From Out-Law.com

A ‘handbook’ giving guidance on the new global standard for automatic exchange of financial account information and a guide to designing an offshore tax disclosure programme have been published by the Organisation for Economic Cooperation and Development (OECD). 13 Aug 2015

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The Common Reporting Standard (CRS) provides a framework for jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis, in an attempt to crackdown on tax evasion using offshore accounts.

Fiona Fernie, a tax investigations expert at Pinsent Masons, the law firm behind Out-law.com said “The implementation of the CRS will mean that financial institutions will need to report to their local tax authority financial details from 1 January 2016 onwards relating to account holders who are resident in countries that have signed up to CRS. However, it is not just banks who will have to report on foreign holders of bank accounts; companies, partnerships and trusts will need to conduct due diligence and if necessary their own reporting on the ultimate individual owners of those structures.”

Over 90 jurisdictions have committed to implement the standard, with the first exchanges starting in 2017 and 2018, subject to the completion of necessary legislative procedures in each country. ‘Early adopters’ who intend to begin exchanging information from 2017 include the UK, its Crown Dependencies (Jersey, Guernsey and the Isle of Man), the British Virgin Islands and the Cayman Islands.

The new ‘Implementation Handbook’ is designed to assist countries with their implementation of the CRS. However, the handbook also contains a section discussing the conceptual framework of the CRS and key definitions. Fiona Fernie said that this section will also be of interest to businesses and individuals when deciding how best to implement CRS compliance procedures.

The main precursor to the CRS is the US’s Foreign Account Tax Compliance Act (FATCA) regime, which requires banks and other financial institutions to provide information about accounts held outside the US by US citizens, with the threat of a withholding on US source income of institutions which do not comply.

Although the initial obligation under FATCA was intended to be on the financial institution to provide information direct to the US Internal Revenue Service, many jurisdictions, including the UK have entered into inter-governmental agreements (IGAs) which mean that financial institutions provide the information to their own tax authority which then provides the information to the US on a reciprocal or non-reciprocal basis depending on the terms of the IGA. The CRS builds on this framework.

Fiona Fernie said: “There are some material differences between FATCA and CRS for all businesses to bear in mind. For example, the de minimis values are different between the two and the CRS only looks at tax residency, rather than citizenship when determining if a person is reportable. Part III of the CRS Implementing Handbook provides a useful summary of the key ways in which the CRS differs from FATCA and will assist businesses with due diligence requirements and prevent errors in decisions as to whether reporting should take place or not.”

The standard sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. It was developed by the OECD in response to a request from the G20.

The OECD has also updated its report on the various characteristics of the disclosure facilities provided by 47 countries. These disclosure facilities enable individuals with tax irregularities to come forward voluntarily to settle their affairs on more favourable terms than if the tax authority had found out about them itself. The OECD press release said “The limited time left until the automatic exchange of information under the Standard becomes a reality will in many instances be the last window of opportunity for non-compliant taxpayers to voluntarily disclose. This is therefore a crucial moment to update the publication and reflects OECD policy of encouraging countries to examine voluntary compliance strategies that enable non-compliant taxpayers to come forward”.

In the UK, the disclosure facility most favourable to taxpayers is the Liechtenstein Disclosure Facility (LDF) which not only offers more favourable terms to taxpayers who voluntarily agree to disclose information, but also protects taxpayers from a criminal investigation. However, it was announced in the March Budget that the LDF will end on 31 December 2015, earlier than originally planned. This change is not reflected in the OECD document as the tables were compiled before this time. The UK’s Crown dependency disclosure facilities will also come to an end at the end of this year.

“The introduction of the CRS coupled with the UK’s arrangements with the Crown Dependencies, where information will be provided from September 2016 in relation to activities in 2014 and 2015, mean that it is highly likely that HMRC will find out over the next couple of years about undeclared offshore income and assets,” said Fernie. “The huge advantage of the LDF is that it gives immunity from prosecution; any replacement disclosure facility will not carry this guarantee and will be on much less favourable terms. The government also plans to introduce a strict liability offence, which would mean it would not have to prove intent to evade tax in order to bring a criminal prosecution for offshore evasion”.

“Anyone with undisclosed offshore assets really needs to come forward before the end of the year. This really is the last chance saloon for those who want to avoid ending up behind bars” she said.

It is envisaged that jurisdictions which sign up to the CRS and obtain the required information from their financial institutions will exchange that information under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. However, some jurisdictions will want to exchange the information under the terms of a Tax Information Exchange Agreement (TIEA).

As the current model TIEA does not allow for spontaneous automatic exchange of information, the OECD has also published a model protocol for amending an existing TIEA to provide for automatic, rather than on request, exchanges. Exchange of information under a TIEA, rather than under the multilateral convention is most likely where a territory is dealing with dependent and associated territories or where a developing jurisdiction is dealing with a developed jurisdiction.

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