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Alert in Brief
In 2017 HMRC will automatically receive from more than 45 foreign tax authorities’, ownership information on companies and trusts in which UK tax residents are settlors, trustees, beneficiaries or protectors and will also receive information detailing UK residents owning foreign financial accounts. Ensuring UK tax residents tax returns correctly reflect foreign income and gains before HMRC makes an enquiry will minimise and potentially avoid penalties. HMRC will also share information with foreign tax authorities’ on their residents UK entities and financial accounts.
SUBJECT: Exchanging Tax Information with HMRC and Simmons Gainsford’s Obligation to Clients
For many years’ it was extremely difficult or some say impossible, for resident country tax authorities to obtain financial statement or financial account information covering an individual’s foreign investments or bank accounts. It began to be less difficult to obtain that information when the resident country and the country where the business or bank account was located had entered into a bi-lateral Double Taxation Convention (DTC) containing a standard exchange of information Article. While these facilitated exchange the information broadly was only made available to a resident country tax authority enquiring about one of its taxpayers. Since these DTCs usually were entered into between countries having reasonable trading relationships, it resulted in few DTCs with ‘so called’ tax havens. While the DTCs provided a tax authority with a right to request information that right was usually limited to situations involving existing investigations by the resident country tax authority.
The Organisation for Economic Co-operation and Development (OECD) began to realise these DTCs would not provide developed countries with information on taxpayers business and investment entities organised in countries not having a DTC, essentially tax havens. This loophole was intended to be countered by countries entering into agreements with tax havens limited to exchanging information (Tax Information Exchange Agreements – TIEA). With havens being required to enter into not less than 12 TIEAs to avoid being treated as non-complying countries, most have entered into many more than 12.
The 2008 Global Financial Crisis brought a massive reduction in Government revenues and the Governments argued the revenue crisis had been exacerbated by Multinational Enterprises (MNEs) and high net worth individuals hiding assets and cash in offshore structures. Without an easier means of accessing information on the assets and structures, the Governments argued they would be at a disadvantage in deciding which individuals and entities to investigate.
The US Government also identified that many wealthy US citizens had salted away assets and cash in Swiss banks and responded with the Foreign Account Tax Compliance Act (FATCA), a process by which assets or income of American taxpayers in all countries was required to be reported back to the IRS. Financial Institutions which failed to report to the IRS would be penalised.
The G20/OECD saw that FATCA could be a role model for the establishment of an Automatic Exchange of Information (AEOI) system covering certain types of income earned within business and investment entities or in bank accounts or insurance policies. This led to the Common Reporting Standard (CRS) being adopted by the tax authorities of countries signing up to the AEOI as the description of information to be delivered to other countries. The CRS is now being used as a Model for any two countries (Competent Authority Agreement- CAA) agreeing to the automatic exchange of information.
What this means therefore is that there is a now a global architecture for exchanging information but individual countries must agree on the terms of the bilateral CAA one by one, as a precondition for the exchange. At 29 December 2016 the UK has entered into CAA’s with 47 countries(1). The Countries are listed in Annex 1 to the Alert.
From a process perspective, financial institutions have used 2016 to obtain details on owners of companies and foundations or settlors, beneficiaries, protectors and trustees of trusts where these entities own bank accounts –either in the country where the entity was formed or in another country (so if a BVI has a bank account in the BVI and in Switzerland it is both the BVI and Swiss banks which both must provide information to their respective tax authorities). The details include tax file numbers in the country of residence, residential address, etc. – or generally speaking all the information which can link that owner of the foreign entities and assets through to his/her personal tax return in the residence country.
Countries which have agreed to the AEOI will also obtain that information on bank accounts opened before 2016. The plan is that from around 30th September 2017 the countries which have the architecture in place will electronically exchange the information with all countries they have entered into a CAA with. This means that if say Singapore has entered into CAA’s with 75 countries, Singapore will automatically exchange the information collected from Singapore financial institutions to those 75 countries and if the receiving country has the architecture in place then the data feed from the Singapore IRAS will link to the resident’s tax file number and compare his tax return with the information received. Where there is a conflict an audit questionnaire may automatically issue. So this is the theory.
The HMRC has further strengthened its rights to request information by imposing obligations on financial institutions and advisers who have clients with offshore assets or income(2). HMRC has established a requirement for the financial institutions to provide information to the HMRC or for those who have provided offshore advice to the client to provide an exchange of information advice to the client.
Where Simmons Gainsford (SG) has provided so called ‘offshore advice’ to a client, SG will be required to provide that notice to that client unless SG has prepared a tax return for the client in which appropriate disclosures of the matter covered by the advice, have been made. The adviser’s notification obligation is not relevant where the individual client was not UK tax resident in 2015/2016 and is not expected to be UK tax resident in 2016/2017. Given the difficulties for individuals seeking to become nonresident under the Statutory Resident Test, this exclusion may have limited applicability.
What must Simmons Gainsford Do:
Simmons Gainsford (SG) will be required to issue a notice in relation to ‘offshore advice or services’, which is defined to mean advice or services relating firstly to a financial account in a participating jurisdiction (see Annex One) or the USA, secondly, a source of relevant foreign income(3) arising from a participating jurisdiction or the USA, thirdly, a source of employment income(4) arising from a participating jurisdiction or the USA or fourthly, an asset(5) which is held or situated in a participating jurisdiction or the USA. The breadth of the inclusions means that there will be many cases where exchange of information notices will need to be provided.
SG is a ‘specified relevant person’ when providing ‘offshore advice or services’ in the course of its business, or where it referred the individual to a ‘connected person’(6) outside the United Kingdom (including SG Dubai) for the provision of the advice or services relating to the individual’s personal tax affairs.
The regulations specify those individuals to whom a ‘client exchange of tax information notification’ must be sent and also prescribe the format which that notification must adopt. Both financial institutions and tax advisers must send these notifications to their specified clients by 31st August 2017(7). SG will provide notices within the required time period.
Should SG fail to comply with any regulation imposed by the Regulations then a flat-rate penalty of £3,000 may be charged for non-compliance. For this reason, SG will fully comply with the Regulations.
What must Financial Institutions do:
In order that Financial Institutions(8) can comply with the rules they must establish and maintain arrangements designed to identify reportable accounts. A Reportable Account is defined as an account held by one or more Reportable Persons or by a Passive Non-Financial Entity(9) with one or more Controlling Persons(10) that is a Reportable Person(11).
These rules must identify the territory in which an account holder or a ‘controlling person’ is resident for income tax or corporation tax purposes or for the purposes of any tax imposed by the law of that territory that is of a similar character to either of those taxes. It must apply the due diligence procedures set out in the relevant agreement(12) and secure the information obtained, or a record of the steps taken to comply with this regulation, in relation to any financial account kept for a period of six years beginning with the end of the year in which the arrangements applied to the financial accounts. The first reporting year is the calendar year 2016 in relation to an account identified as a reportable account for the purposes of the CRS.
Under the new Regulation (effective 30thSeptember 2016), Financial Institutions must identify all of their individual clients with account balances or value exceeding $1m. In relation to accounts open before 1 January 2016 ( pre-existing entities), where the Financial Institution has the account owner’s residence address and wishes to use it then the account is reported but where there is no residential address the account is not reported until the circumstances change which could be as soon as other identification searches have been completed(13). A ‘reportable account’ of a pre-existing entity is one with an account balance or value not exceeding US$250,000 as of 31 December 2015, and in that instance where the Financial Institution applies the threshold the Entity financial account is not reported(14).
Are there Anti-Avoidance Rules:
Yes, the rules(15) provide that where a person enters into any arrangements, and the main purpose, or one of the main purposes, of the person in entering into the arrangements is to avoid any obligation under The International Tax Compliance Regulations 2015, then the Regulations have effect as if the arrangements had not been entered into.
What Actions should clients take:
Clients with offshore assets and structures must immediately review their 2016 tax returns to ensure that correct disclosure has been made of the assets and structures in those returns, especially where the asset or structure sits in a country which the UK has entered into a CAA, and there are now more than 45 such jurisdictions. Inevitably where HMRC identifies through the AEOI that information has not been included in the client’s relevant return it will enquire whether prior returns properly disclosed the income and or gains from the same sources. This may lead to HMRC asserting evasion.
If clients identify incomplete disclosure or missdescription in a return, then we strongly recommend regularising the disclosure with HMRC.
If a client has ceased being UK tax resident then we recommend ensuring foreign financial account and ownership information is updated to reflect the new circumstances.
Where a client has reorganised its foreign assets and accounts and one consequence from that reorganisation is an anticipated cessation for a foreign financial institution to disclose information to HMRC, then Simmons Gainsford (SG) can provide advice on whether it is likely that the reorganisation will be seen by HMRC as avoidance.
UK PARTICIPATING JURISDICTIONS
The UK participating CRS jurisdictions(16) are:
Albania Andorra Anguilla Antigua and Barbuda Argentina Aruba Austria Australia The Bahamas Barbados Belgium Belize Bermuda Brazil British Virgin Islands Brunei Darussalam Bulgaria Canada Cayman Islands Chile China Colombia Costa Rica Croatia Curacao Cyprus Czech Republic Denmark Dominica Estonia Faroe Islands Finland France Germany Gibraltar Greece Greenland Grenada Guernsey Hong Kong (China) Hungary Iceland India Indonesia Ireland Isle of Man Israel Italy Japan Jersey Korea Latvia Liechtenstein Lithuania Luxembourg Macao (China) Malaysia Malta Marshall Islands Mauritius Mexico Monaco Montserrat Netherlands New Zealand Niue Norway Poland Portugal
Qatar Romania Russian Federation Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Samoa 13 San Marino Saudi Arabia Seychelles Singapore Sint Maarten Slovak Republic Slovenia South Africa Spain Sweden
Switzerland Trinidad and Tobago Turkey Turks and Caicos Islands United Arab Emirates Uruguay
2. International Tax Compliance Regulations 2015 (SI 2015/878) and International Tax Compliance (Client Notification) Regulations 2016 (SI 2016/899)
3. Defined by section 830 of ITTOIA 2005, which will include foreign trade profits, profits of property business, overseas property income, interest, dividends from non-UK resident companies, purchased life annuity payments, profits from deeply discounted securities, sales of foreign dividend coupons, royalties and other income from intellectual property, films and sound recordings: non-trading businesses, certain telecommunication rights: non-trading income, estate income, annual payments not otherwise charged, and income not otherwise charged.
4. Defined by section 7(2) of ITEPA 2003
5. Defined by section 21 of TCGA 1992 to be all forms of property whether situated in the United Kingdom or not, including options, debts and incorporeal property generally, any currency other than sterling and any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.
6. A person connected with the specified financial institution, specified relevant person or relevant person in question within the meaning of “connected” given in section 1122 of CTA 2010
7. Section 12D
8. Section 3, The International Tax Compliance Regulations 2015
9. Page 7 of 12, Guidance for Financial Institutions Requesting the Form, https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/CRS_ENTITIES_Self-Cert_Form.pdf
10. If the Entity Account Holder is a Passive NFE then the Financial Institution must “look-through” the Entity to identify its Controlling Persons. If the Controlling Persons are Reportable Persons then information in relation to the Financial Account must be reported, including details of the Account Holder and each reportable Controlling Person ( para 105 CRS Handbook) and in relation to a Trust, (and Entities equivalent to trusts), the term Controlling Persons is explicitly defined in the Standard to mean the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust. If the settlor, trustee, protector, or beneficiary is an Entity, the Reporting Financial Institution must identify the Controlling Persons of such Entity in accordance with FATF Recommendations ( para 109 CRS Handbook).
11. Para 94, CRS Implementation Handbook
12. Sections 2 to 7 of the CRS
13. Para 127 The CRS Implementation Handbook
14. Page 59 The CRS Implementation Handbook
15. Section 23, The International Tax Compliance Regulations 2015
16. SCHEDULE 1 Regulation 1(3)(b) Participating jurisdictions, The International Tax Compliance Regulations 2015 at 29 December 2016.