’ means expats need to take extra care with their tax planning.
Global tax transparency through the new ‘automatic exchange of information’ means expatriates need to take extra care with cross-border tax planning.
The tax authorities in Spain, France, Portugal, Cyprus, Malta, other EU countries and the UK will now start to receive new information on their taxpayers’ offshore assets and income.
This is carried out under the Common Reporting Standard (CRS) for automatic exchange of financial account information in tax matters. 100 countries have so far committed to obtain information from their financial institutions and pass it on to the clients’ country of residence.
50 jurisdictions began collecting data from January last year, and had to pass it on by September 2017. Another 50 began collecting information from January this year, ready to share it by September 2018.
This automatic information exchange will be repeated every year going forward.
The information being shared about the financial assets you own outside your country of residence includes personal data such as your name and address, country of tax residence and tax identification number. You have probably received requests from financial institutions to confirm these details.
The information to be reported about your accounts includes the investment income you earned over the year, (such as interest, dividends, income from certain insurance contracts, annuities etc), account balances and gross proceeds from the sale of financial assets.
The financial institutions that need to report include banks, custodians, certain investment entities such as investment funds, certain insurance companies, trusts and foundations.
When local tax offices receive this information they will be able to verify whether the taxpayer has accurately reported income and assets on their income and wealth tax returns. In Spain, the authorities will also compare data with Modelo 720 declarations, where Spanish residents have to declare their non-Spanish assets.
In the UK, HMRC has reaped the rewards of its tax evasion measures, and has sent out very clear warnings to taxpayers about the consequences of not paying tax correctly on offshore assets.
In a document entitled “If you have money or other assets abroad, you could owe tax in the UK”, the Revenue advises that the tax world is becoming more transparent and that it is getting tougher on those who are not paying the right amount of tax across their offshore tax affairs.
The document states:
“From 2016, HMRC is getting new financial information about our customers from more than 100 jurisdictions – including details about overseas accounts, structures, trusts and investments.
“HMRC is already using information, supplied by overseas banks, insurers, and wealth and asset managers, to identify the minority who are not paying what they owe.”
It asks recipients if they are confident that their UK tax affairs are up-to-date, advising them that it is their responsibility to regularly check they have declared all their UK tax liabilities and bring their tax affairs up to date if necessary.
It is clear that, if someone has not paid the correct amount of tax, HMRC will now find out about their money and overseas assets. Penalties are increasing for offshore tax evasion, which could be based on the value of the asset as well as the tax due, resulting in potentially life changing consequences. Criminal prosecution is also a possibility, depending on circumstances.
While this document is aimed at UK taxpayers, it is worth paying attention wherever you live, as the principles are the same.
First of all you need to establish where you are resident for tax purposes, and then ensure you are fully declaring all your income and wealth as required by law. If you live in one country and earn income in another, be clear on where you need to declare this income and where it is taxable. Make sure you are following the double tax treaty correctly.
Cross-border tax planning can get very complex, so you need specialist advice to ensure you get it right as well as to take advantage of compliant tax mitigation opportunities.
The HMRC document also notes that:
“Personal circumstances change. For example, you may have recently inherited assets overseas. Tax laws change too. All of this means that previous advice can be out-of-date, with costly consequences.”
If you do receive an inheritance from another country, it is important to establish if and where you personally have to pay tax on it. For example, if you are resident in Spain, you have to pay succession and gifts tax on any assets you receive as a gift or an inheritance, even if the assets are located abroad and never brought into Spain.
If you have lived in France for at least six out of the last ten years, you generally have to pay French succession tax on inheritances or gifts you receive, even if the donor and assets are outside France. There are severe penalties for failing to declare such inheritances/gifts. This is subject to any double taxation agreement terms, so if you receive an inheritance from the UK you do not have to pay tax in France, but if you receive a gift from the UK, you do.
Another point worth considering about inheritances is that if you do not make sure your affairs are in order now, this could cause problems for your heirs when they inherit these assets. Read more about estate planning
The tax regimes in Spain, France, Portugal, Cyprus and Malta do provide compliant tax planning opportunities for your investment capital, so that you do not end up paying the headline rates of tax. They can all be an attractive country for retirees to live in from a tax point of view. Take personalised, specialist advice to structure your assets to in the most tax efficient way for your country of residence.
Any questions? Ask our advisers for help
Tax rates, scope and reliefs may change. 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; an individual is advised to seek personalised advice.