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The “common reporting standard” (CRS) may sound innocuous enough to those outside the tax world, but to families with carefully designed and international wealth-planning structures, these three words are critically important.
Under an OECD-led initiative, agreed in May 2014, more than 60 countries will start to exchange details of individuals’ bank accounts and trusts on an automatic basis from September 2017.
It promises to prise open the secretive affairs of those who are evading tax, and to play a part in reducing the so-called “tax gaps” of governments struggling with stubbornly high fiscal deficits.
The initiative is symbolic of a broader move towards more disclosure of information, with a greater onus on individuals and their advisers to comply and steeper penalties for those who do not.
Damian Bloom, a private client partner who specialises in international tax and estate planning at Berwin Leighton Paisner, the law firm, says changes are “unavoidable” for wealthy families.
“Clients have moved on from throwing their hands up in horror, to accepting that all of their affairs will soon become available to at least one tax authority, and that they need to plan on this basis,” he says.
Bloom says families are worried about having to explain some of their arrangements to authorities for the first time. “There are many justifiable reasons for having an offshore bank account, not least privacy, but in the current climate there is an assumption that those with offshore accounts must be dodgy.”
Sophie Dworetzsky, a partner at Withers, the global law firm, says the common perception that wealthy people with offshore accounts and trusts must “have something to hide” is misplaced. It is often due to perceived threats of extortion and kidnap in many countries.
The EU’s proposals to require tax advisers to report the beneficial ownership of trusts, with the creation of a publicly accessible register of the details, would undermine the anonymity that trusts currently afford. “If information like this is open to the public, it is open to abuse,” says Edward Stone, a partner at Berkeley Law.
Dworetzsky says many families are “justifiably” concerned that details of their wealth could prompt targeted attacks, particularly in their home countries. They are re-evaluating their arrangements in the EU because of the plans for a beneficial-ownership register.
Other large tax jurisdictions, such as the UK, have become less attractive for wealthy non-residents recently as politicians have tightened tax regimes.
Dworetzsky points to the UK government’s pledge this July to abolish the permanent non-domiciled status that allows overseas income to be exempted from UK tax. The announcement that anyone living in the country for more than 15 years out of 20 will become a tax resident followed other changes, including increases to property taxes, that target wealthy foreign families. “When you put everything together, people are starting to feel a little hounded,” she says.
It is this rising cost of compliance combined with new regulations that is prompting action now, Dworetzsky continues. “There are frustrations that costs are being incurred to disclose different information to different jurisdictions . . . [and] it leaves people wanting to simplify their structures.”
Bloom says that his firm’s clients are looking to consolidate their affairs in one jurisdiction, often from myriad countries, to avoid costly duplication of administration and reporting.
Moving assets to low-tax jurisdictions outside the common reporting standard has not been on the agenda, he adds, especially because financial institutions are increasingly unwilling to risk facilitating tax evasion.
HSBC, Europe’s largest bank, came under scrutiny earlier this year after detailed allegations that its Swiss private bank helped clients to avoid tax. In March, it launched a review of the Jersey accounts of its UK-resident clients.
At a time when banks are particularly fearful of breaching compliance rules, Bloom says “there is growing tension between banks’ desire to protect their own reputations and their responsibilities to act in clients’ best interests”.
The cost and complexity of complying with the US Foreign Account Tax Compliance Act (Fatca), which requires financial institutions to pass on details of overseas assets held by US citizens, prompted some wealth managers to shun their custom.
Wealthy individuals are, of course, not immune to reputational concerns, and although it may be possible to circumvent international information sharing, very few appear to be adopting aggressive strategies, says Berkeley Law’s Stone.
“There are low-tax jurisdictions where people could go, such as Panama and Dubai, [but] tax is just one item on the balance sheet,” he says. “Families do not pay more [tax] than they have to, but their main goal is wealth preservation while remaining compliant. Tax is not the number one priority.”
“Individuals used to be happy to talk about their non-dom status at the dinner table, but now it is whispered in the corridor,” says Bloom. “It is now not socially acceptable at all to say ‘I am moving all of my assets to Panama’.”
Stricter penalties are also a factor. Tax evasion is a criminal offence in most countries, but intent must usually be proved. The UK government has proposed introducing a “strict liability” offence, meaning individuals can be prosecuted automatically for tax evasion regardless of whether they necessarily intended to break the law.
Dermot Callinan, UK head of private client advisory at KPMG, the professional services group, says that opportunities such as the Liechtenstein Disclosure Facility for “accidental” tax evaders (who may have inherited undeclared offshore assets) to become compliant with tax authorities are running out.
“People are effectively being told they must now be compliant, having had years to settle any issues on beneficial terms,” he says.
“Once tax authorities have information from the CRS, it will be a very different environment where people need to understand that carelessness can lead to severe penalties.”