This article examines the likely reaction to the arrival of what is called the Common Reporting Standard, seen in some ways as akin to a "global FATCA".

Could regulations that have much in common with the controversial US FATCA rules, known as the Common Reporting Standard, trigger voluntary disclosures? This is a question posed by Andrew Knight, partner with Maitland, the global advisory, fund administration and fiduciary services firm. Knight is based in Luxembourg. This publication is grateful for these comments but the editors stress that they don’t necessarily endorse all the views expressed, and invite readers to respond.

In recent years there has been a series of attacks on perceived tax evasion by way of a concerted drive for greater tax transparency between countries. The US Foreign Account Tax Compliance Act (US FATCA) and the so-called UK FATCA will soon be followed by a set of global FATCA-like regulations drawn up by the OECD, known as the Common Reporting Standard. 

The CRS is a “universal code” of reporting aimed at incorporating as many jurisdictions as possible on a global reciprocal basis of “you show me yours and I will show you mine.” For example, once Switzerland, Monaco, South Africa, France and the UK are all implementing CRS, each of them will be reporting to each of the others on any accounts maintained by its local financial institutions for any of the others’ tax residents. 

The diagram illustrates the impact.  

 
The CRS has already been adopted in principle by over 100 jurisdictions. Well over 50, known as the “early adopters”, have committed to implement CRS as from 1 January 2016, with the others a year later. The result is that all the traditional secret banking centres (including Luxembourg, Switzerland, Monaco and Liechtenstein) and all the traditional offshore jurisdictions (including the BVI and the Cayman Islands) have committed to applying automatic exchange of information. 

The early adopters group will have filed their first reports with their CRS partner countries by the end of September 2017. This group includes most of Western Europe (including Luxembourg and Liechtenstein), Mauritius, the UK’s Crown Dependencies (Isle of Man, Guernsey and Jersey), and the UK Overseas Territories (including the BVI and the Cayman Islands). The rest of the signatory states will start reporting in 2018. This second-phase group includes Monaco, Switzerland, Brazil, Hong Kong, Singapore, Macao, Antigua and Barbuda, the Bahamas, as well as Australia, New Zealand and Canada. 

The first date of relevance for the early adopters group is 31 December 2015 and for the other signatories, 31 December 2016. Any accounts in existence on such dates will be subject to due diligence and reporting by the financial institutions maintaining those accounts. 

What will be reported?
Reportable information includes the personal details of the account holder, the year-end account balance and, in due course, the interest, dividends and other income or proceeds from sales credited to the account. 

The scope of “reportable accounts” extends beyond typical offshore bank or investment fund accounts and includes information relating to beneficiaries, settlors and, in some cases, protectors of trusts. This is because the CRS extends the scope of a financial institution to include trusts whose trustees are professional corporate trustees or whose assets are managed by professional investment managers. The fact that a large number of states have committed to the CRS will make it very difficult for individuals connected to trusts to avoid disclosure. 

Even those trusts that avoid falling within the definition of financial institution (for example by having only non-professional trustees) will not escape the CRS, since any bank situated in a CRS signatory state that maintains an account for a trust (wherever situated) is likely to require the trustees to disclose the identity of the trust’s beneficiaries, settlors and protectors who are resident in a CRS signatory state, which in turn will disclose the information to its local tax authority. 

The way the CRS applies to trusts is such that awards made in the course of 2015 to discretionary trust beneficiaries under trusts that are resident in early adopter countries are already at risk of reporting in 2017. Settlors and mandatory beneficiaries will find themselves subject to similar reporting. Thus, the clock is already ticking in relation to early adopter countries. In respect of trusts in other countries, reporting will start in 2018.

Time for voluntary disclosure?
The CRS will have two major implications for residents of CRS signatory states. Firstly, their local tax authority is likely to acquire information regarding undeclared funds and income, which may well result in a tax audit followed by criminal prosecution and significant penalties. A number of countries currently have voluntary disclosure programmes (whether formal or informal) in place including South Africa, Brazil, the US, and a number of European countries (for example, France, Germany, Italy, Netherlands, Portugal, Spain and the UK). Indications are that the EU Commission will encourage all EU member states to introduce regularisation programmes before implementation of the CRS. 

Ideally, in order for a regularisation programme to be successful, it should have the following attributes:

•    It should be managed by a separate unit of the tax authority and disclosures should not give rise to a general tax audit;
•    The information provided should be used for purposes of the programme only and not be shared with other regulators; 
•    Advisors offering taxpayers assistance should be able to offer them legal privilege, something that generally only lawyers can offer; and 
•    Penalties should be commensurate with the nature of the historical non-disclosure.

While some taxpayers will wish to consider the alternatives to regularising their affairs, the scope for alternative course of action is limited. Furthermore, indications are that, where regularisation programmes exist, financial institutions will be insisting that clients take advantage of them.