4 August 2022
International Common Reporting Standard
How CRS will Affect You When you Open an Offshore Account
Are Tax Havens (and all they could do for you) dead? No, they aren’t. It’s simply the meaning of Tax Haven that has changed. With the widespread adoption of the Common Reporting Standard (CRS), a Tax Haven is now a jurisdiction that offers legal, ethical, and transparent tax benefits.
What is CRS?
Instituted by the Organization of Economic Co-operation and Development (OECD) in 2014, the CRS is a standardized reporting structure for exchanging financial information between OECD member countries around the globe.
CRS was developed on the back of the US implementation of the bilateral Foreign Account Tax Compliance Act (FATCA) in combating offshore tax avoidance by US citizens.
It was also instituted in response to G20 demands for structures of accountability in global offshore banking. This was a result of widespread tax evasion, by both corporate entities and individuals, through international corporate structuring and tax domiciling in ‘tax haven’ jurisdictions to either pay an ethically questionable level of ‘less tax’ or avoid paying taxes altogether.
Essential Points about CRS Compliance in ‘former Tax Havens’ and other OECD member countries:
The requirements for governmental and institutional CRS compliance include:
- The Automatic Exchange of Account Information (AEOI)
- Adherence to a standard set of due diligence procedures that must be undertaken by all Reporting Financial Institutions (RFIs)
- Broad reporting by all financial institutions that deal with foreign account holders or resident account holders who are tax residents of other countries.
- Adherence to a reporting structure that complies with CRS minimum compliance frameworks and guidelines as to what financial institutions are required to be RFIs, and how each jurisdiction and each RFI should implement CRS – taking local regulations into account
What is the OECD?
The Organization of Economic Co-operation and Development (OECD) was created in 1961 to promote global economic cooperation and growth. In 2022, the OECD has a membership of over 120 countries worldwide – including all the so-called ‘Tax Haven’ countries, such as the Cayman Islands. Not all member countries have tax information exchange agreements, but such contracts are actively encouraged by the OECD as part of their commitment to the principles behind CRS.
Download the complete list of OECD countries that do have Bilateral Agreements.
What is the difference between FATCA and CRS?
Instituted in 2010, FATCA (Foreign Account Tax Compliance Act) provides for the intergovernmental tax information exchange between the US and any country where a US citizen can open a bank account. US Citizens who are tax residents of other countries must comply with FATCA, as must all financial institutions that deal with them. The only way to avoid FATCA reporting is by renouncing US citizenship and becoming both a tax resident and a citizen of another or other jurisdictions.
CRS was developed to exchange financial information between two or multiple OECD member countries for taxation purposes. CRS was predicated on FATCA. However, FATCA only required compliance and reporting of financial information for US citizens banking abroad.
This information is provided AUTOMATICALLY between countries that have bilateral agreements – as with FATCA. However, while The OECD recommends that all member jurisdictions do the same, countries that do not have bilateral agreements are subject to CRS recommendations (and so pressure) for automatic reporting through the OECD’s ‘Multilateral Convention on Mutual Administrative Assistance on Tax Matters.
How does this affect you when you open an Offshore Account?
Your offshore bank will require you to complete the CRS Self-Certification documentation to record information about your tax residency. This includes Self-Certification Forms for ‘Individuals’ (CRS – I), for ‘Entities’ (CRS – E), and for ‘Controlling Persons’ (CRS – CP)
This documentation needs to be supplied annually, and your bank will be required to share this information with the tax authorities in the country where you are a tax resident.
- Financial Institutions in OECD member countries must obtain specific financial information relating to tax residency from account holders when they open the accounts.
- This information must be shared automatically* with the country where the account holder is a tax resident, as opposed to on request in case of an investigation or litigation.
- This information must be shared annually, with CRS forms re-submitted each tax year for automatic annual information exchange.
What does CRS mean for Offshore Banking and the Tax Benefits once offered by ‘Tax Havens’?
Tax planning and global wealth management must now be done with transparency. The onus is now on doing everything legally. CRS does not impact the tax advantages offered by banking offshore in tax-favorable jurisdictions. The global implementation of CRS means that you cannot avoid declaring global income to the country’s tax authorities where you are a tax resident (or citizen in the case of the US).
Banking offshore still offers numerous tax benefits and is an essential tool for global wealth management. Rather than negatively impacting the offshore banking and global wealth management industry, CRS legitimizes the financial structures and strategies offered by offshore banking and the tax advantages offered by ‘tax havens’ countries.