by Amit Puri
Managing tax risks for cross-border investments in a newly transparent world, what you can expect as automatic exchange of banking information commences.
This area of tax is close to my heart, having been the Head of HMRC's Offshore Disclosures Unit in London. Immediately before joining private practice I held a strategic, policy role in Whitehall where I focused on 'offshore tax evasion'.
The international tax/banking information arena has become considerably smaller and at a rapid pace too, especially with the introduction of the new global standard for the automatic exchange of information, known as the Common Reporting Standard (CRS).
Developed by the OECD's Global Forum on Tax Transparency, with the help of many different tax authorities and treasury departments, their goal was to provide a uniform framework to help identify offshore tax evasion, eg untaxed investment (interest and dividend) income and gains that arise overseas as well as identifying taxable assets held overseas.
The US' Foreign Account Tax Compliance Act (FATCA) acted as a catalyst for over 100 jurisdictions committing to adopt the CRS, including: Switzerland, Liechtenstein, the British Virgin Islands, Singapore, Dubai/UAE, Panama and others like India and South Africa. The most up to date list can be found here.
The UK's Intergovernmental Agreements (IGAs) effectively secured the same exchange of comprehensive financial account information – like under the CRS – from financial institutions based in the UK's Crown Dependencies and Overseas Territories, but one year earlier.
The number of people who remain unsure about the impact of having unpaid tax liabilities, in relation to investments held overseas, is alarmingly large. But it is not too late to recognise (and act on) the fact that comprehensive tax/banking information will soon be shared by other authorities/jurisdictions with the UK (HMRC) and India, with the first exchanges under the IGAs taking place with the UK as you read this very article!
Which comprehensive information will be exchanged automatically, every year eg with the UK/HMRC and India?
- interest income
- dividend income
- investment and any other income
- income from certain (cash-value) insurance products
- proceeds on the disposal of financial assets
- annual balances/values (even if that's nil, because there is no threshold)
Also, in certain circumstances where non-financial entities are holding reportable financial accounts, the extended CRS requirements require that, as part of the bespoke due diligence process, 'controlling persons' are identified and corresponding reports made. For example on: shareholders, directors, trustees, protectors, settlors, beneficiaries etc.
When will this rich tax/banking information begin to flow into the UK/HMRC (and India)?
|by jurisdiction/territory||due diligence commences (for all existing accounts)||UK (HMRC) receives information|
|from the Crown Dependencies and Overseas Territories: under UK IGAs||30-Jun-14||31/05/2016 - 30/09/2016|
|Rest of the EU: under the revised Directive for Administrative Cooperation (DAC)||31-Dec-15||31/05/2017 - 30/09/2017|
|Non-EU: under the CRS (as adopted by the EU via the DAC)||31-Dec-15||31/05/2017 - 30/09/2017|
What type of person might these rules affect (references to the UK/HMRC could apply to India/IRS too, as both jurisdictions begin exchanging and receiving information from 2017)?
An elderly client holds liquid funds and fixed termed deposits in India, where he or she was born and educated before coming to the UK to live and work. Irrespective of the balances on those accounts, the accounts information might be seen by HMRC as something more sinister. It might for example contend that historic income and gains have gone untaxed (giving rise to income tax and capital gains tax liabilities) and/or that some or all of the funds have since been gifted to family members to hide their existence. Importantly, even nil balance and non-interest bearing accounts will be reported.
Following the death of an elderly individual a client inherited a mixture of funds, some liquid and some longer termed investments, in India. The deceased was born and educated there, but had moved to the UK a few decades ago. Irrespective of the balances, it could be contended for example that the more recent income and gains have gone untaxed (giving rise to income tax and capital gains tax liabilities) in the hands of the successor, and lead to questions on whether other income producing assets exist, for example rental properties. All of which are likely to give rise to an inheritance tax liability in the hands of the executors or representatives of the deemed domiciled deceased's individual's estate.
A client holds a mixture of funds, some liquid and some longer termed investments, in Switzerland and Singapore. It could be contended that historic income and gains have gone untaxed (giving rise to income tax and capital gains tax liabilities), and perhaps suggest that the source of capital is untaxed UK business income (giving rise to further income tax liabilities).
As in example three, a client holds a mixture of funds through a complex British Virgin Islands holding structure, some liquid and some longer termed investments, in say Switzerland. As part of the reporting financial institutions' due diligence processes, they identify certain entities - companies and trusts - which require attention. Where the controlling persons are found to be UK residents, corresponding tax/banking information will be exchanged with HMRC, ultimately giving rise to income tax and capital gains tax liabilities in the beneficial owner's hands.
There are many reasons why people hold financial accounts outside of the jurisdictions in which they reside, for example: greater privacy, greater returns on capital, ancestral wealth etc. It follows that receipt of this information by tax authorities will not always result in additional tax being payable, but it may mean that one has to demonstrate that they are fully tax compliant.
While there are some jurisdictions which have yet to commit to adopt the CRS, some of them are not secure financial centres, and so there is a considerably higher risk of losing one's investments. I get asked this question a lot, 'where can my overseas assets be moved to now?' And my answer is quite simple, 'anywhere, so long as the funds are tax compliant.'
Amit Puri is a senior tax manager at Grant Thornton, specialising in investigations, dispute resolution and voluntary disclosures.