Financial asset reporting in the EU has been taken out of your hands, your assets are now automatically being reported to your tax authorities
Financial privacy is a thing of the past – your local tax authority will automatically receive information about your investment assets without having to request it. This makes it imperative that you realise that if you live in an EU country for 183 days a year then you will automatically become a tax resident.
The tax authorities in Spain have been particularly harsh on those who have declared their assets incorrectly – to the extent that the draconian fines and penalties they’ve imposed have been challenged by Brussels. In recent years there have been instances where the Spanish authorities have imposed massive fines of 150% on the value of incorrectly reported assets. Imagine not correctly declaring £500,000 of financial assets held outside of Spain and then being fined £750,000!
It is therefore imperative that, as a matter of urgency, all those who spend time living in Spain become aware of what information will be shared about their income and assets. Equally important, they should then consider what tax and estate planning arrangements are best suited for them and their family, for today and the long-term.
The situation going back to 2005
There has been some automatic exchange of information in Europe since 2005, under the EU Savings Tax Directive, but it only applied to interest income. The Isle of Man, Jersey and Guernsey started off by offering a withholding tax option, but have now moved to automatic exchange of information only. Other countries such as Switzerland, Liechtenstein, Monaco, Andorra and San Marino implement the directive by applying the withholding tax on savings income, thereby maintaining banking secrecy.
Many countries and offshore centres around the world have signed bi-lateral tax information exchange agreements. These however are of limited benefit to tax authorities. They can only receive information on a taxpayer’s offshore accounts and investments if they ask for it, and to do that they need to have solid suspicions of tax evasion. If they are not aware of an account, they will not receive any information about it.
The situation from January 2016
In July 2014 the council of the Economic Co-operation and Development (OECD) approved a new standard for the Automatic Exchange of Financial Information in Tax Matters. It comprises the Competent Authority Agreement and the Common Reporting Standard (CRS), and went live on 1st January 2016.
This new regime involves the systematic and periodic transmission of taxpayer information by the source country to the residence country concerning various categories of income – it goes way beyond sharing details of interest income.
This means that tax authorities in the country of residence will automatically receive information on all the financial assets their taxpayers hold overseas – without having to ask for it.
So, every tax authority in the participating countries will receive information on all their residents, regardless of whether those residents have been fully compliant and declared everything correctly. It is no longer possible to hide assets offshore.
The tax authorities will receive information about offshore accounts and investments they may not have been aware of before. Any cases of tax evasion, whether on the investment return or underlying capital sum, will come to light, even if there were no suspicions previously.
The OECD warned last summer that transgressors have a “last window of opportunity” to disclose previously hidden assets and income.
Local tax authorities will compare data received against tax returns. Where they find discrepancies, they will have good reason to launch a tax audit. This could result in the taxpayer having to pay previously unpaid tax, plus interest, plus penalties. In some cases, they could face criminal prosecution.
In Spain, the authorities will also compare the data received with Form 720, where residents must declare their overseas assets. The penalties for undeclared assets can be severe.
What will be reported?
Under the Common Reporting Standard, the financial information to be reported includes the name, address and tax identification number (where applicable) of the asset owner, as well as the balance/value, interest and dividend payments and gross proceeds from the sale of financial assets.
The financial institutions that need to make such reports include banks, custodian financial institutions, investment entities such as investment funds, certain insurance companies, trusts and foundations.
The tax authorities will receive much more information than ever before – even information they do not strictly need. For example, there is no wealth tax in countries like the UK, Portugal, Cyprus and Malta, but the tax authorities will still receive account balances. If this raises any red flags they may investigate where the money came from in the first place.
Almost 100 jurisdictions around the world have signed up to the Common Reporting Standard so far.
It comes into effect in stages. The ‘early adopters’ (including the EU and UK offshore centres) start to collect data from January 2016, and will make the first information exchange (for fiscal year 2016) by September 2017. The other countries, including Switzerland, will introduce the standard a year later – so they will start sharing information by September 2018, on 2017 data.
In Europe, the Common Reporting Standard will be implemented through the Administrative Cooperation Directive. It provides for automatic information sharing on interest, dividends and other investment income, account balances, sales proceeds from financial assets, income from employment, directors’ fees, life insurance, pensions and property.
How am I affected and what is the best way to respond?
If you have a number of different offshore bank accounts, investment products, trusts etc, then each one of these institutions will be sharing information on your holdings with your local tax authority.
Cross border tax planning is complex. You need to be clear on what income and assets you should be declaring in which country. For example, if you live in Spain and receive pension or rental income in the UK, should you pay tax in the UK, Spain, or both? You need to make absolutely sure you have declared everything correctly. If you find that you have not done so you should regularise your affairs as soon as possible.
The first thing to do, for your ongoing peace of mind, is to consider grouping as many assets as possible into a single arrangement. This means that there is much less information being passed around, and it will be easier to follow what is being exchanged about you.
It’s also a good time to review your tax planning and investment arrangements. Are they approved in your country of residence? For example, residents of Spain, France and Portugal may be using non-compliant products, such as non-EU bonds, including those from the Isle of Man, Jersey and Guernsey. Provided these people have been fully declaring them in their country of residence they are not illegal – but they are being taxed more aggressively than Spanish, French and Portuguese compliant bonds.
For all of these reasons it makes sense to get some advice from experts who are totally on top of the changes and busy advising others like yourself on how best to manage their affair in this new environment. If you’d like to discuss your specific circumstances, and ways you can secure your assets and peace of mind for the present and the future, contact us today.