A key theme over recent years, as governments look at ways of coordinating reform of the global financial system, has been the pursuit of greater international tax transparency, with the most significant development being the move to automatic exchange of information between countries.
This loss of financial privacy affects us all. If we live in one country and have assets in another, our financial information will be shared between tax authorities. They will be able to track our wealth like never before.
Automatic data exchange will replace previous standards where information was disclosed on request, or where jurisdictions imposed a withholding tax to protect the account holder’s privacy.
There have been a number of initiatives undertaken by the EU, Organisation for Economic Cooperation and Development (OECD), G10 and US, resulting in different models of automatic exchange.
The EU pioneered automatic exchange of information with its 2005 Savings Tax Directive. This is limited to savings income and it has been trying to revise it to include other types of income.
Following agreement on a revised Directive on Administrative Cooperation (see below), however, the Savings Tax Directive will be repealed and replaced by the new more comprehensive legislation.
If you have bank accounts in Jersey, there is one change to the Savings Tax Directive that affects you. The withholding (“retention”) tax option is abolished from January 1 2015, and banks will exchange information on interest payments paid to all EU residents.
Remember that the Channel Islands, Isle of Man and Gibraltar are not tax efficient homes for your money for Portuguese residents, since interest and investment income arising in these “tax havens” is taxed at higher rates.
The US Foreign Account Tax Compliance Act (FATCA) was the more recent catalyst for global information sharing. Foreign financial institutions have to report all accounts held by US persons to the US authorities. The US has developed “intergovernmental agreements” with countries around the world to allow for reciprocal automatic exchange of information.
The OECD Common Reporting Standard: the game changer
The OECD issued its Common Reporting Standard in July 2014. Closely modelled on FATCA is the technical standard for automatic exchange of information that all signatories will follow.
Ninety-eight countries have committed to implement the standard so far. Fifty-one (including Portugal and most of the EU) start in 2017, relative to 2016 data. Others (including Switzerland) follow a year later.
Reporting will not be triggered by an event such as a surrender or withdrawal. Financial institutions, including life assurance companies, will have to report all non-resident accountholders each year if they are resident in another participating territory.
In Europe, the Common Reporting Standard will be implemented through the Directive on Administrative Cooperation. Exchange between non-EU countries will be on a bilateral basis.
The revised EU Directive on Administrative Cooperation
The original draft contained provisions for a switch to automatic exchange, but was limited in terms of income and was conditional on the information being “available”.
This was revised at a meeting of the EU Economic and Financial Affairs Council (ECOFIN) last October. An EU Press Release on December 9 2014 then confirmed that the directive brings interest, dividends, gross proceeds from the sale of financial assets and other income, as well as account balances, within the scope of automatic exchange of information.
It explains that: “The dual aim is to prevent taxpayers from hiding capital abroad or assets on which tax is due, whilst also improving the efficiency of tax collection.”
Member states will start automatically exchanging data under the revised directive by the end of September 2017.
Guidance for account holders
The UKHM Revenue & Customs has issued some information for accountholders. It will be the same for other EU countries.
The guide advises that if you are a UK tax resident and hold an account in another country, then HMRC will receive information about you. If you are tax resident abroad and have accounts in the UK, your provider will forward information to HMRC to pass onto your local tax authority.
The information to be provided in respect of each account will be: name; address; date and place of birth; tax identification number (where applicable); account number; name and identifying number of account provider and account balance or value as at end of the calendar year or other appropriate period.
Further information will be reported in stages from the year ended December 31, 2015 to include interest, dividends and gross amount of other income or proceeds from the sale or redemption of investments paid or credited to the account.
Expatriates with cross border affairs need to be aware of the implications of this new automatic exchange of information regime. It is a new world, but you still have the right to structure your assets in a tax efficient manner. Take professional advice on approved tax advantageous structures in Portugal.
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