Tax Planning

Does cross-border tax planning stand as much as scrutiny?

There has never been as much tax transparency as there is today. With the Common Reporting Standard (CRS) now in full swing, tax offices around the world are tracking taxpayers’ offshore assets and accounts through the automatic exchange of information.

And they’re increasingly starting to pursue disagreements, warns Jason Porter, director at Blevins Franks.

In the case of the UK tax officer, where the declarations did not match the offshore information received from CRS, they sent out “nudge letters”.

These will cause taxpayers to review and correct information on overseas income and profits in their UK tax records or possibly undergo a tax investigation.

“Legitimate cross-border tax planning has always been vital,” Porter said.

“With these tightened controls around the world, however, it is more important than ever to ensure that the right taxes are paid in the right place at the right time. If something goes wrong – even unintentionally – the penalties can be severe. “

Four years later

CRS went into effect in 2016 when early adopters started collecting information about financial accounts from foreigners.

The first actual exchange took place in 2017 between 49 jurisdictions; including UK, Spain, France, Portugal, Cyprus and Malta.

Today over 100 countries work together.

In 2019 alone, they shared details of 84 million offshore accounts with total assets of EUR 10 billion (GBP 9.07 billion, USD 12.1 billion).

Financial institutions that are required to report information each year include banks, custodians, certain investment and insurance companies, trusts and foundations.

In addition to basic contact details, the country of tax residence and tax identification number, the focus is on financial assets outside the country of residence.

This includes investment income (interest, dividends, income from certain insurance contracts, annuities, etc.), account balances and gross proceeds from the sale of financial assets.

When local tax offices receive CRS information, they can easily verify that taxpayers have correctly reported their worldwide income through their income tax and, if applicable, wealth tax returns.

Harsher penalties

In the past decade the UK government has put in place over 100 measures and 200 task forces aimed at tax avoidance.

Today, CRS plays an important role in the finance officer’s strategy. With the “Connect” analysis program, it can compare data received from abroad with its own data (including information on salaries, bank accounts, loans, real estate, car ownership, etc.).

In 2018/19, HMRC received £ 560m from offshore tax investigations – 72% more than the year before CRS data collection began.

Recent harsher penalties for undeclared offshore income and profits include an unlimited fine and up to six months’ imprisonment.

The UK budget of March 2020 allocated additional funds, staff and resources to further develop the tax evasion audit.

To prevent aggressive tax planning and to expose information that is not normally collected through CRS, the EU has introduced new reporting requirements for cross-border tax regimes from consultants, accountants and other third party professionals.

“While the EU directive known as DAC6 has been incorporated into UK law and was due to come into force on July 1, 2020, the EU has delayed it for up to six months due to the coronavirus pandemic,” Porter said.

“If it starts in 2021, relevant cross-border activities dating back to June 25, 2018 – including certain agreements with companies and trusts – will need to be declared by intermediaries across the EU.

“Despite Brexit, the UK is likely to honor its commitments to gather and share relevant information under DAC6 in order to fight tax evasion.”

No license after Brexit

If a customer is a tax resident in one country and has assets or is earning income in another, use extreme caution. You will need to follow local tax rules, UK tax rules and also the relevant double taxation treaty to ensure you are correctly reporting income and paying taxes where they should be.

“While cross-border taxes are very complex, if you get it wrong for any reason, it can have serious consequences,” Porter said. “Ignorance is not a defense; Worldwide assets have to be declared and the tax situation has to be updated. “

“Also note that many UK-based banks, consultants and financial service providers will lose their license to operate in the EU after the Brexit transition period ends.”

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