Exchange of information and the end of financial privacy

There has been talk about this for years. You may have seen our articles covering developments, with the EU, UK, G5, G8, G20, Organisation for Economic Cooperation and Development (OECD) and the US all having something to say on the matter, and various action being proposed or taken.

It is important to realise, however, that this is not just talk; and events have accelerated in the last year or so in a number of ways. Automatic exchange of tax information will soon become a reality. And one affecting most corners of the globe – there is no hiding place.

The new automatic exchange of information for tax purposes will follow a Common Reporting Standard, which was developed by the OECD. Almost a hundred countries have committed to it so far.

The Standard provides for annual automatic exchange between governments of financial account information. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

The information to be exchanged includes:
▪ account balances
▪ interest
▪ dividends
▪ sales proceeds from financial assets

This covers accounts held by individuals, as well as by entities like trusts and foundations.
The financial institutions that need to report include banks, custodians, guardians, certain collective investment vehicles and certain insurance companies. They will have to determine the residence of each customer and collect data on their assets and income. This will be forwarded to the tax authorities in the customer’s country of residence.

This is quite different, and much further reaching, to the information exchange on request which was introduced through many bilateral agreements after governments stepped up their fight against offshore tax evasion following the 2008 financial crisis.

Under these agreements, tax authorities ask for information on people’s financial assets when they suspect them of tax evasion. Now they will receive information on everyone, every year, regardless of how compliant or not the taxpayer is.

By comparing the data received with what taxpayers include on their tax returns, the authorities will be able to detect where income or the underlying have not been declared. This will include many cases where the tax administrations had no previous indications that the taxpayer was not compliant.

The participating countries expect that this will provide tax authorities around the world with details of billions of Pound/Euros/Dollars etc of assets held abroad.

Financial information will start to be collected in 2016, for the first transmissions in 2017. Fifty-eight jurisdictions, the so-called “early adopters”, have committed to be ready then. This includes Portugal, the rest of the EU, Isle of Man, Jersey, Guernsey, Gibraltar, Bermuda, Cayman Islands, British Virgin Islands, Ireland, Iceland, Liechtenstein, Luxembourg, San Marino, Seychelles, Argentina and South Africa.

A further 35 jurisdictions have pledged to start in 2018. This includes Australia, Austria, Bahamas, Brazil, Brunei, Canada, China, Hong Kong, Monaco, Qatar, Russia, Singapore, United Arab Emirates and, significantly, Switzerland. Bahrain, Cook Islands, Nauru, Panama and Vanuatu have not yet committed to a timeline.

The OECD will establish a peer review process to ensure that exchange of information is effectively implemented in all jurisdictions. It is also encouraging developing countries to join the movement.

In Europe, the Common Reporting Standard will be implemented through the Administrative Cooperation Directive.

The revised version of this Directive was adopted in December 2014. It provides for automatic information sharing on interest, dividends and other investment income, account balances, sales proceeds from financial assets, income from employment, directors’ fees, life insurance, pensions and property.

Over recent years, the Portuguese government has stepped up its efforts to detect tax evasion and collect unpaid taxes. This is a vital part of improving its tax revenue, to help reduce the country’s deficit. This new global exchange of information will be an invaluable tool for the tax authorities.

This loss of financial privacy is a significant change and affects everyone who lives in one country and has assets in another.

One thing has not changed, though, and this is that every individual has the right to structure their assets in a tax efficient manner. It is important to only use arrangements which are compliant in Portugal, but it is also important to protect your wealth, for yourself and your heirs, where possible. It is possible to take advantage of legitimate opportunities to protect your assets from various Portuguese taxes. You need to be informed on developments and take specialist advice.

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. |

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