The global shift towards tax transparency may present some challenges for HNWIs, their advisors and International Finance Centres, however, it also presents new opportunities for those who successfully understand and respond to the new paradigm.
Over recent years, financial transparency and regulation have become a global focus. National governments and supranational organisations, such as the Organisation for Economic Co-operation and Development (OECD) have collaborated with the aim of achieving greater levels of transparency to prevent tax evasion. With the advent of the Automatic Exchange of Information (AEOI), specifically the Common Reporting Standard, and the call for Beneficial Ownership Registers, it is evident that the shift in global tax transparency is gaining momentum.
So, what does this mean for our High Net Worth Individuals (HNWIs)? Most HNWIs understand the need for tax transparency. In this article, we assess the impact of the transparency agenda for HNWIs and identify actions that should be taken now.
Automatic Exchange of Information
In 2010, the paradigm shift in global tax transparency commenced with the US government introducing the Foreign Account Tax compliance Act (FATCA). This act represented the first multi-jurisdictional transparency regime which allowed a government to have visibility of assets and financial accounts held offshore by its citizens. It not only captured accounts held by individuals but also the Ultimate Beneficial Owners (UBOs) or controlling persons of companies, trusts, foundations and similar entities.
On a global scale, in 2014 the OECD announced “a coordinated effort to gain a truer picture of income and assets worldwide” through the publication of the Common Standard on Reporting and Due Diligence for Financial Account Information (CRS). With more than 100 countries committing to CRS, it is AEOI on an unprecedented scale. CRS was implemented from 1 January 2016, with the first disclosures of information being made in September this year.
Under CRS, HNWIs’ highly sensitive personal and financial details will be shared with governments around the world, representing a marked change from the autonomous environment they previously operated in. In broad terms, under CRS financial institutions (including fiduciary providers, wealth managers, banks and family offices) will identify ‘reportable accounts’ held by ‘reportable persons’ of each participating jurisdiction and exchange data on those accounts with the relevant tax authorities.
Reportable accounts include bank accounts but also investment entity accounts (such as companies and trusts), which are defined as a debt or equity interest. For trusts, reportable persons could be the settlor, beneficiary or any natural person exercising effective ultimate control.
The details exchanged include the name and address of the reportable person, the account number and the name of the reporting financial institution. The financial data reportable is income credited to the account, the redemption of investments and the account balance or value.
Beneficial Ownership Registers
It has been a longstanding aim of global groups such as the G7, the IMF and the Financial Action Task Force (FATF) to determine who really owns and benefits from complex structures. With the shift towards transparency, the aim of the registers is to identify complex constructs that hide corruption, financial crime and money laundering.
Many jurisdictions such as Jersey have required beneficial ownership information on companies for a number of years, and in 2016, the UK introduced the People with Significant Control (PSC) register for UK companies.
The new wave of proposals has gone further, with the European Commission accelerating the implementation of the 4th Money Laundering Directive (4MLD). The 4MLD introduces a requirement for the creation of trust registers in many jurisdictions for the first time. The UK government has lead the charge and introduced a new Trust Register in July of this year. This brings with it compliance and reporting requirements for trustees of any relevant trust – broadly a UK trust or non UK trust, which has a UK tax liability or income sourced from the UK. A large amount of information will be reported to HMRC in respect of relevant trusts, including personal information relating to the settlor and the beneficiaries and the value of trust assets.
Attitudes to whether the registers should be public differ widely, with countries trying to find the right balance between maintaining the principle of transparency and concerns over the welfare and safety of potentially vulnerable individuals whose details might form part of a register. For the moment, the UK has confirmed that the Trust Register will not be publicly available. However, there are proposals at EU level for a requirement for trust registers to be public and so we may yet see further developments in this regard.
This Trust register marks a significant change in reporting requirements for trusts, and HNWIs should be aware of the shift, particularly when re-structuring or reviewing their affairs. HNWIs should see this as an opportunity to consider the way their structures are managed, whether they should have a class of beneficiaries rather than naming individuals, whether the current protector is fit for purpose or should a more suitable protector be appointed.
The Requirement to Correct
While much of the debate around tax transparency is geared towards those who have deliberately evaded tax, at a domestic level, the UK government recognises that many individuals do not identify with evasion and have therefore introduced a new statutory ‘Requirement to Correct’ (RTC) in relation to offshore wealth structures.
The RTC provides that taxpayers should review their offshore interests and correct any UK tax irregularities by disclosing the relevant information to HMRC by 30 September 2018. HNWIs should note that this is deliberately aligned with the CRS reporting deadline. Liabilities in respect of income tax, capital gains tax and inheritance tax are all within the scope of RTC.
The new RTC includes any circumstance in which tax has been underpaid. Offshore wealth structures are inherently complex and it is not uncommon for errors to be made, either as a result of poor implementation, historic advice not being updated, or simply due to a careless error all of which are captured by the new RTC.
The consequences of failing to check and correct any errors are severe. In addition to the current penalty regime, HNWIs will be liable to a maximum penalty of 200 per cent of the under-declared tax. This penalty can only be mitigated to 100 per cent and any reduction will be based on the timing, nature and extent of the disclosure. In more serious cases, a further asset based penalty of up to 10 per cent of the value of relevant offshore assets and/or public naming and shaming may apply.
Technological advances mean that the collection, transfer and processing of large amounts of data received under CRS and the UBO registers is now possible. At a domestic level, HMRC has spent years developing its ‘Connect’ technology, which collates data from a large number of sources, such as the Land Register, credit card companies and financial institutions. HMRC will start to match all information received as part of the transparency agenda with the information filed by HNWIs through their tax returns. Any mismatches will be a reason for tax enquiries and compliance checks. The vast majority of HNWIs who use overseas structures do so for legislative commercial and personal reasons. However, due to the complexity of tax legislation, it is not uncommon that errors are made within overseas structures. For those who have not paid the right amount of tax historically, making a disclosure to HMRC as soon as the error is spotted is key.
What Actions Should HNWIs Take Now?
With the move towards transparency, all HNWIs should be reviewing their global tax affairs. HNWIs should first understand whether they have reporting obligations themselves which they need to comply with. Next they should examine what information will be disclosed by each institution with which they hold assets, directly or indirectly, and when the information will be disclosed. It is important for HNWIs to be undertaking due diligence on their service providers globally to ensure that they have the capability to implement and comply with the various transparency measures accurately and securely. They should also understand what information will be accessible publicly and what this may mean for their wider arrangements.
The global shift towards tax transparency may present some challenges for HNWIs, their advisors and International Finance Centres, however, it also presents new opportunities for those who successfully understand and respond to the new paradigm. The increase in global wealth and the continued cross-border movement of people and assets means there is a need for high quality advice and services. HNWIs are keen to demonstrate their commitment to working in a tax compliant and tax transparent environment and are increasingly being drawn towards professionals operating in secure, well-established and well-regulated jurisdictions. Jurisdictions which are in tune with the transparency agenda and the future direction of the global financial services industry will be well placed to benefit from the new opportunities presented.
Natalie Martin Private Client Senior Manager
PwC Albania, Algeria, Andorra, Angola, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Bermuda, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, British Virgin Islands, Brunei Darussalam, Bulgaria, Cambodia, Cameroon (Republic of), Canada Cape Verde, Cayman Islands, Chad, Channel Islands, Chile, China Colombia, Congo (Democratic Republic of), Congo (Republic of) Costa Rica, Cote d'Ivoire (Ivory Coast), Croatia, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Fiji, Finland, France Gabon (Republic of), Georgia, Germany, Ghana, Gibraltar, Greece Guatemala, Guinea, Honduras, Hong Kong SAR, China, Hungary Iceland, India, Indonesia, Iraq, Ireland, Isle of Man, Israel, Italy Jamaica, Japan, Jordan, Kazakhstan, Kenya, Kosovo, Kuwait, Kyrgyzstan, Lao PDR, Latvia, Lebanon, Liberia, Libya, Liechtenstein, Lithuania, Luxembourg, Macau SAR, China, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Malta, Mauritius, Mexico, Moldova, Monaco (Principality of), Mongolia Montenegro, Morocco, Mozambique, Myanmar, Namibia, Netherlands, New Caledonia, New Zealand, Nicaragua, Nigeria Norway, Oman, Pakistan, Panama, Papua New Guinea, Paraguay Peru, Philippines, Poland, Portugal, Puerto Rico, Qatar, Romania Russia, Rwanda, Saudi Arabia, Senegal, Serbia, Sierra Leone Singapore, Slovak Republic, Slovenia, South Africa, South Korea Spain, Sri Lanka, Swaziland, Sweden, Switzerland, Taiwan, Tanzania, Thailand, Trinidad & Tobago, Tunisia, Turkey, Turkmenistan, Turks & Caicos Islands, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Uzbekistan, Venezuela, Vietnam, West Bank & Gaza, Zambia and Zimbabwe.