Automatic Exchange of Information: What is reported and could it generate tax enquiries?
Tuesday 14 February 2017
By Monica Dixie, Senior Tax Consultant, Equiom Solutions
Isle of Man Portfolio talks to Monica Dixie, Senior Tax Consultant at Equiom Solutions which recently held a local seminar on the upcoming tax changes for UK non-doms. It also addressed the Common Reporting Standard (CRS), which is the new international standard for the automatic exchange of information between governments in respect of tax residents in their jurisdiction. CRS has been driven by the Organisation for Economic Co-operation and Development (OECD) and more than 100 jurisdictions have signed up to implement it. It took effect in the Isle of Man, and other early adopter jurisdictions, at the beginning of 2016. Similar tax agreements have also been implemented in the past, including the highly publicised Foreign Account Tax Compliance Act (FATCA). Portfolio asked Monica how automatic exchange agreements like CRS and FATCA work and why they are important.
Why is this relevant to the person on the street?
You may have been finding more correspondence coming through to you from your banks, insurance companies and other financial institutions (which can include funds and trusts) asking about your tax residencies, tax identification numbers and other information. These forms will most likely refer to ’FATCA’ and ’CRS’, which are regimes that result in the automatic exchange of information about account holders of financial institutions by governments.
What are FATCA and CRS?
FATCA is a piece of US legislation that has an impact in other jurisdictions as it requires non-US financial institutions to identify anyone with indicators of being a US person and then report those account holders, and information about their accounts either directly or via their local government to the US Government.
CRS is a regime developed by the OECD to provide a standardised reporting regime, similar to FATCA, for other jurisdictions to implement. CRS allows jurisdictions to implement the rules requiring financial institutions to identify persons with indicators of being tax resident in another CRS-reportable jurisdiction and then report those account holders to their local government for onward transmission to the other CRS jurisdiction in which the person has an indicator of being resident.
Where does this CRS information come from?
A financial institution will be able to use existing information they hold as an indicator of which jurisdiction(s) the account holder is resident in, where an account is already open at a specified date in local legislation (31 December 2015 for the Isle of Man). For accounts opened after the specified date, the financial institution must ask the account holder for their tax residency, tax identification number and other information.
The information they may look at for accounts open at the specified date includes residential address or mailing address, telephone number, standing instructions to repeatedly transfer funds to an account in another jurisdiction, address of power of attorney or signatory authority and ‘hold mail’ address if there is no other address on file. This could be an issue if the information on their systems is out of date or there are various jurisdictions noted within their files for these indicators as there could be information reported about persons to a jurisdiction they are not actually tax resident in. For that reason, financial institutions will often send out the forms asking for confirmation of tax residency. Once you have completed the forms, the financial institution is able to confirm your tax residency and so the information regarding your account should not be reported to a jurisdiction in which you are not tax resident.
What are the implications of this exchange of information?
As governments around the world are receiving information regarding accounts held by possible tax residents in their jurisdiction, they will be comparing the data to information they receive on tax returns and also identifying where tax returns haven’t been received.
For example, if an Isle of Man resident is a beneficiary of a Jersey trust which is a financial institution for CRS and that person has received a distribution in January 2016, but did not declare it on their Isle of Man tax return for the year ended 5 April 2016. In this scenario, the Jersey trust would report the settlor, the trustee and the beneficiaries receiving distributions to the Jersey Tax Office which would transmit the information regarding the Isle of Man resident to the Isle of Man Income Tax Division. It would then be able to identify that the distribution has been omitted from the tax return by the individual. The distribution may not necessarily be taxable in the Isle of Man depending on the facts and circumstances.
Although the example is of a trust that is a financial institution, reporting will be in respect of bank account holders, policy holders of insurance products with an investment element, investments into funds, portfolios of investments and other ‘financial accounts’ held with financial institutions.
This exchange of information is likely to lead to more tax enquiries from governments.
What should you do if you get an enquiry?
First, I would say that if you are declaring the income you receive in line with tax legislation, you shouldn’t worry, but you do need to respond to the enquiry letter. The fact information has been exchanged about your account and an enquiry opened does not necessarily mean you haven’t declared income in your tax return.
Secondly, I would highlight that the information exchanged under the automatic exchange of information is not tax information, it is information about the account balance and the amount credited to the account holder in a calendar year, but does not take into account tax laws in different jurisdictions. There are mismatches between who and what a financial institution is required to report under FATCA and CRS and the amounts which should be included in a person’s tax return which will always throw up differences in the information that tax authorities have from financial institutions compared with what is included in tax returns.
When an enquiry letter is received, it is important to understand which account or income the enquiry relates to, why a financial institution was required to report information under their local legislation, whether that information is relevant to your tax affairs and, if so, when the receipt should have been included in a tax return. This is something your tax adviser can help you understand.
We have seen this type of enquiry opened by Her Majesty’s Revenue and Customs (HMRC) in respect of information from Swiss banks, under a different exchange of information mechanism, and have helped clients successfully respond to HMRC to confirm that although information has been reported to HMRC it was not required to be included in their tax returns due to the facts in those cases.
The aim of CRS and FATCA is not to tax receipts which aren’t taxable under law, it is to identify where taxable income (and gains, if relevant to the jurisdiction) has not been correctly declared and taxed.
What do you need to do?
When a financial institution sends a form through to confirm tax residency and other information, we would recommend that you complete the form accurately and return it to the financial institution. This will mean that information about your account shouldn’t be reported to a jurisdiction in which you are not tax resident.
If you do receive an enquiry letter, it is important to gather all the facts regarding the account before responding to the letter, including understanding whether the amounts received in respect of the account are taxable. If so, and the amounts were omitted from your tax returns, you should regularise your tax affairs and will need to pay the outstanding tax, interest and penalties due. If you believe the amounts are not taxable based on tax law, you will need to respond to the enquiry letter outlining the facts and circumstances, and tax law on which your conclusion is based. If you have a tax adviser, I recommend you discuss this with them before responding.
For more information on this topic, please contact Monica Dixie