Over the years tax evasion – the practice of actively and purposely escaping paying any tax due – has been closely monitored. Countries and tax authorities have battled to target and catch those who are undertaking any illegal practices, especially in territories which have become notorious for tax evasion. Recently more universal systems have been set up to enable financial institutions to better share information across international borders.
What is the Automatic Exchange of Information?
The Automatic Exchange of Information is a global initiative which gives financial organisations the ability and power to collect, share and report personal financial information.
What is the Common Reporting Standard?
The Common Reporting Standard (CRS) was introduced in 2014 to clarify and standardise the sharing of personal financial information between countries. It is the framework by which the Automatic Exchange of Information is facilitated. There are a handful of different frameworks in place, but CRS is the method adopted by the UK, and most other notable global jurisdictions. It is based on the US Foreign Account Tax Compliance Act (FATCA) and stipulates how information is automatically shared between countries.
More than 100 countries have signed up to the Common Reporting Standard including the UK, all countries in the European Union, China, India, Hong Kong and Russia. The USA is currently not part of this initiative as it has its own regulations.
The CRS also covers:
- Which financial institutions are required make reports
- Who is subject to information exchange
- What procedures need to be followed
Since its inception, anyone who lives, works and/or pays tax in more than one country must comply. With many countries sharing their records, regular reports about British expatriates and UK residents with overseas financial assets are now disclosed to the British tax authorities – HMRC.
Who is affected?
The purpose of CRS and the Automatic Exchange of Information Agreement is to identify those who are avoiding paying tax by using offshore tax havens. The regulations also target those who fail to declare their overseas income in order to avoid paying tax on it.
The Automatic Exchange of Information and Common Reporting Standard can apply to anyone, depending on where you live and your financial transactions. It tends to affect those with a multi-national element to their finances, such as British expatriates. The CRS applies depending on your resident status for tax – in simple terms where you pay income or business taxes. For example if you have a bank account in the UK, but live and pay taxes overseas, then the CRS could be used to enable information about your finances to be shared in both jurisdictions and allow the relevant tax authorities to have a transparent picture about you and any monies or investments you hold.
If CRS does apply your bank or investment facility will have made you aware of the need to share information about your accounts and transactions.
The information which tends to be shared includes:
- Date of birth
- Place of birth
- Country/countries of tax residence
- Tax Identification Number/National Insurance Number (or equivalent where applicable)
- Account details (bank account or similar)
- Annual account balance/value at 31 December including interest
Once the information is received, it is checked against current tax records. Any incorrect declarations can lead to criminal prosecution and a fine of up to 300% of the tax owed.
How is the Automatic Exchange of Information Applied?
There are four key methods by which the Automatic Exchange of Information is applied:
United States Foreign Account Tax Compliance Act (FATCA)
FATCA is the reporting standard which the US tax authorities identify any non-US financial accounts of US resident taxpayers. It’s also applied to US citizens who live outside of the United States who are believed to remain in the US tax net. FATCA is the basis on which other automatic exchange of information standards, including the Common Reporting Standard, are based.
Common Reporting Standard
This is the global standard for automatic exchange and was based on the US FATCA system. More than 100 jurisdictions – including the UK and most EU countries – have adopted the system.
Crown Dependencies and Overseas Territories
All governments in the Crown Dependencies and Overseas Territories, including the UK, Alderney, Guernsey, Jersey, the Isle of Mann, the Cayman Islands, British Virgin Islands and Gibraltar have committed to sharing information using these automatic protocols.
Directive on Administrative Co-Operation
The Directive on Administrative Co-Operation is the EU legislation which governs the automatic exchange of information across all member states.
If you are a British expatriate with accounts in the UK and overseas it is vital that you ensure your tax affairs are in order, with the correct taxes paid in each country. To discuss any aspect of your tax or tax planning please contact your nearest office.