The cross-border regime that sets out how jurisdictions can chase after information to foil tax cheats has come into force: this article is a reminder of how the CRS is supposed to work, and what the challenges are.

It has been some time since the first wave of jurisdictions – including the UK – entered the framework of cross-border pacts to swap information to chase after tax cheats that’s known as the Common Reporting Standard. The CRS remains controversial in how it fits alongside issues such as financial privacy, and the US is not a signatory. (A prominent law firm has published research claiming that the CRS is a “disaster waiting to happen”.)

Now that the CRS is reality, and in force, it is timely for legal experts to consider how it is working and what the early effects are. Two authors – Luke Micallef Trigona, solicitor, and Alex Ruffel, partner, from tom.burroughes@wealthbriefing.com

The Common Reporting Standard (“CRS”) is a global standard for the exchange of financial account information between tax authorities of different jurisdictions. The first exchange using CRS occurred in 2017 (49 countries), with a further 53 countries committed to exchange in 2018.

All financial institutions (“FIs”), including banks, certain insurance companies and investment funds, which operate in a jurisdiction that has agreed to exchange information with another jurisdiction using CRS are required to identify accounts and gather certain information of people who are tax-resident in that other jurisdiction. 

The FIs must then pass this information to their local tax authority who will then automatically share this information with the tax authority of the other jurisdiction (and vice versa).

The information which will be exchanged includes the name and address, tax number, date and place of birth, account number, FI details, account balance or value.

For example, Mr Z, who is tax resident in the United Arab Emirates (“UAE”), has an account in Malta with Bank X. From this year (assuming all proceeds as planned), Bank X must provide certain information about Mr Z’s bank account to the Maltese tax authority. The Maltese tax authority is then obliged to send this information to the tax authority in the UAE.

The example indicates why some individuals are concerned about CRS. The stated purpose of CRS is to help detect and deter tax evasion, but the UAE has no income tax and no exchange controls.  Why would they want such data and what will be done with it? There is particular concern that the information may be used by authorities in some jurisdictions (i.e. that have a less than perfect rule of law or law enforcement) for illicit purposes which might endanger those about whom information is exchanged.

It is not only accounts belonging to individuals that are subject to CRS exchange.  If an account belongs to an entity such as a company or a trust, it may also be reportable if its ‘Controlling Person’ is in a reportable jurisdiction. 

In the case of a trust, the term “Controlling Persons” means the settlor, the trustees, the protector, the beneficiaries and the classes of beneficiaries receiving distributions, and any other natural persons exercising ultimate effective control over the trust.

For example, Company A, incorporated in Bermuda, opens a bank account with a Swiss bank.  It is owned by a Guernsey discretionary trust that was settled by Mr B, an Azerbaijan tax resident, and the protector lives in South Africa .The trust’s beneficiaries are resident in Colombia. 

CRS requires the Swiss bank to identify the Controlling Persons of Company A. The bank therefore looks through the ownership of Company A to the Guernsey trust and may be required to treat Mr B and the protector, as the controlling persons of Company A. If any of the beneficiaries have received a distribution from the Guernsey trust they will also be regarded as controlling persons. Information about Company A’s account will be passed from the Swiss tax authority to the Azerbaijani, South African and, potentially, Colombian tax authorities.

If Mr B, the protector or the trust beneficiaries have legitimate reasons for wishing to prevent information about their/company A’s accounts being sent to Azerbaijan, South Africa or Colombia, the safest option is to cease their residence in those countries, which will then not automatically receive information. 

If Mr B has substantial business interests in Azerbaijan that he cannot simply abandon, his options are very limited.  It may be necessary to close the Guernsey trust and transfer the funds outright to the beneficiaries. If the protector retires or is replaced by someone in another jurisdiction, then the automatic supply of information to South Africa may be halted.

All in all, the information exchanged under CRS, on an annual basis, is extremely sensitive, and in the context of trusts, will unveil the identities of personnel who, previously, enjoyed a degree of anonymity. Investing across national borders, therefore, no longer offers the discretion it once did and, in fact, may open up personal affairs to a greater degree of transparency than local ownership in some instances.