We are about to enter a new era for international tax planning and cross border wealth management. Your local tax authority will passively receive information about your investment assets without having to ask for it.
We are about to enter a new era for international tax planning and cross border wealth management.
January 2016 sees the start of a new global automatic exchange of information regime that affects everyone who has financial assets outside their country of residence. Financial privacy is dead and buried, to the point where your local tax authority will passively receive information about your investment assets without having to ask for it.
Everyone should be aware of what information will be shared about their income and assets, and consider what tax and estate planning arrangements are best suited for them and their family, for today and the long-term.
The current situation
There has been some automatic exchange of information in Europe since 2005, under the EU Savings Tax Directive, but it only applies to interest income. The Isle of Man, Jersey and Guernsey started off by offering a withholding tax option, but have now moved to automatic exchange of information only. Third countries Switzerland, Liechtenstein, Monaco, Andorra and San Marino implement the directive by applying the withholding tax on savings income, thereby maintaining banking secrecy.
Many countries and offshore centres around the world have signed bi-lateral tax information exchange agreements. These however are of limited benefit to tax authorities. They can only receive information on a taxpayer’s offshore accounts and investments if they ask for it, and to do that they need to have solid suspicions of tax evasion. If they are not aware of an account, they will not receive any information on it.
The situation from January
In July 2014 the council of the Economic Co-operation and Development (OECD) approved a new standard for the Automatic Exchange of Financial Information in Tax Matters. It comprises the Competent Authority Agreement and the Common Reporting Standard (CRS), and goes live on 1st January 2016.
This new regime involves the systematic and periodic transmission of taxpayer information by the source country to the residence country concerning various categories of income – it goes much further than just interest income.
This means that tax authorities will automatically receive information on all the financial assets their taxpayers own overseas – without having to ask for it.
So every tax authority in the participating countries will receive information on all their residents, regardless of whether they have been fully compliant and declaring everything correctly, or hiding assets offshore.
It will receive information about offshore accounts and investments they may not have been aware of before. So any cases of tax evasion, whether on the investment return or underlying capital sum, will come to light, even if there were no suspicions previously.
The OECD warned this summer that transgressors have a “last window of opportunity” to disclose previously hidden assets and income.
Local tax authorities will compare data received against tax returns, and where they find discrepancies have good reason to launch a tax audit. This could result in the taxpayer having to pay previously unpaid tax, plus interest, plus penalties. In some cases they could face criminal prosecution.
In Spain, the authorities will also compare the data received with Form 720, where residents have to declare their overseas assets. The penalties for undeclared assets can be costly.
Information to be reported
Under the Common Reporting Standard, the financial information to be reported includes the name, address and tax identification number (where applicable) of the asset owner; the balance/value, interest and dividend payments and gross proceeds from the sale of financial assets.
The financial institutions that need to report include banks, custodian financial institutions, investment entities such as investment funds, certain insurance companies, trusts and foundations.
The taxman will receive much more information than ever before. Even information it does not need. For example, there is no wealth tax in countries like the UK, Portugal, Cyprus and Malta, but the tax authorities will still receive account balances. If this raises any red flags they may investigate where the money came from in the first place.
Almost 100 jurisdictions around the world have signed up to the Common Reporting Standard so far.
It comes into effect in stages. The ‘early adopters’ (including the EU and UK offshore centres) start to collect data from January 2016, and will make the first information exchange (for fiscal year 2016) by September 2017.
The other countries, including Switzerland, will introduce the standard a year later – so they will start sharing information by September 2018, on 2017 data.
In Europe, the Common Reporting Standard will be implemented through the Administrative Cooperation Directive. It provides for automatic information sharing on interest, dividends and other investment income, account balances, sales proceeds from financial assets, income from employment, directors’ fees, life insurance, pensions and property.
What does this mean for you?
If you have many different offshore bank accounts, investment products, trusts etc, then each one of these will be sharing information on you to your local tax authority.
For peace of mind you could group as many assets as possible into one arrangement, so that there is much less information being passed around, and it will be easier to follow what is being exchanged about you.
Cross border tax planning is complex. You need to be clear on what income and assets you should be declaring in which country. For example, if you live in Spain and earn pension or rental income in the UK, do you pay tax in the UK or Spain? If you have got this wrong, you should regularise your affairs before the new regime starts.
This is also a good time to review your tax planning arrangements. Are they approved in your country of residence? If, for example, residents of Spain, France and Portugal use non-compliant bonds, such as non-EU bonds including those from the Isle of Man, Jersey and Guernsey, provided you have been fully declaring them in their country of residence they are not illegal – but they are taxed more aggressively than Spanish, French and Portuguese compliant bonds. So why are you paying more tax than necessary? And do these bonds provide estate planning benefits?
We are entering a completely new era. Are you ready?
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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.