We are about to enter a new era for international tax planning and cross border wealth management.
January 2016 sees the start of a new global automatic exchange of information regime that affects everyone who has financial assets outside their country of residence. Financial privacy is dead and buried, to the point where your local tax authority will passively receive information about your investment assets without having to ask for it.
Everyone should be aware of what information will be shared about their income and assets, and consider what tax and estate planning arrangements are best suited for them and their family, for today and the long-term.
The current situation
There has been some automatic exchange of information in Europe since 2005, under the EU Savings Tax Directive, but it only applies to interest income. The Isle of Man, Jersey and Guernsey started off by offering a withholding tax option, but have now moved to automatic exchange of information only. Third countries Switzerland, Liechtenstein, Monaco, Andorra and San Marino implement the directive by applying the withholding tax on savings income, thereby maintaining banking secrecy.
Many countries and offshore centres around the world have signed bi-lateral tax information exchange agreements. These however are of limited benefit to tax authorities. They can only receive information on a taxpayer’s offshore accounts and investments if they ask for it, and to do that they need to have solid suspicions of tax evasion. If they are not aware of an account, they will not receive any information on it.
The situation from January
In July 2014 the council of the Economic Co-operation and Development (OECD) approved a new standard for the Automatic Exchange of Financial Information in Tax Matters. It comprises the Competent Authority Agreement and the Common Reporting Standard (CRS), and goes live on 1st January 2016.
This new regime involves the systematic and periodic transmission of taxpayer information by the source country to the residence country concerning various categories of income – it goes much further than just interest income.
This means that tax authorities will automatically receive information on all the financial assets their taxpayers own overseas – without having to ask for it.
So the Spanish tax authority will receive information on every resident of Spain, regardless of whether they have been fully compliant and declaring everything correctly, or hiding assets offshore.
It will receive information about offshore accounts and investments they may not have been aware of before. So any cases of tax evasion, whether on the investment return or underlying capital sum, will come to light, even if there were no suspicions previously.
The OECD warned this summer that transgressors have a “last window of opportunity” to disclose previously hidden assets and income.
Local tax authorities will compare data received against tax returns, and where they find discrepancies have good reason to launch a tax audit. This could result in the taxpayer having to pay previously unpaid tax, plus interest, plus penalties. In some cases they could face criminal prosecution.
Over recent years, the Spanish government has stepped up its efforts to detect tax evasion and collect unpaid taxes. This new global exchange of information will be an invaluable tool for the tax authorities. It will help them not only compare data with tax returns, but also with Form 720 where residents have to declare their overseas assets. The penalties for undeclared assets can be costly, so it is important that you declare everything correctly.
In Part 2 Blevins Franks will look at what information is to be reported, implantation of the Common Reporting Standard and what it means for you.
Blevins Franks is covering this important topic, along with Wealth Tax, at its Autumn Seminar at Castillo Hotel Son Vida, Palma de Mallorca, on 17th November. Click here for information and to reserve your place online, or call 971 719 181.
More about Blevins Franks tax advisors
For more information and personalised advice, contact Peter Worthington, Senior Partner at Blevins Franks, on +34 971 719 181 or email@example.com.
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 06th of October, 2015.