From January 2016, financial institutions in over 50 countries around the world began collecting information on their clients and their accounts. This data will be passed onto the clients’ country of residence in 2017. Cross-border taxation can get complex for expatriates, and it is important to make sure you are correctly declaring your income and paying tax in the right country.
This exchange of information will be repeated every year, with a further 47 countries starting to collect data in 2017, ready to exchange it in 2018. It is carried out under the Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD).
The loss of financial privacy affects us all. Our local tax authority will automatically receive information on the financial assets we own overseas, without asking for it. If you live in Spain and have, for example, investments in the Isle of Man, or bank accounts in Switzerland, or pension funds in the UK, the Spanish tax authorities will receive information on these assets.
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Information to be exchanged
The information being shared about the financial assets you own outside your country of residence includes personal data such as your name and address, country of tax residence and tax identification number.
The information to be reported about your accounts includes the investment income you earned over the year, such as interest, dividends, income from certain insurance contracts, annuities etc, account balances and gross proceeds from the sale of financial assets.
The financial institutions that need to report include banks, custodians, certain investment entities such as investment funds, certain insurance companies, trusts and foundations.
The 54 “early adopter” jurisdictions will make the first exchange by September 2017, in relation to 2016 data. This list includes Spain, the UK, most EU countries, the Channel Islands, Isle of Man and Gibraltar, UK offshore territories and South Africa.
The countries starting the following year include Switzerland, Monaco, Singapore, Hong Kong, United Arab Emirates, Panama, Australia and Canada.
The US exchanges information globally under its FATCA initiative – the Foreign Account Tax Compliance Act.
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What does this mean for you?
When local tax offices receive this information they will be able to verify whether the taxpayer has accurately reported their income on their tax returns. In Spain the authorities will also compare the data with Modelo 720 declarations, where all Spanish residents have to report their non-Spanish assets.
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Cross-border taxation is complex. If you spend time in more than one country it may be hard to determine where you should be paying tax. You have to follow tax residency rules and double taxation treaties.
Tax residents of Spain are liable to Spanish tax on their worldwide income, gains and wealth. This includes most income which is also taxed elsewhere. Some British expatriates believe that if income is taxable in the UK, like rental income, pensions and ISAs, they do not have to declare it in Spain. This is incorrect; even if they are declared and taxed in the UK, you still need to declare them in Spain.
Another aspect to consider is that if you have many different offshore bank accounts, investment products etc, each one will be sharing information with your local tax authority. For peace of mind you could group as many assets as possible into one arrangement, so that there is much less information being passed around, and it is easier to follow what is being exchanged about you.
This is also a good time to review your tax planning arrangements. Are they approved here in Spain? If, for example, you use non-compliant bonds, such as non-EU bonds including those from the Isle of Man, Jersey and Guernsey, provided you have been fully declaring them in Spain they are not illegal – but they are taxed more aggressively than Spanish compliant bonds.
Exchange of information does not mean that we do not have the right to structure our assets in the most tax efficient way, but we have to ensure we only use arrangements which are compliant in Spain. There are structures which can be very effective, but take specialist advice to make sure you get it right.
For more information and personalised advice, contact Blevins Franks on +34 971 719 181.
To keep in touch with the latest developments in the offshore world, check out the latest news on Blevins Franks Tax & Wealth Management Specialists.
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This article was written on the 22nd of November, 2016.