Financial institutions around the world exchanging tax information - part one

International tax transparency: banks and other financial institutions around the world are exchanging valuable information across borders

Those of us following developments in international tax transparency and those only just noticing those developments, will recognise groundbreaking attempts by governments across the world to recoup more tax revenues than ever before. Tax authorities, treasury departments and the OECD's Global Forum (with over 125 member countries) on transparency and exchange of information for tax purposes continue to work closer than ever before, to help identify investments and assets held overseas. This article is a little trip down memory lane by an ex-HMRC Tax Inspector, so as to remind ourselves how the UK and indeed the world has got to where it has and deliver a sharper message about that which is just around the corner, Automatic Exchange of Tax Information (AEOI).

Relatively few have yet to hear about FATCA (foreign account tax compliance act), which is regarded as either rather aggressive or ingenious legislation. Essentially, it requires financial institutions around the world to identify whether their domestic customers are 'US citizens' and subsequently report comprehensive tax/banking information about them and their account(s) to the US' IRS. This article does not cover FATCA in any detail at all, but it is safe to say that the US expects to identify and collect billions of dollars in unpaid tax from its taxpayers, where previously the tax authority was not privy to the financial account information but which it will soon have in its possession. Needless to say, many people hold accounts/investments outside of the country they live in or from one that they originate from, for quite legitimate reasons.

For the UK though, what came next is of profound importance. In its endeavours to support the UK financial services industry in complying with new US law but still adhering to the strict duty of confidentiality it has to clients, the UK entered into an intergovernmental agreement (IGA) with the US. This IGA allows the UK, on behalf of its reporting financial institutions, to exchange the required information under FATCA directly with the US. Domestic legislation has been enacted, enabling banks and other financial institutions required to identify and report on US citizens to share that information with HMRC, who at the time of writing will already have started exchanging that bulk information automatically with the IRS.

This initiative fuelled the UK to seek out and finalise AEOI IGAs for its own benefit with its crown dependencies (the Isle of Man, Guernsey and Jersey) in October 2013 and shortly thereafter with its overseas territories (Cayman Islands, Gibraltar, Montserrat, Bermuda, the Turks and Caicos Islands, the British Virgin Islands and Anguilla). So for UK residents or people with historic unpaid UK tax liabilities in relation to investments/assets (reporting financial accounts) held in those jurisdictions, significantly rich tax/banking information will soon be shared by financial institutions via their tax authorities with HMRC – first exchanges will take place next year – but the due diligence processes have already started, on 30 June 2014.

Simultaneously, the UK collaborated with other G5 countries to pilot a similar arrangement for automatically exchanging comprehensive tax information with one another. As a result of the UK's G8 presidency, that group and its influence became significantly enlarged and was soon supported by the G20 and the agenda was firmly being driven by the OECD. The OECD's Global Forum – of member tax authorities and treasury officials – expedited the design of a new global standard for AEOI, the "Common Reporting Standard (CRS)." The CRS is sometimes referred to as 'Global FATCA' or 'GATCA' in and around the US.

Under this new standard, detailed tax/banking information will be identified, collected and then shared by reporting financial institutions with their local tax authorities, before being exchanged with other tax authorities where reportable persons are considered to be tax resident there. For the purpose of comparison, this information is considerably more valuable than that which is currently reported by UK banks under domestic reporting requirements (refer to Schedule 23 of the Finance Act 2011), which is typically interest/investment income only.

Under the CRS, reporting financial institutions will automatically report, annually:

• interest/investment income
• dividend income
• any other income
• income from certain (cash-value) insurance products
• proceeds on the disposal of financial/portfolio assets
• annual balances/values

Furthermore, where passive/shell entities are used to hold reportable financial accounts, CRS requirements are extended to effectively look through them to identify owners/shareholders and in many cases named directors. In the case of certain trusts and trust like structures, the reporting requirements are such that "controlling persons" must be identified, ie trustees, protectors, settlors, beneficiaries etc.      

To date over 90 jurisdictions have given political commitments to adopt this new global standard for AEOI, with many of them having finalised domestic legislation and legal frameworks under which their financial institutions will be required to carry out the necessary due diligence to report the comprehensive tax/banking information. Much to the surprise of many, long established private [and secure] financial centres are part of this international tax transparency wave, such as Switzerland, Liechtenstein, Luxembourg, Austria, Hong Kong, Singapore, Dubai/UAE, Israel and India. Please refer to the OECD's up-to-date list, as of 23 July 2015, of all these jurisdictions, arranged by the timetables to which they will make their first information exchanges.

So when does all this rich tax/banking information begin to be exchanged with the UK?

There are of course many reasons why people hold accounts and investments outside of the UK, for example: greater returns on capital, greater privacy, historic family wealth origins, temporary residence etc. So HMRC will have its job cut out wading through the millions of lines of data it will receive from other jurisdictions. Most, if not all, that data will be cross checked against existing self-assessment records and against third party intelligence already held, as well as sharing it with other law enforcement agencies. You would be right in thinking there might not be an epic drive by HMRC to risk assess all cases or circumstances, because waning public sector resources simply do not allow for that. So in terms of compliance action, the one-to-many approach we have got used to seeing is here to stay. There is no time like the present for clients to seek professional advice and undergo a free tax health-check to ensure that their assets and holding structures are UK tax compliant.

Lastly, I have been asked this question on many occasions, "where can overseas money be placed now?" The answer to that question is quite simple, "anywhere, so long as the underlying funds are tax compliant." But remember, some of the jurisdictions which have yet to commit and adopt the new AEOI standard are not considered to be secure financial centres and so they present considerable investment risks.

Grant Thornton will not assist anyone looking to continue concealing untaxed funds, but we will offer support and professional advice to those looking to regularise historic tax affairs whether they have made unfortunate mistakes, left problems unresolved over a length of time or simply correcting past failures. We will help them unlock their potential by being in a better position to utilise their accumulated wealth.

Amit Puri

Senior Manager, Tax Investigations

Grant Thornton

020 7728 3254

[email protected]