OECD Addresses Tax Transparency Risks Linked to Citizenship and Residence by Investment Programmes

This major shift in favour of tax transparency through the CRS has already led to greater levels of compliance of taxpayers in relation to their foreign assets, as shown through the more than EUR 93 billion of additional tax revenues that were identified as a result of voluntary compliance programmes and off-shore investigations.

With the automatic exchange of CRS information now being a global reality, the OECD’s focus is to ensure the effective implementation of the system by both jurisdictions and financial institutions, and to preserve its integrity. Three key pillars of the current work are the peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes; the development of mandatory disclosure rules for CRS avoidance arrangements; and the so-called CRS loophole strategy. As part of that last pillar, the OECD actively gathers intelligence on avoidance behaviour that taxpayers or financial intermediaries may deploy in order to escape CRS reporting.

One area of risk that the OECD has identified in this respect, including by stakeholder input through the CRS Loophole Disclosure Facility, is the abuse of Citizenship and Residence by Investment (CBI/RBI) programmes to circumvent CRS reporting. These programmes, otherwise known as ‘golden passports/visas’, allow individuals to obtain citizenship or residence rights through local investments or against a flat fee. While individuals may be interested in these schemes for a number of legitimate reasons - including greater mobility thanks to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability - some of these schemes also carry the risk of compromising the CRS due diligence procedure.

The review of over 100 CBI/RBI programmes that are being operated by jurisdictions committed to the CRS has led the OECD to identify 25 schemes that carry risks for its integrity.[1] It is important to stress that the purpose of the identification of certain programmes is not to insult particular jurisdictions or to question the legitimacy of their programmes. Rather, the focus of the analysis has been to equip financial institutions with the right tools to conduct their CRS due diligence obligations in relation to CBI/RBI. p

The review was carried out on the basis of two indicators, chosen in light of the potential attractiveness of a jurisdiction for a person that allegedly intends to ‘misrepresent’ his tax residence for CRS purposes:

• The first tax-related indicator looks at whether a jurisdiction applies a zero or low personal income tax rate on offshore financial assets.
• The second physical presence indicator assesses whether, as a matter of immigration law, an individual need to spend a significant amount of time in the jurisdiction operating the programme

The combination of both indicators can potentially make a CBI/RBI program attractive for taxpayers wishing to circumvent CRS reporting, as the requirements and consequences of claiming to be resident in the jurisdiction for CRS purposes would neither lead to a significant level of taxation on the foreign financial assets, nor would they require a fundamental change in lifestyle by having to spend a substantial portion of the year in the CBI/RBI jurisdiction.

This would, for instance, be the case if an individual who is resident for tax purposes in Country A opens a bank account in Country B and uses a passport or residence permit obtained under an RBI/CBI programme offered by Country C to document the account. The bank could, on that basis, identify the person as tax resident in Country C, although the person actually is a tax resident of Country A. In CRS terms, this would mean that the information on the taxpayer and their account does not get reported to Country A, as should be the case. Provided that Country C is, in addition, a ’non-reciprocal jurisdiction’ (sending information but not asking to receive any), there would be no CRS jurisdiction sent to Country C and thus, no information on the bank account would be exchanged under the CRS at all.

It is in that light that the OECD has, concurrently with the results of the analysis, issued guidance for financial institutions that is designed to assist them when confirming the reasonableness of a self-certification, or the reliability of documentary evidence when documenting an account holder for CRS purposes. To that end, the guidance includes a set of additional questions that financial institutions may ask when presented with documentation issued by a jurisdiction operating a CBI/RBI programme that, on the basis of the analysis, carries CRS-related risks. The questions relate to other tax residences of a person, the locations where income tax returns are filed, as well as to the lifestyle of the taxpayer. While the guidance does not alter the CRS due diligence obligations of financial institutions, including in relation to the requirement to confirm the reasonableness and validity of self-certifications, its purpose is to support financial institutions in ensuring that all jurisdictions of tax residence of account holders and controlling persons are correctly documented for CRS purposes.

Shortly after the public release of the OECD work on CBI/RBI, some jurisdictions have already indicated their interest to introduce mitigating measures in order to ensure that their CBI/RBI systems cannot be misused by taxpayers to circumvent the CRS. In this respect, we have been working with a number of jurisdictions to confirm that any specific CRS-related risks in relation to their CBI/RBI programmes are effectively addressed. Several jurisdictions are now implementing a spontaneous exchange of information about individuals who have obtained residence or citizenship rights through CBI/RBI platforms with all original jurisdictions of tax residence. When implemented, this measure will ensure that the appropriate jurisdiction is informed about its taxpayer’s newly acquired foreign residence status. As such, the tax authority concerned can then take any appropriate action to ensure that foreign financial income of the taxpayer is effectively declared and taxed, thus taking away the risks related to the circumvention of CRS reporting.

Going forward, the OECD intends to extend its analysis beyond the jurisdictions committed to the CRS to also cover other jurisdictions that operate CBI/RBI programmes that may pose risks to the accuracy of CRS reporting. We will, of course, continue working with jurisdictions, financial institutions and other stakeholders to ensure that CRS-related risks are detected and addressed.

While the adoption and implementation of the CRS over the last years has marked a major step towards greater tax transparency, it is equally important to safeguard its effectiveness and integrity over time, so that persons trying to circumvent reporting do not succeed.

[1] The full list of schemes identified as high-risk is available on the OECD website: http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/residence-citizenship-by-investment/

Pascal Saint-Amans
Pascal Saint-Amans is the Former Director of the Centre for Tax Policy and Administration at the OECD. Mr. Saint-Amans, a French national, joined the OECD in September 2007 where he played a key role in the advancement of the OECD tax transparency agenda in the context of the G20. Prior to his appointment as Director, he was the Head of the Global Forum on Transparency and Exchange of Information for Tax Purposes since 2009. Mr. Saint-Amans graduated from the National School of Administration (ENA) in 1996, and was an official in the French Ministry for Finance for nearly a decade.