Important factors to consider in residence planning
Dr. Niklas J. R. M. Schmidt, TEP, Partner, Wolf Theiss, Austria
We live in an unprecedented era of change and never is this adage truer than when it comes to taxation.
It has only been a few years since tax authorities were severely restricted by national borders. If they wanted to verify whether a certain taxpayer had a bank account, a company, a trust, or a foundation in another jurisdiction, they were dependent on that country's cooperation. Cooperation did exist but, for the most part, only between certain developed countries. Tax havens, on the other hand, typically refused to cooperate. Indeed, their business model was built on non-cooperation with requests for assistance in tax matters.
The global financial crisis of 2007–2008 changed this state of affairs. As The Economist succinctly summed it up: "Governments once turned a blind eye to their wealthy citizens' offshore tax acrobatics. Now they are strapped for cash and hungrily hunt every penny in tax revenue. So a cold war on banking secrecy is turning hot."
In this war, the most important party was surely the Organisation for Economic Co-operation and Development (OECD), an intergovernmental organization with its headquarters at the Château de la Muette in Paris, France, which was founded to stimulate economic progress and world trade. In the area of tax, the OECD was mainly known for two reasons: (i) It publishes and updates a model tax convention that serves as a template for bilateral tax-treaty negotiations between countries; and (ii) its employees are exempt from taxation in most of its member countries. When a scapegoat for the global financial crisis was being hunted, the OECD was quick to point to unregulated hedge funds that are typically domiciled in tax havens and thus the OECD carved out a niche for itself in the war against such havens.
The first thing it did in this respect was to set up ‘white’, ‘grey’ and ‘black’ lists of countries in 2009. To be on the white list, a jurisdiction had to have a minimum number of agreements with other countries in which it promised to answer requests from their tax authorities. Due to convincing threats against blacklisted countries announced by several major countries, it did not take long for hundreds of bilateral agreements to be concluded within a short period and for all well-known tax havens to be cajoled into signing up to this initiative. This obviously spelled the end of banking secrecy as we knew it. The OECD then followed up by implementing a peer-review program to ensure that countries that had, on paper, committed to exchange tax-related information upon request, in fact honored their obligations in practice.
The next milestone was passed in 2010, when the US Congress passed the Foreign Account Tax Compliance Act (FATCA), a statute targeting US taxpayers with bank accounts abroad. Under this gargantuan and extraterritorial piece of legislation, non-US banks were pressured into committing to supply — automatically and on a yearly basis — certain account data regarding their US clients to the US Internal Revenue Service (IRS). In order to implement FATCA, the US concluded so-called intergovernmental agreements (IGA) with various countries. The intent of FATCA was obviously to let the IRS receive bank data from their foreign counterparts, not the other way around.
In April 2013 the UK, France, Germany, Italy and Spain agreed on a far-reaching proposal: since their banks already had to collect and transmit financial account information regarding US taxpayers, why not extend the collection and transmission to UK, French, German, Italian and Spanish taxpayers and implement automatic exchange of information within this group? This initiative was taken up by the OECD, and in February 2014 it presented what — in true Orwellian fashion — it called the Common Reporting Standard (CRS).
Under the CRS, banks in (now over 100) participating jurisdictions have to identify the residency of their account holders; collect information regarding interest income, dividends, gross proceeds from the sale of financial assets and account balances of their account holders; and submit this information to their tax authorities. Once a year the authorities then automatically pass on, in bulk, the (hopefully encrypted) information received from all banks to their respective counterparts in other participating jurisdictions. There, the information received can theoretically be used to verify tax returns and to discover cases of tax evasion even where no previous indication of non-compliance existed.
Obviously, fighting against tax evasion is an important objective and a lot of immoral cheating with offshore jurisdictions has been going on in the past decades. It can therefore surely be argued that the OECD's efforts in 2009 to extend exchange of information upon request created a level playing field for tax authorities and taxpayers after decades in which dishonest taxpayers had been at an advantage. However, in the view of considerate practitioners, the introduction of the automatic exchange of information — i.e. the systematic transmission of information about certain categories of income having their source in one state and received by a taxpayer in another state — has tipped the balance.
In particular, concerns have been raised about the compatibility of CRS with fundamental privacy- and data-protection principles. In order to seek out a few tax evaders, many innocent bystanders may be harmed by exposing them to the considerable risk that massive amounts of very private financial information might be leaked and end up in the wrong hands. CRS is a cybercriminal's dream come true: armed with a high net worth individual's banking and financial history, date of birth and address, a criminal could carry out various crimes ranging from identity theft to kidnapping and extortion. Apart from wealthy families, charities that provide grants to political dissidents or human-rights campaigners living in high-risk jurisdictions are particularly at risk, since the disclosure of grantees to their local authorities may end up putting their lives in danger. It is strange that former NSA contractor Edward Snowden's disclosures about government-sponsored mass-surveillance programs have not fueled debates about the legitimacy of CRS.
As if this intrusion of governments into their citizens' privacy was not bad enough already, further dark clouds are gathering on the horizon in the form of bank account registers and ultimate beneficial ownership (UBO) registers. Under certain legal instruments, governments will soon want to set up lists showing which bank accounts a resident individual holds and which companies such an individual ultimately controls. It seems that times will indeed remain taxing for global citizens…