We are about to enter a new era for international tax planning and cross border wealth management.
January 2016 sees the start of a new global automatic exchange of information regime that affects everyone who has financial assets outside their country of residence. Financial privacy is dead and buried, to the point where your local tax authority will passively receive information about your investment assets without having to ask for it.
Everyone should be aware of what information will be shared about their income and assets, and consider what tax and estate planning arrangements are best suited for them and their family.
The current situation
There has been some automatic exchange of information in Europe since 2005, under the EU Savings Tax Directive, but it only applies to interest income.
Many countries and offshore centres around the world have signed bi-lateral tax information exchange agreements. These however are of limited benefit to tax authorities. They only receive information on a taxpayer’s offshore accounts and investments if they ask for it, and to do that they need to have solid suspicions of tax evasion. If they are not aware of an account, they will remain unaware.
The situation from January
In July 2014 the Economic Co-operation and Development (OECD) approved a new standard for the Automatic Exchange of Financial Information in Tax Matters. It comprises the Competent Authority Agreement and the Common Reporting Standard (CRS), and goes live on January 1, 2016.
This involves the systematic and periodic transmission of taxpayer information by the source country to the residence country concerning various categories of income – it goes much further than interest income.
Tax authorities will automatically receive information on all the financial assets their taxpayers own overseas – without having to ask for it.
They will receive information about offshore accounts and investments they may not have been aware of before, bringing cases of tax evasion, whether on the investment return or underlying capital sum, to light.
Local tax authorities will compare data received against tax returns, and where they find discrepancies have good reason to launch a tax audit. This could result in large bills for unpaid tax, plus interest, plus penalties. In some cases taxpayers could face criminal prosecution.
Information to be reported
The financial information to be reported includes the name, address and tax identification number (where applicable) of the asset owner; the balance/value, interest and dividend payments and gross proceeds from the sale of financial assets.
The institutions that need to report include banks, custodians, investment entities such as investment funds, certain insurance companies, trusts and foundations.
The taxman will receive much more information than ever before. Even information it does not need. For example, there is no wealth tax in Portugal or the UK, but the tax authorities will still receive account balances.
Almost 100 jurisdictions around the world have signed up to the Common Reporting Standard so far.
It comes into effect in stages. The ‘early adopters’ (including the EU and UK offshore centres) start to collect data from January 2016, to make the first information exchange (for fiscal year 2016) by September 2017. Other countries, including Switzerland, will introduce the standard a year later.
In Europe, the Common Reporting Standard will be implemented through the Administrative Cooperation Directive. It provides for automatic information sharing on interest, dividends, other investment income, account balances, sales proceeds from financial assets, income from employment, directors’ fees, life insurance, pensions and property.
What does this mean for you?
If you have many different offshore bank accounts, investment products, trusts etc, then each one of these will be sharing information with your local tax authority.
For peace of mind you could group as many assets as possible into one arrangement, so that there is much less information being passed around, and it will be easier to follow what is being exchanged about you.
Cross border tax planning is complex. You need to be clear on what income and assets you should be declaring in which country. For example, if you live here and you earn income in the UK (eg, pension or rental income), do you pay tax in the UK or Portugal? If you have got this wrong, you should regularise your affairs before the new regime starts.
This is a good time to review your tax planning arrangements. Are they approved here in Portugal? If, for example, you use non-compliant bonds, such as from the Isle of Man, Jersey and Guernsey, provided you have been fully declaring them in Portugal they are not illegal – but they are taxed more aggressively than Portuguese compliant bonds. So why are you paying more tax than necessary? And do these bonds provide estate planning benefits?
We are entering a completely new era. Are you ready?
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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