Tax authorities and financial institutions are gearing themselves up for the new automatic exchange of tax information under the Common Reporting Standard, which goes live on 1st January 2016.
The Organisation for Economic Co-operation and Development (OECD), which developed the new standard, has warned that transgressors are facing “the last window of opportunity” to disclose previously hidden offshore assets and income.
Each participating country will receive much more information on their taxpayers’ overseas assets than ever before. Until now, they only received information on request, based on evidence of tax fraud or another crime, so receiving information automatically, even on accounts they were not aware of, is a major change.
The new regime covers a wide range of investment income, as well as account balances.
The definition of “financial institutions” that need report is broad, and besides banks includes insurance companies, certain investment vehicles and trusts. The data they collect on their international clients will be passed on to the tax authorities of the clients’ country of residence.
In the UK, HM Revenue & Customs (HMRC) has published its draft guidance notes on how the Common Reporting Standard will be implemented. Financial institutions are obliged to carry out due diligence to establish the tax residency of the account holder, and keep the information for six years.
For existing accounts this needs to be done by 31st December this year, and they start capturing the information for new accounts from 1st January 2016.
The guidance sets out the information that must be collected and disclosed: account holder’s name, address and taxpayer identification number; jurisdiction to which the information is reportable; account number (or similar); balance or value at end of calendar year or other appropriate period, and details of the financial institution.
There are also additional reporting requirements depending on the type of account that is being reported on.
HMRC will benefit from information from all the other participating countries and offshore centres around the world. It will receive the first data in 2017, relating to fiscal year 2016. The government has been investing in data analytics for HMRC. This will expose undeclared income and gains arising from overseas assets and investments.
The government is considering a new “strict liability” criminal office for offshore tax evasion. It would not need to prove that the taxpayer intended to evade tax, simply that they had undeclared offshore assets. Much higher financial penalties could be imposed, and potentially six months imprisonment.
The UK is one of several countries to introduce voluntary disclosure schemes. More and more people are coming forward to regularise their affairs as they realise there is nowhere left to hide in this new world of tax transparency.
The UK’s Liechtenstein Disclosure Facility and Crown Dependencies Disclosure Facilities close at the end of this year, several months earlier than planned. The government said that there will then be one last opportunity for evaders to come clean, before it starts receiving information under the new regime. This ‘last chance’ disclosure regime will be less generous than its predecessors.
While much of this article uses the UK as an example, the new automatic exchange of information regime equally affects residents of Spain. This is a step change in the world of cross border taxation. Everyone needs to ensure their tax planning is legal and complaint.
Note that although the first reporting takes place in 2017, it is for calendar year 2016, so there is only a short amount of time before this new regime starts. There are effective arrangements available here, but you should take personalised advice to ensure you get it right.
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This article was written on the 16th of November, 2015.