Over one hundred countries are now automatically sharing financial information on taxpayers to expose tax evasion – and tax authorities are starting to benefit. 

Tax transparency has recently been revolutionised by the global automatic exchange of information under the ‘Common Reporting Standard’ (CRS). Now in full flow, this initiative enables tax offices across the world to keep track of taxpayers’ offshore assets and accounts. 

Meanwhile, many countries, including the UK, have introduced additional measures to check taxpayers are making correct declarations. HM Revenue & Customs (HMRC) revealed it collected £560 million from offshore tax investigations in the 2018/19 tax year – up 14% from last year and 72% more than 2016/17, before CRS data collection began.

With such heightened worldwide scrutiny, it is more important than ever to make sure 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 – where the 2016 data was passed on to the taxpayers’ country of residence – took place in 2017 between 49 jurisdictions, including the UK, Spain, France, Portugal, Cyprus and Malta. Another 51 began sharing information in September 2018, including perceived ‘tax havens’ such as Switzerland, Panama and some Caribbean jurisdictions. Today, over 100 countries are co-operating, with more joining each year.

Financial institutions that are obligated to report information include banks, custodians, certain investment entities and insurance companies, trusts and foundations.   

What information is being shared under the CRS?

Focusing on the financial assets owned outside your country of residence, the data includes basic details such as your name and address, country of tax residence and tax identification number. 

Financial information includes the investment income you earned over the year (interest, dividends, income from certain insurance contracts, annuities etc.), account balances and gross proceeds from the sale of financial assets. 

Local scrutiny 

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. 

Investigations in Spain

In Spain, the authorities have already started following up discrepancies after comparing data to residents’ declarations. In the last CRS exchange, the Hacienda received information on approximately 1.5 million offshore accounts with a total balance of €457 billion, while only €150 billion was declared through Modelo 720

Investigations in France

In France, we are now hearing about local tax offices calling British expatriates in for interviews to discuss non-declaration of foreign bank accounts, premium bond winnings, capital gains in the UK etc.

Beware that penalties for non-compliance are more severe following France’s 2018 anti-fraud act. You must now also remember to 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.

Tax transparency measures in Portugal

With many countries already investigating discrepancies in foreign income declared by British nationals, it is likely that Portugal will follow suit.

A new tax avoidance bill that came into force in Portugal this year – obliging banks to inform the tax office of any accounts valued over €50,000 – means transparency there has never been greater.

The UK’s clampdown on tax evasion 

Last year, ‘Requirement to Correct’ (RTC) rules put the onus on UK taxpayers to regularise their offshore affairs. Around 18,000 individuals disclosed undeclared offshore tax liabilities before the RTC’s 30 September deadline, just before HMRC received a wave of information from the CRS. Now, anyone found to still have undeclared offshore income and gains can face tougher penalties of up to 200% the original tax owed.

Although the deadline has passed, HMRC has made it clear that those who voluntarily declare and correct their offshore tax arrangements will be in a much better position than anyone who waits until investigators identify their non-compliance. 

Overall, since 2010, the UK government has introduced over 100 new measures to tackle tax evasion. This enabled HMRC to recover over £2.9 billion in lost taxes even before it started benefiting from CRS data. In the UK's "No Safe Havens" policy paper from March, the UK revealed that it received 5.67 million records on UK taxpayers’ offshore financial accounts in 2018, involving around 3 million UK resident individuals (or entities they control). 

HMRC uses its ‘Connect’ analysis programme to cross-check data it receives from abroad with its own (including details on salaries, bank accounts, loans, property, car ownership etc.). This provides tax officials with information to challenge around 500,000 cases each year.

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. 

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. An adviser with cross-border expertise can help you enjoy favourable tax treatment while offering peace of mind that you are meeting your tax obligations, here and in the UK.

Contact your local adviser for personalised 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.