The era of bank secrecy is over!

In recent years, EU governments have come under pressure from their constituents to implement punitive measures to levy tax on large amounts of undisclosed wealth held in offshore accounts. Governments see a big opportunity to boost revenue by collecting tax relating to these accounts – but only if sufficient data can be obtained from financial institutions around the world.

Individuals in particular find it relatively easy to hold and manage investments through financial institutions outside of their country of residence, without any income being visible to their domestic tax authorities, unless the taxpayer actually discloses it. Traditional arrangements for exchanging information in the EU have been bilateral, mainly based on double taxation agreements, and to date have not been universally successful nor comprehensive enough.

However, with new impetus, the governing forces across the EU have been preparing to correct this malaise and have of late introduced a wealth of changes.

Who’s the driving force?

International bodies such as the G20 and the OECD (Organisation for Economic Co-operation) have started coordinated efforts to gain a truer picture of income and assets worldwide. These efforts are primarily aimed at tax evasion by individuals, as opposed to corporate groups. One of the mechanisms now in force is the Automatic Exchange of Information (AEoI).

Supranational Organisation leading the fight against cross tax evasion

Last year, on February 13, the OECD, at the request of the G8 and the G20, released a model Competent Authority Agreement (CAA) and Common Reporting Standard (CRS) designed to create a global standard for the automatic exchange of financial account information.

The publication of the CAA and the CRS is a significant structural step in governments’ efforts to improve cross-border tax compliance. This follows a raft of tax compliance legislation such as the US Foreign Account Tax Compliance Act (FATCA) and active campaigns of voluntary disclosures and legal procedures.

The CRS represents another global compliance burden for financial institutions and increases the risks and costs of servicing globally mobile wealthy customers –an otherwise attractive customer segment.

The good news for financial institutions is that the OECD has modelled the CRS on FATCA, which means it should be possible to leverage existing and planned FATCA processes and systems. However, the data required is different, and the volume of reporting required is likely to be significantly greater under the CRS. The standard has no direct legal force, but it is expected that jurisdictions will follow the CAA and CRS closely when implementing bilateral agreements.

Timing of reporting – Participating countries

Whilst a worldwide initiative, all 28 EU member states have agreed to fiercely cooperate to fully implement the changes in line with the timescales established (the regime has also been extended to five nonaligned European countries; Switzerland, Liechtenstein, Andorra, Monaco and San Marino).

The timing depends on the domestic law of each EU member state, and will have to conform to information exchange procedures: at least once a year for all interest payments during that year, and within six months of the end of the tax year.

The first annual reporting will be on March 31, 2015 (for 2014), while FFIs may have a longer period to report to their domestic tax authority. There is transitional reporting for non-participating FFI accounts and withholdable payments for 2015 and 2016. However, for the normal investor holding non-reported accounts, there is no clemency-reporting period.

What must be reported?

The identity and residence of the account holder held on file. This will extend to accounts held by entities (which includes trusts and foundations), and the requirement to look through passive entities to provide information on reportable controlling persons.

Once the above is established all reportable income will be communicated, such as investment income (including interest, dividends, income from certain insurance contracts, annuities and similar), as well as account balances and sales proceeds from financial assets that give rise to such income.

Once an account is identified as reportable, it remains so for all subsequent years, even if the account has no balance or value or received no reportable payments – unless the account holder ceases to be a reportable person due to a change in circumstances, or if the account is closed.

What to do?
Seek professional assistance from an independent financial adviser to assess if the above measures affect you!

If the above synthesis causes you to ponder, remember “procrastination is the thief of time”, so act now and avoid regretting tomorrow…