Daniel J Dzenkowski, FS Tax Director at PWC, comments on how the UK is implementing FACTA and CRS, amongst nearly 100 countries who are "early adopters" of the regulation
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The shift towards greater tax transparency continues beyond the Foreign Account Tax Compliance Act (FATCA) with the advent of the Common Reporting Standard (CRS). The CRS originated from a common desire amongst tax authorities around the world to obtain information about financial interests held by their taxpayers in other jurisdictions through the automatic exchange of taxpayer information with participating countries.
There has been significant worldwide interest in the adoption of the CRS with nearly a 100 countries announcing a desire to participate in the standard and a number of so called "early adopters" implementing on 1 January 2016 with reporting commencing in 2017.
The UK has led much of the drive towards increased tax transparency, including: (i) the first FATCA Intergovernmental Agreement (IGA) with the United States (ii) IGAs with the Crown Dependencies and certain Overseas Territories (iii) offshore disclosure centres for taxpayers to regularise their tax affairs and (iv) participation in the CRS.
Under the IGAs and through the CRS, the UK tax authority, HMRC, is expected to automatically receive a wide range of information on offshore financial interests held by UK tax residents, including names, addresses, account numbers, payments of income and information about the value of financial instruments. This is an unprecedented step in HMRC’s ability to tackle offshore tax evasion and entails significant new reporting obligations for Reporting Financial Institutions (RFIs), which include among others, banks, certain investment advisors and trusts.
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By GlobalDataThe aim of these tax transparency regimes is to ensure that there are no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC. In July, HMRC went a step further by publishing consultation documents outlining their "No Safe Havens Strategy" whereby proposed legislation is intended to ensure that potential tax evaders realise that the balance of risk is against them.
In particular, the consultation proposes four new offences (i) a new strict liability offence for those who have not paid the tax due on offshore income (ii) new civil penalties for enablers of tax evasion (iii) a new offence of corporate failure to prevent tax evasion or the facilitation of tax evasion and (iv) a toughening of the range of penalties available to HMRC, including naming those who have evaded tax. The breadth of the consultation suggests that penalties apply to domestic or overseas corporations whose agents facilitate evasion of UK or other overseas taxes; provided that tax evasion is an offence in the overseas jurisdiction. These penalties could also potentially extend to instances where an RFI fails to report taxpayer information under an applicable IGA and the CRS.
The consultation outlines a defence whereby reasonable procedures have been put in place to prevent agents or employees of the RFI from facilitating tax evasion.
The CRS is a new compliance challenge and the proposed penalties suggested by the consultation document could be significant. In our experience, where tax authorities have investigated offshore tax evasion, they have focused their efforts on reviewing the activities of service providers and the related controls, processes, procedures and training to ensure adherence to regulation and guidance.
The ability to defend compliance, in particular tax information reporting, suggests the need for controls that are designed effectively and can be measured and monitored on a regular basis.
Wealth firms have recognised that complying with the CRS is a significant undertaking in terms of costs, for instance, those related to qualified personnel and technology. Moreover, firms recognise the need to adopt a more systematic approach to document their method and strategy for meeting their tax information reporting and compliance obligations.
Institutions are increasingly adopting an integrated approach to CRS compliance which evaluates, measures and monitors the effectiveness of controls to support compliance generally and reporting specifically. PwC has a proven approach and supporting technology to achieve these results, which has been enhanced by the recent acquisition of a specialist tax reporting software company – Ellis Financial Systems Ltd.
This enables wealth management firms to meet the significant tax information reporting requirements and to achieve effective and efficient compliance across for automatic exchange of tax information regimes such as FATCA and the CRS.
