The OECD continues to progress the Tax Transparency agenda with an important announcement regarding 20 jurisdictions with tax residence schemes, which may lead to CRS reporting being undermined.
Enhanced due diligence for banks
On 16 October 2018, the OECD published the results of its analysis into the residence and citizenship by investment (CBI/RBI) schemes maintained by some jurisdictions. The OECD have focused on these schemes on the basis that they can be misused by certain account holders or controlling persons (through misrepresentation of an individual’s tax residence), and thus undermine the CRS due diligence processes carried out by financial institutions (FI).
The OECD have identified 20 jurisdictions as making available CBI/RBI schemes which they have determined lead to a high risk of undermining CRS reporting. The list of jurisdictions includes Cyprus, Malta, Panama and the United Arab Emirates. The main criteria for identifying a scheme as being high risk are (i) it gives a taxpayer access to a low personal income tax rate of less than 10% on offshore financial assets and (ii) it does not require significant physical presence of at least 90 days in the jurisdiction offering the CBI/RBI scheme.
The OECD has also issued guidance regarding the steps that financial institutions should take to enhance due diligence regarding account holders/controlling persons claiming tax residence in these countries.
If a FI has a doubt that the account holder or controlling person is claiming residence in a jurisdiction offering a potentially high-risk CBI/RBI scheme, the FI may consider raising further questions, including:
- Did you obtain residence rights under a CBI/RBI scheme?
- Do you hold residence rights in any other jurisdiction(s)?
- Have you spent more than 90 days in any other jurisdiction(s) during the previous year?
- In which jurisdiction(s) have you filed personal income tax returns during the previous year?
Subsequent OECD updates
In the past week, the OECD have issued two further press releases on this topic to clarify the objective of their analysis and to inform that certain jurisdictions (including Monaco) have taken sufficient action to be removed from the list of countries with relevant CBI/RBI schemes (leaving only 17 jurisdictions on the OECD list).
Finally, it is expected that the OECD will soon issue their 2018 Implementation Report regarding the Automatic Exchange of Information. This report will likely follow the format of the 2017 report, by providing an overview of the exchanges of information in 2018 as well as the outlook for 2019.
The full OECD/ CBI press releases can be found here.
Closing remarks
Although these developments are issued from the OECD and thus are not included in local CRS legislation in any country, they are indicative of the direction that the OECD wishes CRS due diligence to travel in the near future.
Any such requirements to introduce enhanced due diligence will put additional operational pressure on banks and other financial institutions. This demonstrates that CRS obligations will continue to grow for Swiss FIs even though the initial reporting has been completed this year. We will continue to keep you informed on developments regarding operational taxes as they arise.
