International crackdown on tax evasion
In recent years governments have become increasingly aware of the level of unreported wealth individuals are holding in off shore accounts. In an effort to increase tax revenue, countries across the globe are coming together to fight tax evasion. By uniting forces, governments will have access to information on citizens’ wealth worldwide.
Foreign Account Tax Compliance Act
In 2010, the United States introduced the Foreign Account Tax Compliance Act (FATCA) to ensure the reporting of US citizen’s offshore accounts if over $50,000.by financial institutions. Since FATCA became law, the US has been able to prevent tax evasion through proper reporting of foreign accounts.
INTRODUCTION OF THE COMMON REPORTING STANDARD
Building upon the FATCA, the OECD (Organization for Economic Co-operation and Development), an organisation committed to improving global cross border tax compliance, have enacted the Common Reporting Standard (CRS). The CRS will require the exchange of bank account details between nearly 100 countries enabling governments to have access to information on citizens’ wealth worldwide in order to create greater transparency across borders and a single globalized reporting standard.
COUNTRIES UNITING TO COMBAT TAX EVASION
Under CRS financial institutions in participating countries will be required to report the same as FATCA without the minimum threshold. Countries must obtain information from their financial institutions and exchange that information automatically to participating countries annually. However, the CRS is based upon tax residence rather than citizenship, as FATCA is.
Essentially a global FATCA, under CRS, financial institutions in partnering countries will have additional responsibilities to report interest, dividends, account balances, income from certain insurance products and sale proceeds from financial assets of their customers to their home country.
The CRS is expected to come into effect in stages from January 2016. So far 97 countries have signalled their intention to adopt the legislation, however according to a survey conducted by KPMG, only around 58 have formally committed to be early adopters from January 2016. Due to this delay, it is predicted CRS may not begin in earnest until 2017 or 2018.
CRS TO INCREASE TAX REVENUE
Once deployed the CRS is expected to greatly increase participating countries tax revenue as more offshore accounts become known. Countries and jurisdictions that once were known as tax havens such as Switzerland, the Bahamas, and Cayman Islands will be enacting CRS making all offshore accounts available to home countries.
According to a recent review by the Financial Times however many countries are already benefitting as thousands of tax payers come forward voluntarily to disclose information of their assets in advance of the introduction of CRS next year. Since the introduction of FATCA in 2010 US authorities have collected about $6.5bn in taxes, interest and penalties from 45,000 voluntary disclosures.
While the new legislation has on the whole been welcomed, potential loopholes such as the exclusion of safe deposit boxes have been noted, and there has been criticism that the costs of implementing the regime will prevent developing countries from participating. The new measures also do not seem to be lessening the growth of private wealth offshore which the Financial Times reported grow by 7 per cent in 2014.
If you have any questions on FATCA or what the new CMS legislation may mean for you, or you would like advise on your taxes more generally, please get in touch with us.