Further measures on Tax Transparency

Like many tax professionals, it is not uncommon to meet clients who honestly believe that they can beat the system.  They use layering, nominees and even “other” passports and believe that this may grant them privacy.

FATCA and CRS are real.  They provide a framework for banks to automatically share account holder information with other governments.  But not only do they compel banks, but they also apply to service providers including Trustees and Corporate Service Providers (such as those that offer incorporations).

Read more here.  I’ve included some of the articles we have previously written on FATCA / CRS and the services that our consultants provide –

But to be completely honest, certain structures do mitigate FATCA and CRS reporting.   That’s where some other acronyms come in.  Let’s talk about MDR and DAC6.

Further measures on tax transparency

(a) Mandatory disclosure rules (“MDR”) for CRS avoidance arrangements and opaque offshore structures
On 9 March 2018, the OECD issued disclosure rules which are in line with the principles contained in its position countering Base Erosion and Profit Shifting (“BEPS”), with a view to further enhancing tax transparency globally.  In principle, once implemented into domestic law in the participating jurisdictions, an intermediary shall be required to provide tax authorities with information on the steps and transactions that form part of an arrangement that (purports to) circumvent the CRS (“CRS Avoidance Arrangement”) or a structure that disguises the beneficial owners of assets held offshore (“Opaque Offshore Structure”). 
Intermediaries refer to persons responsible for the design or marketing of such arrangement or structure (“Promotors”) and also persons that provide assistance or advice with respect to the design, marketing, implementation or organization of such arrangement or structure and who can reasonably be expected to know it is a CRS Avoidance Arrangement or Opaque Offshore Structure (“Service Providers”).
The MDR shall apply to a broad range of intermediaries such as banks, trustees, financial advisors, lawyers, tax advisors, accountants, and so forth, although is not expected to diminish or require a solicitor, attorney or other admitted legal representative to disclose information that is protected by legal professional privilege or equivalent professional secrecy obligations insofar that an information request for the same information could be denied under the (exchange of information articles of the) OECD Model Tax Convention and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, respectively.
Penalties and other mechanisms for non-compliance are recommended in the model rules. As with the other requirements and obligations in the model rules, individual jurisdictions will have to choose the nature and extent to which penalties should apply for non-compliance.

(b) EU
Parallel with the above, in May 2018, the EU issued Directive 2018/822 (known as “DAC6”) regarding the mandatory automatic exchange of information in the field of taxation in relation to reportable crossborder arrangements.  In essence, this framework is designed to require persons involved in either the promotion, design, marketing, implementation or management of a relevant arrangement or structure in the relevant jurisdiction, to be legally obligated to report the existence of the arrangement or structure and the users of it to the relevant tax authority which, in turn, shall exchange the relevant information to those jurisdictions in which the users are resident, subject to the relevant international exchange relationships being in place.  Although there are differences between the reporting requirements under the EU’s DAC6 and the OECD’s MDR, particularly with respect to the circumstances where a requirement to make a disclosure would be triggered, DAC6 seems to cover a part that is the equivalent of the MDR published by the OECD.
The EU Member States are working towards a 31 December 2019 timescale.  For non-EU jurisdictions in Europe, such as Guernsey, as at 31 October 2019, it is intended to implement the MDR, which is also expected to be the preference of the other Crown Dependencies.  Although it remains to be seen we understand there is a presumption that the United Kingdom will also adopt the MDR rather than the DAC6 in light of Brexit.  

Do note that our team offers FATCA / CRS consulting services –

Be Cautious

Service Providers should also carefully consider the implications of the CRS and the MDR, and seek advice from appropriate advisors in the relevant jurisdictions on the implications for themselves and/or their clients. 

Given the exposure to penalties and possibly even criminal prosecution in home jurisdictions, it is advisable that families and individuals who have established or are users or beneficiaries of offshore trust and/or company structures should evaluate the tax and legal implications or their structures, preparing for the scrutiny that is expected to arise or has already arisen in respect of themselves as individuals, entities and controlling persons of certain entity accounts on an annual basis.  

In essence, trusts remain as a useful instrument for reasons including asset protection, succession planning and confidentiality, but in particular settlors and beneficiaries of trust structures should seek advice while establishing offshore trusts and any underlying holding companies so as to be clear on the information that is likely to be made available to the tax authorities of the jurisdiction(s) where they are resident, review whether their tax matters are in order, and resolve issues in case there are any issues to be resolved. 

Likewise for offshore structures that no doubt continue to offer advantages that retain their usefulness, but again, the need for a proper review and analysis of the use of offshore structures in the new global environment of tax transparency and fiscal responsibility cannot be over-emphasized. 


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