Tax Transparency and the Everyday Investor - Understanding Common Reporting Standards

Insight | by Trudi Hayes
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Jason Pearce from OMI International explains Common Reporting Standards in simple terms in the below article which was published in the British Chamber of Commerce Magazine.

Since late 2018, information on local financial accounts held by overseas tax residents has been shared with their home tax authorities. Here’s how it could affect you.

Over the last year or so, many of us will have received letters from our bank, insurance company or other financial institution asking for confirmation of certain personal information including, perhaps surprisingly, our tax residency. Have you ever wondered why, and what the information will be used for?

This is all related to the international initiative known as the Common Reporting Standard (CRS).

Since late 2018, Hong Kong’s Inland Revenue Department has been sharing information on local financial accounts held by overseas tax residents with their home tax authorities and receiving information on overseas accounts held by tax residents of Hong Kong. The process by which this is implemented is called the Automatic Exchange of Information (AEOI).

Background to the CRS and the AEOI

Put simply, more than 100 governments worldwide, galvanised by the Organisation for Economic Co-operation and Development (OECD), have committed themselves to exchange information about financial accounts held by their taxpayers with overseas financial institutions. The purpose of this initiative is to improve tax collection by foiling tax evasion.

The institutions involved include not only banks, but also custodians, certain brokers, collective investment vehicles, and insurance companies where contracts have redeemable cash values, including those held in complex company and trust structures.

Soon, many more countries will be signing up for CRS. Surprisingly to some, the likes of Switzerland, South Africa, the UAE, China, and Russia have already signed up to CRS; although the USA is not currently a signatory (see below). Within Europe, the EU is fully committed, as are the UK Crown Dependencies, namely Guernsey, Jersey, and the Isle of Man. You can find a list of jurisdictions committed to CRS here: tax/transparency/AEOI-commitments.pdf

Who and what is being reported?

In the US, the initiative to ensure their citizens worldwide declare and pay tax appropriately is known as FATCA, the Foreign Account Tax Compliance Act. But unlike FATCA, which provides data to the Internal Revenue Service (IRS) on US ‘persons’ (citizens and green card holders) with wealth outside the US, the CRS focuses on tax residency.

For example, under CRS, a UK domicile Hong Kong tax resident with wealth in China will have data on themselves and their relevant assets in China made available annually by the financial institution in China to the Hong Kong tax authority (albeit through the tax authority in China).

The reporting of assets will depend on the information held by financial institutions on account holders and the self-certification made by them to those institutions. That explains why financial institutions have been writing to investors to confirm relevant information in cases where they didn’t hold it in the past.

Not all information is provided to all participating governments; just where the wealth is situated and where the owner is tax resident. Reportable information will be shared annually and includes:

  • information on the account holder
  • account number
  • the account balance or value
  • all types of investment income, and
  • sales proceeds and other income generated, or payments made, with respect to the account.

The CRS is a requirement that is binding on financial institutions, not clients. Clients will, of course, have their own reporting obligations so the information supplied by the client and through the CRS should match up.

It has been reported*, for example, that through the CRS, the National Tax Agency of Japan has gathered details of over 400,000 offshore bank accounts held by Japanese nationals, whereas only 9,000 citizens declared offshore accounts in 2016.

All information exchanged is done through a financial institution’s domestic tax authority. It is the responsibility of the financial institution to identify reportable accounts and, as a result, you might be asked by financial institutions to provide new or updated information, including self-certification of your tax status.

Should I sell all my overseas assets?

Holding wealth overseas can be perfectly legal. It is the non-disclosure of wealth, where obliged to do so, that is illegal, and this is what the CRS is aiming to address. It is extremely important to discuss this issue with your professional adviser to ensure you are not in an arrangement which you think is legitimate when it isn’t, or not reportable when it is.

Many advised investors prefer to invest in an offshore portfolio bond as, in the majority of jurisdictions, it can legitimately and legally provide tax efficient growth known as gross roll up, tax deferral, and a number of flexible options to access their money. So, with the benefit of quality advice, the burden of tax can be reduced.

If you are concerned about whether your income and gains need to be disclosed, you should take action and review your current wealth solutions to ensure they remain fit for your purposes.

Confidentiality and personal data

Needless to say, this initiative involves the collection and distribution of large amounts of personal data and financial information. Unfortunately, research** shows that in the first half of 2018, over 3.3 billion records suffered data breaches worldwide, in 944 separate incidents. Most of these breaches were caused by malicious outsiders gaining access to the data as well as accidental loss of the data.

Because of the sensitivity and significance of the data that the CRS harvests and shares, legitimately shielding this information from the risk of a breach can be highly valuable. Those with complex financial affairs may choose to invest in structures that contain them in a single wrapper, for example, a portfolio bond. In such cases, the assets linked with the portfolio bond are not reported individually, instead, the wrapper is reported as a single holding, consolidating all holdings within.

The reported value of the investor’s holdings remains the same, but by cutting down the amount of data transmitted, the chances of personal data being exposed are reduced.

Jason Pearce is Head of Technical Sales, Hong Kong and NE Asia for Old Mutual International.

* internationalinvestment/news/3505796/japan-obtains-400- overseas-account-details
** Breach level index from Gemalto. Data Privacy and New Regulations Take Center Stage, 2018 first half review.
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