This article is authored by Lam Fong Kiew, Head of Tax, Nexia TS
There has been a fair bit of controversy over the impact that FATCA has had on the financial affairs of US persons and the financial institutions that engage them as clients. Then UK FATCA burst on to the scene targeting UK citizens based in the UK’s Crown Dependencies and Overseas Territories. And now it seems the rest of us may well need to sit up and start taking notice too. That is because a new global FATCA-style information exchange initiative called the Common Reporting Standard (CRS) is being drawn up by the OECD which will impact individuals of all nationalities.
The recent leaking of the ‘Panama Papers’ demonstrates the prevalence of the use of far-flung offshore jurisdictions, some constituting little more than a collection of picturesque beaches with fringing palms, as a means of parking funds away from the prying eyes of tax authorities worldwide. Increasing capital mobility across borders in tandem with an unprecedented growth in wealth that has accompanied the booming economies of the emerging world means such jurisdictions have never been more attractive. Indeed, it has never been easier for the wealthy global elite to move money and investments across national borders and hide it abroad to evade taxes.
Against this backdrop, CRS essentially aims to facilitate the ‘automatic’ exchange of information among countries to counter such evasion. The CRS requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information required to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as the common due diligence procedures to be followed by financial institutions.
Financial institutions covered by the standard include banks, custodians, brokers, certain collective investment vehicles, trusts and certain insurance companies. The financial information to be reported includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets, and other income generated with respect to assets held in the account or payments made with respect to the account.
Such information is required to be reported for the ‘reportable accounts’ which means accounts held by any individual who is a resident for tax purposes in the reportable country. The standard also requires financial institutions to ‘look through’ passive entities (including trusts and foundations) to report on the relevant controlling persons.
There is no doubt that this will have a huge impact on financial institutions in general, given the wide scope of CRS and the need to identify customers from the participating jurisdictions for whom reporting will be done, as well as customers from jurisdictions which will be adopting CRS in the coming years.
Jurisdictions covered by CRS?
More than 50 jurisdictions (known as the ‘Early Adopters’) across the world have committed to the first exchanges of information under CRS in 2017. These include the UK and its Crown Dependencies and Overseas Territories, as well as tax havens such as the Cayman Islands, Cyprus, Liechtenstein, Luxembourg and Seychelles, among others.
Hot on their heels, more than 40 other jurisdictions have committed to the first exchange of information under CRS in 2018. These include key business and banking hubs such as Singapore, Hong Kong and Switzerland. There was an initial hesitation from Panama to commit to CRS, however on 11 May 2016, OECD announced Panama’s commitment, taking the number to 101 jurisdictions. Interestingly, the US has not indicated any commitment to the CRS given that it has already entered into various bilateral Intergovernmental Agreements (IGAs) with other participating countries for the implementation of FATCA.
As stated above, Singapore has indicated its commitment to CRS in 2018 by signing bilateral Competent Authority Agreements (CAAs) with other jurisdictions.
Indeed, Singapore had, on 1 March 2016, released draft legislative amendments for public consultation. The draft Bill makes clear that the existing Automatic Exchange of Financial Account Information (AEOI) provisions in the Income Tax Act, which were earlier introduced to implement the Singapore-United States FATCA IGA, will also be applicable to any other AEOI agreement that is in accordance with the CRS. This will enable the signing of CAAs with other jurisdictions to implement AEOI under the CRS.
The CRS may not necessarily be a game changer in the ever widening pursuit to combat tax evasion, but it does ratchet those efforts up by a significant notch. Suspicious jurisdictions, dodgy dealings and shady structures will always be around. What the CRS aims to do is shine yet another spotlight on the darker corners of our global tax landscape by enabling the sharing of vital information globally among tax administrators. And by the looks of it, such a measure has arrived none too soon.
For more information, please contact:
Ms Lam Fong Kiew
Head of Tax