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The Common Reporting Standard draws near

The Common Reporting Standard (CRS) is an information system for the automatic exchange of tax information, developed in the context of the OECD. So far, 98 countries have signed up with more expected to join in the near future.

Until now, the parties to most Double Tax Treaties in place for sharing information have done so only upon request. This approach has not always proven effective in preventing tax evasion. The new method is supposed to transfer all relevant information automatically and systematically.

Recently, we received the following query based on this “Brave New World” of information sharing. The questions and answers are relevant to many living in Portugal.

Dear Sirs,
I am a Swiss citizen and have been living in Portugal since 2007 when I got my “número fiscal”. I have never made a tax declaration here and have never been approached by the Portuguese tax authorities. I make a living from interest and dividends, which are deposited in my bank account in Switzerland.
The problem is that, starting in 2017, the Swiss banks will inform the Portuguese authorities annually about my dividend and interest income. I was thinking about different alternatives:
▪ do nothing, hoping that the tax people do not care about my income.
▪ establish a tax declaration in 2018 for the year 2017, hoping that the authorities do not ask about earlier years.
▪ make contact with the authorities and ask what I should do.
What could be the worst consequences for me? Paying the taxes for the last four years? Big fine? Prison? Does it make a difference if I approach the tax authorities or if they take the initiative?
I would very much appreciate your opinion. Depending on your answer, I would then contact you. Thanks in advance for your answer.

Signed, “in arrears”

Dear “in arrears”,
Your situation is not unusual. You are one of many foreign residents living in Portugal who are not compliant with their Portuguese income tax obligations. With the Common Reporting Standard coming into place, it is clear that these irregularities will soon see the light of day.
If you remain non-compliant, the Authorities are more likely to dig into your past to determine when you first became fiscally resident in Portugal. They can go back as many as 4 years.
On the other hand, it is less probable that questions will be asked about previous years if you are already seen as a Portuguese fiscal resident when information sharing occurs in 2016 and beyond. As a minimum, we recommend that you be proactive and bring your Portuguese IRS declaration up to date for fiscal year 2015 and continue reporting in subsequent years. Keep in mind that you are protected by treaty against double taxation. Being compliant does not necessarily mean paying more tax.

In this fast-changing world, confidentiality and non-reporting will only lead to complications. Compliance is key. Understanding your rights and making the most of valid opportunities are essential to finding sustainable solutions to tax problems.

By Dennis Swing Greene
|| [email protected]

Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.