It is the end of financial privacy. Financial institutions around the world will start collecting data on their international clients next year, ready to share it under the new automatic exchange of information. France is a keen participant.
It is the end of financial privacy. Financial institutions around the world will start collecting data on their international clients next year, ready to share it under the new automatic exchange of information. France is a keen participant.
Automatic exchange of information is quite different to the information exchange on request introduced through bilateral agreements, and much further reaching. Under those agreements, tax authorities have to request information on people’s financial assets when they suspect them of tax evasion. Now they will passively receive information on everyone, every year, regardless of how compliant or not the taxpayer is.
By comparing the data received with tax returns, the authorities will be able to detect where income and assets have not been properly declared. This will include many cases where there was no previous indication that the taxpayer was not compliant.
This loss of financial privacy affects us all; governments will be able to track our wealth like never before. If you are a French tax resident and have, for example, investments in the Isle of Man, or bank accounts in Switzerland, or pension funds in the UK, the French tax authorities will receive information about these assets.
France, as part of the G5, was instrumental in pushing for automatic exchange of information on a global scale. It rejected withholding tax models, insisting that tax evaders should not be able to get away with hiding assets offshore. It has a good track record of cracking down on tax evasion. The state collected around £2bn from tax evaders in 2014 and and is expecting a similar amount this year. The new global exchange of information will be an invaluable tool and help increase tax revenue even more, not to mention penalties and interest on unpaid tax.
Background
The EU pioneered automatic exchange of information with its 2005 Savings Tax Directive. This is limited to savings income, and over recent years sought to include other types of income.
The US Foreign Account Tax Compliance Act (FATCA) was the more recent catalyst for global information sharing. Foreign financial institutions have to report all accounts held by US persons to the US authorities. The US has developed “intergovernmental agreements” with countries around the world to allow for reciprocal automatic exchange of information.
The game changer, however, is the Economic Co-operation and Development’s (OECD) Common Reporting Standard. Issued in July 2014, and closely modelled on FATCA, it is the technical standard for automatic exchange of information that all signatories will follow. Almost a hundred countries have committed so far.
Common Reporting Standard
The Standard provides for annual automatic exchange between governments of financial account information. It sets out the financial account information to be exchanged and the financial institutions that need to report (which includes banks, custodians, guardians, certain collective investment vehicles and certain insurance companies), as well as common due diligence procedures to be followed by financial institutions.
It is expected to provide tax authorities around the world with details of assets worth billions held abroad.
Financial information will start to be collected in January 2016, for the first transmissions in 2017. 58 jurisdictions, the so called “early adopters” have committed to be ready then. This includes France, the rest of the EU, Isle of Man, Jersey, Guernsey, Cayman Islands, Liechtenstein, Luxembourg, San Marino and South Africa.
A further 35 jurisdictions have pledged to start the following year. This includes Australia, Canada, China, Hong Kong, Monaco, Singapore, United Arab Emirates and Switzerland. A few others have not yet committed to a timeline.
In Europe, the Common Reporting Standard will be implemented through the Administrative Cooperation Directive.
The revised version of this Directive was adopted in December 2014, and will replace the Savings Tax 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 financial assets outside France, the financial institution will collect and provide the French tax authorities with the following every year:
- your name, address and date of birth
- your tax identification number
- account numbers
- account balances
- interest
- dividends
- sales proceeds from financial assets.
All this information about your financial assets will land right on the French taxman’s desk! They do not need to ask for it.
It is essential you take specialist advice as to which assets and income need to be declared in France. If you get this wrong, it could have serious consequences when your local tax office finds out.
As a French tax resident you have to declare your worldwide income, gains and wealth. This includes income which is taxed elsewhere, such as UK rental income and pensions. Although the income is declared and taxed in the UK, you are still obliged to declare it in France. Many people who have paid UK tax believe they have no further requirement to declare it on their French tax returns – and have no idea they are doing anything wrong.
Although UK government service pensions remain taxable in the UK and are not taxed in France, the income must still be declared here and is taken into account for the purposes of determining the rate of tax payable on your other French source income.
Likewise, people who live in France and rent out UK property frequently believe that, since they have obtained their non-resident land certificate, they have no further reporting requirements or liability. In fact, the income needs to be declared in both the UK and France.
It is also essential to only use tax planning arrangements that are fully compliant in France. French taxation may be high, but when it comes to your investments, pensions, wealth and estate there are often arrangements you can use in France that will significantly lower your tax liabilities. You do need to protect your wealth and assets from French tax where possible, and to do so you need to be fully informed and take specialist, personalised advice.
