Advances in Automatic Exchange of Information – the Common Reporting Standard · 2017-04-24 · • New offence of 'facilitating/enabling' tax evasion • New corporate criminal

Advances in Automatic Exchange of Information – the Common Reporting Standard International Tax Transparency April 2017

Amit Puri Tax Senior Manager

© 2017 Grant Thornton UK LLP. All rights reserved | Confidential

• My story…

• Our speciality

• The UK’s outlook & sources of information

• 'Offshore' quiz!

• Automatic Exchange of Information ─ It’s origins ─ The current position/timelines ─ Case studies (what to expect)

Introduction


• Brings together diverse experience and expertise, comprising tax qualified professionals as well as fully trained ex Tax Inspectors.

• We specialise in resolving tax & penalty disputes and managing risks, enquiries and investigations, across all taxes. Eg civil fraud investigations, cross taxes business enquiries, defending or un-ravelling tax planning / avoidance schemes

• Our work is typically 'non-recurring', as we support our fellow professionals - and do not poach their clients!

Our team


• Fraud Investigations Service, FIS ─ Specialist Investigations, "Offshore" and "Fraud & Bespoke Avoidance"

• "Affluent Unit" and "High Net Worth Unit" re complex personal tax affairs/returns

• "Trusts & Estates re IHT Compliance, residence, domicile, remittance basis, sham or transparent holding structures, other cross border/offshore matters incl. anti-avoidance measures

Our team (and experience) contd…


"We are hitting tax avoidance and tax evasion harder than ever before. Our message is simple – come forward and settle your affairs, play by the rules, or be caught and face the

consequences."

HMRC's "Tackling tax evasion and avoidance" publication,

post Budget March 2015

The UK’s outlook


• SR10: HMRC re-invested £994m in tackling 'evasion' and 'avoidance' between 2010 and 2015

• SR15: A further £800m re-investment, announced at the March 2015 Budget…

• … Forecasted to raise £7.2bn by 2020 (increased since!)

• HMRC to raise an additional £5bn a year by 2019/20, by tackling tax avoidance and aggressive tax planning, evasion and other non-compliance! (May 2016 news release)

• Increased multi-team taskforces, underpinned by greater sharing of information (bulk data), to more easily target industries/sectors or increasingly jurisdictions

The UK’s outlook


• Full business 'books and records' enquiries (more often cross-taxes, eg CT, VAT and EC)

• EBTs and EFRBs – tax-efficient remuneration

• Provisions/WIP/reserves/valuations/accruals

• Disposal of goodwill; incorporation relief; R&D relief

• Private expenses; BIKs; Directors' Loan Accounts

• Sch 36 FA 2008 (Information Notices)

• Taskforces, campaigns & disclosure facilities

• Penalty negotiations (suspension; "behaviour")

• Money Laundering Regulations (AMLS visits)

HMRC's activities


• BIG BULK DATA "CONNECT"

• Originally cost £45m - software developed by BAE

• Significant and on-going investment

• Last reported: additional £2bn recovered through it

• More information than the entire

British Library!

• Spider diagram illustration

HMRC's many sources of information


• Mortgage Fraud information from Lenders

• DVLA (Cars and Registration numbers)

• Land Registry (properties) & Stamp Duty office

• Council Tax; Voters' Roll; pyts to Landlords

• Credit reference agencies, eg Experian

• Merchant Acquirers data (credit cards usage)

• Internet trawling, eg "Web-robot" & "Coosto"

• Social Networking – Facebook, Twitter, LinkedIn

• UK & overseas bank/financial account information

HMRC's information sources


Secret jurisdictions can cause/encourage (at least) two problems for any tax authority: • Money easily hidden in offshore bank accounts • Corporate/trust structures further help to hide untaxed money,

assets and identities Q1. Where the population of the BVI was/is approx. 32k… How many active companies are managed on the islands? Q2. How many Double Taxation Agreements (DTAs) and Tax Information Exchange Agreements (TIEAs) does the UK have with other jurisdictions?

“Quiz time!”


Q3. How much £ revenue have the UK's offshore tax disclosure facilities raised for the gov't to date? Q4. How many jurisdictions have committed to the new 'game changing' global standard for the automatic exchange of information?

“Quiz time!”


Using a jurisdiction with the objective of evading UK tax

This includes:

• moving latent UK gains, or UK income or assets, offshore to conceal them from HMRC

• not declaring taxable income or gains arising offshore, or taxable assets kept offshore

• using complex offshore structures to hide the beneficial ownership of assets, income or gains

Definition of “Offshore Evasion”


Offshore initiatives to date

Offshore Disclosure Facility (ODF) 2007

Liechtenstein Disclosure Facility (LDF)

MoU signed Aug 09 – ran till Dec 15 New Disclosure Opportunity

(NDO) 2009 UK-Swiss Tax Cooperation

Agreement came into force Jan 13

Crown Dependency Disclosure Facilities IGAs signed 13 – ran till Dec 15


• Offshore 'financial account' data revolution!

• Around 100 jurisdictions committed to adopt

• To automatically exchange detailed tax/banking information, every year

… where an account is a 'reportable financial account‘ (+reporting jurisdiction +reporting financial institution) … financial institutions may also need to identify “controlling persons” re certain passive entities

Common Reporting Standard (CRS)

© 2017 Grant Thornton UK LLP. All rights reserved | Confidential 15

JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2017 (52) Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands, United Kingdom JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2018 (48) Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Curaçao, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Trinidad and Tobago, Turkey, United Arab Emirates, Uruguay, Vanuatu

Reporting Jurisdictions (10/04/17)


• Significantly tougher 'offshore' penalties (up to 300%)

• New strict liability criminal offence, incl custodial sentence

• New offence of 'facilitating/enabling' tax evasion

• New corporate criminal offence, 'failing to prevent tax evasion'

• New additional penalty, up to 10% on 'capital value' of previously undisclosed offshore asset(s) concerned

• Compelling banks/tax advisers to message their customers about the CRS/offshore penalties

• Recent consultation on compelling banks/tax advisers to notify HMRC about setting up offshore structures (ie trusts & companies)

Sanctions - developments


Broadly the obligation on an FI to report arises if: -

• The entity is defined as an FI/financial institution under CRS rules

• The relevant account is a reportable account

• The account holder (or controlling person) is a reportable person

• The reportable person is resident in a participating jurisdiction

Reporting checklist


CRS Overview Chart


Reporting Financial Institutions


Reportable Accounts


Reportable Accounts


Reportable Accounts


Reportable Accounts


Client holds liquid funds in current accounts in India, where he was born & educated before coming to the UK to live, work & start a family.

Irrespective of the balances on those accounts, the information might be seen by HMRC as something more sinister. HMRC might contend that historic (interest) income and (investment) gains have gone untaxed in the UK (giving rise to UK income tax and UK capital gains tax liabilities.

… Importantly, even nil balances and non-interest bearing accounts will be reported under the CRS (unlike under FATCA).

… There is typically no UK bookkeeper/accountant or regrettably one that is competent enough to advise re Remittance Basis of taxation.

Case study: UK resident elderly client


After the death of an elderly parent, a client inherits a mixture of funds, some liquid and some longer-term investments, held in India. The deceased was born and educated in India, but had moved to the UK a few decades ago.

Irrespective of the balances, HMRC might argue that (1) the more recent income and gains have gone untaxed in the hands of the successor(s), which could also lead to questions about whether there are other income-producing assets in India, such as properties. Also-

This is likely to give rise to (2) (pre-death) UK income tax, capital gains tax and inheritance tax liabilities in the hands of the executors or representatives of the (deemed UK domiciled) deceased’s estate.

Case study: next generation, inherited funds


Client had established a discretionary trust for the benefit of his family, in the BVI. He had never personally received any distributions so he considered there was no UK tax exposure for him.

However, given his long residence in the UK, he was deemed to be UK domiciled (but had not been advised correctly) when he settled funds on the trust. Therefore, he had inadvertently created a ‘relevant property trust’ and it was ‘settlor-interested’ too, so there had been a failure to account for inheritance tax (on entry) at that time, as well as on-going personal tax liabilities for him.

Under the CRS he might be identified as a ‘controlling person’ and HMRC will then have identified the offshore trust, and consequently any undeclared and unpaid tax liabilities too…

Case study: non-UK family Trust

© [YEAR] [Copyright text] | [Classification]

Questions


Contact details

Amit Puri

Tax Senior Manager [email protected]

020 7728 3254

© 2017 Grant Thornton UK LLP. All rights reserved.

Changes to the taxation of non-doms


April 2017 tax changes • From 6 April 2017, non-UK domiciled individuals who have been UK tax resident for 15

out of the previous 20 tax years will be deemed to be UK domiciled for all tax purposes

Tax implications Income tax and CGT • No ability to claim the remittance basis • Taxed on world wide income and gains on an arising basis IHT • Worldwide assets within the scope of IHT • Assets settled into protected trusts will remain outside the scope of UK tax (except UK

residential property)


Changes to Non-domiciliaries Rules

Transitional protections Asset rebasing • Individuals who become deemed-domiciled from 6 April 2017 will be able to rebase directly

held foreign assets to their market value on 5 April 2017 • Any further increase in the value of an asset between April 2017 and the date of disposal will

be charged to CGT in the normal way • It is possible to elect out on an asset by asset basis 'Clean up’ historic mixed funds • All non-UK domiciliaries will have the opportunity to separate out the constituent parts of

their mixed funds (bank accounts and similar holdings only) into separate offshore accounts. • They will be able to move their clean capital, foreign income and foreign gains into separate

accounts, and will then be able to remit from their accounts as they wish and pay the appropriate amount of tax

• This clean-up can begin from 6 April 2017 but must be completed by 5 April 2019 • Only one instruction per bank account is allowed • Should consider delaying where future transactions envisaged – e.g. sale of assets


Taxation of Trusts Protected settlements • Settlements created before settlor becomes deemed domiciled will be protected i.e. taxation based on

benefits/capital payments • Non-UK income and gains remain within the trust until a benefit is enjoyed by a UK resident

beneficiary. • Settlement can be tainted where value subsequently added by deemed domiciled settlor or by one of

their other trust structures. In such circumstances the foreign income of the trust would become assessable on settlor on an arising basis and they would not be able to claim the remittance basis

• Other tainting risks – loans from settlor to the trust, loans between trusts, services provided by settlor to trusts. Future loans will need to be on fully commercial terms with interest being paid (not rolled up)

• Overarching agreement and adjuster clauses


Taxation of Trusts Other changes from 6 April 2017 – proposed but not in draft legislation • Distributions to non-resident beneficiaries will not deplete the gains pool – applies to all trusts • Capital payments to non-resident close family members will be attributed to the settlor – applies to all

trusts • Loans from trusts will give rise to a benefit even where interest arising but rolled up – applies where

deemed dom beneficiaries • Distributions to non-resident beneficiaries followed by a gift to UK resident

beneficiaries within 3 years will be looked through


Proposed IHT changes for UK residential property


Extension of IHT to enveloped residential property • From April 2017, IHT will be charged on UK residential property irrespective of how it is held.

• New IHT exposure for individuals and trusts

• De-minimis exemption of 5% holding in offshore close company

• Value of shares attributable to residential property – minority discounts available

• Debts likely to be apportioned across assets of company even if wholly secured against residential

property

• Relevant loans – loans made to finance the acquisition of UK residential property or its maintenance/enhancement will be within the IHT estate of the lender e.g. relevant property for trusts

• Sale proceeds of wrapper company will remain within the scope of IHT for 2 years.


Extension of IHT to enveloped residential property

• Collateral provided for such a loan will also become exposed – exposure capped to value of UK property

• Sales by the enveloping entity of the property should not be caught by the 2 year rule


Potential planning

• Rebasing of offshore assets should wash out gains

• Foreign assets could be sold into an existing trust to allow future extraction of value which will be clean from a UK tax perspective (or to a UK FIC)

• Accelerate distributions whilst remittance basis available

• Review existing cash balances to quantify the amount of clean capital which may be extracted.

• Foreign assets could be settled into a non-UK trust before individual becomes deemed domiciled to qualify as a protected settlement yielding income and IHT protection

• Deemed domiciled individuals can consider the use of a UK FIC to mitigate future IHT exposure and to benefit from low tax rates whilst maintaining control


Family Investment Company ("FIC") • A FIC can be a UK tax resident company either by virtue of the company being incorporated in the UK or

it being centrally managed and controlled in the UK, where the company is incorporated elsewhere. The company can be incorporated in or outside the UK

• There are two main ways an investment company can be established which are;

− transferring assets into a company in exchange for shares; and/or − transferring assets into the company by way of loan

• Parent can be the sole director such that they will hold all of the voting rights and have ultimate

control over how the funds in the company are used. • Children can be gifted growth shares. Parent may also subscribe for non-voting preference

shares which are gifted to the children

Assets/Cash

FIC

1. Ordinary shares 2. Loan Account

© 2017 Grant Thornton UK LLP | Arjun Menon | March 2017

DRAFT

39

Investment company

Tax benefits of a FIC over holding assets in personal name – assuming UK tax resident and deemed domiciled individual

Investments held personally

Investments held in FIC

Dividend income Taxed at rates of up to 38.1% for additional rate tax payers.

No tax on exempt distributions (which covers most dividends received from companies in the UK or in a country with which the UK has an appropriate double tax treaty).

Income on unit trust and fixed deposit interest

Taxed at rates of up to 45%. Taxed at corporation tax rates, currently 20%, falling to 17% from 1 April 2020.

Gains Annual exemption £11,100 pa (2016/17) per individual Capital gains tax of up to 20% (with the exception of UK residential property and carried interest which are taxed at rates of up to 28%).

Corporation tax rates at a rate of 20% reducing to 17% but with the benefit of an 'indexation allowance' (which effectively means that only gains above RPI inflation are taxed). A relief is also available where shareholdings of more that 10% are held in trading companies/groups which can exempt the gain from tax.

IHT IHT at 40% on death (a nil rate band of up to £325,000 is available). Treaty protection may be available..

IHT at 40% on death (a nil rate band of up to £325,000 is available). Treaty protection may be available

Investment management charges No tax relief available for investment management charges.

Tax relief available for investment management charges.

Cash extraction Already held personally. Tax free withdrawal in relation to loan repayment. Dividends paid from the FIC may be taxed on the shareholders at a rate of up to 38.1% (dependent on their tax residency). Alternatively the company could be liquidated and the assets distributed to the shareholders. Any resulting gain may be subject to CGT at the rate of 20%.


Individuals spending more time in the UK


The UK Tax System - Residence • UK statutory residence test introduced in April 2013 that allows certainty over an individual's residency

status.

• Broadly;

• If an individual falls between these day counts, the number of days they can spend in the UK without

becoming UK resident will be dependent on their 'ties' to the UK.

• HMRC will consider the following ties:

(a) Family in the UK (b) Accommodation in the UK (c) Substantive work in the UK (d) More than 90 days presence in the UK in either of the previous 2 years (e) More time in the UK than in any other single country

Automatically UK resident More than 183 days in the UK Automatically non-UK

resident Less than 16 days in the UK


The UK Tax System - Residence

• Worldwide income subject to UK income tax at the rate of up to 45%* • Worldwide gains subject to UK capital gains tax at the rate of 20%* (28%* for residential property)

* Subject to claiming the remittance basis of taxation

Tax implications

Remittance basis of taxation • Only available to non-UK domiciled individuals • Foreign income and gains only subject to UK tax to the extent that the funds are remitted to the UK • A charge must be paid to make the claim depending on period of time the individual has been resident in

the UK:

• Income and gains arising prior to becoming UK resident are treated as 'clean' capital and can be remitted to the UK without being subject to UK tax.

Charge Years of residence £0 less than 7 out of the previous 9 tax years

£30,000 7 out of previous 9 tax years £60,000 12 out of previous 14 tax years


What Constitutes a Remittance • Rules are complicated and care needs to be taken.

• There will be a taxable remittance where any property representing or derived from foreign income or

foreign chargeable gains is brought to, received or used in the UK for the benefit of a 'relevant person'.

• Examples of when a tax remittance can arise: - settling a UK credit card debt - settling an overseas credit card used for UK expenditure - repaying a UK loan - paying professional fees where the service has been provided in the UK - bringing assets acquired abroad to the UK - investing in UK companies

• Statutory exemptions and reliefs may be available e.g. Business Investment Relief

• We can advise and help with pre-arrival planning in order to mitigate the risks.

This involves establishing an appropriate bank account structure to maximise the amount of clean capital.


Structuring of future property acquisitions


Commercial property - Investment

• Corporate wrappers remain beneficial for commercial property acquisitions as recent tax changes have targeted residential property only.

• No ATED • Potentially no UK tax on sale of property or shares • No SDLT for purchaser where shares sold • No IHT • Income tax limited to 20% (subject to anti-avoidance)

Offshore company

UK property

or Trust


Residential property- Investment

• Corporate wrappers remain beneficial for residential property where property is let out on a commercial basis as ATED and ATED-related CGT will not be in point.

• No ATED • Potentially no UK tax on sale of property or shares • No SDLT for purchaser where shares sold • IHT exposure from April 2017 – insurance? • Income tax limited to 20% (subject to anti-avoidance)

If the property is not let out, the associated ATED cost may outweigh the benefit of the structure. In which case de-enveloping could be considered However, the cost of restructuring will need to be compared to the cost savings

Offshore company

UK property

or Trust


Property development

Non-UK incorporated, UK

resident


resident


resident


resident


resident

• Previously the DTT between the UK and Jersey/Guernsey could be used to shelter profits from UK tax. However, following the recent changes, this is not possible

• An alternative structure could be to use non-UK incorporated but UK tax resident companies

• To the extent that the developments are at different stages of their lifecycle, it may be possible to surrender losses to be offset against profits arising within the other companies. This does not mitigate the tax due but does defer it

• The SDLT saving for the purchaser remains


De-enveloping existing property structures


De-enveloping

• De-enveloping will remove the ATED cost as well as the costs associated with running an offshore company. The IHT protection will also be lost from April 2017

• However, there are costs:

– SDLT at the rate of up to 15% where debt secured on the property

– Where debt is removed, IHT protection lost – exposure at 40%

– Future purchaser will have to pay SDLT – Company will be treated as disposing the property

for MV consideration – Individual will be treated as having disposed of

the offshore company for consideration equal to the distributed assets (no ability to claim the remittance basis)

The Government have now confirmed that there will be no transitional reliefs

Offshore company

UK property


Incorporation of existing property portfolios


Incorporation a property portfolio • Properties are transferred to a UK company in return for shares

• Reorganisation rules apply such that no capital gain is triggered and the base cost of the properties is

uplifted to market value. The deferred gain will be crystalised upon a future disposal of the shares

• SDLT will arise unless it is a partnership being incorporated - steps can be take to create a partnership and make the position robust prior to incorporation

• Clearance can be sought from HMRC

• Future sale of properties and rental income taxed at the rate of 20% (reducing to 17%). Gain may be minimal due to uplifted base cost. Compared to 28% and 45% where held personally.

• Company could be used as a Family Investment Company going forward


Questions


Contact

Richard Perry Senior Manager T +44 (0)207 728 2626 M +44 777 133 9548 E [email protected]

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Disclaimer At Grant Thornton, we are committed to providing a highly professional service to help all of our clients meet their financial objectives, both business and personal. This seminar is part of our service but is intended only as a guide in highlighting general issues which may be of interest. It is not a substitute for full professional advice and specialist assistance should be sought in relation to any particular circumstances. Accordingly no responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this seminar can be accepted by Grant Thornton. The contents of this presentation is based on our understanding of current legislation and HM Revenue & Custom's practice, which is subject to change.

Documents

Advances in Automatic Exchange of Information – the Common Reporting Standard · 2017-04-24 · • New offence of 'facilitating/enabling' tax evasion • New corporate criminal