Analysis of Common Reporting Standard Loopholes



Website updated 19 October 2018

19 Oct 2018 China detains Ms. Rebecca Lin, Singapore based Executive Director, UBS for assisting covert illegal outflows of Chinese residents as well as establishing CRS avoidance structures, such as non reporting Investment Entities. Many other International banks such as Julius Baer plying their international wealth management trade to Chinese residents have recalled staff travelling to China and forbade future travel. No doubt China will get UBS to divulge names of Chinese resident clients. This puts a bit of a damper on Singapoer and Hong Kong bankers assisting Chinese residents. Co-incidentally, China government this week mandatred all lawyers and other advisors to divulge names of clients they assiste dto obtain foreign residence or citizenship by investment. Tied with te OECD announcement this week on addressing residence by investment schemes, one can expect a sudden end to residence by investment schemes being sold in China.


OECD clamps down on residence by investment schmemes. OECD publishes initiative against 21 blacklisted jurisdictions providing residence and investment by investment schemes.


HK repeals non reporting FI status for ORSOs. In December 2017, the OECD conducted an assessment on Hong Kong’s inclusion of Mandatory Provident Fund schemes, ORSO registered schemes, ORSO pooling agreements and approved pooled investment funds as jurisdiction-specific low-risk non-reporting financial institutions and concluded that these entities should not be considered as NRFIs. To meet the international requirements, the Government will commence a legislative amendment exercise to remove these entities from the list of NRFIs under the Inland Revenue Ordinance.
Gibraltar pension plans next on the chopping block: Gibraltar trustee based pension segergated saving shams have not yet adopted the OECD updated CRS FAQ in June 2018, that compartmentalised savings accounts do not qualify as being equivalent to Broad Participation Retirement Plans, and hence do not qualify as non reporting FIs, which Gibraltar trustees promote in their marketing material.


Non cash value insurance policies loopholes closed: Life insurance Asian subsidiaries of insurers based in Switzerland and UK overseas territory, Bahamas insurers have exploited the non cash value insurance policy. These insurers ensured the policyholders signed a confidential rider that they could no longer access the policy assets. In effect, converting the policies to irrevocable non cash value policies, which were out of scope of the CRS. The June 2018 OECD CRS FAQ update mandates that if no-one can access the policy assets, then the reportable person will be the policy owner. It will be interesting to see how these policyholders pay taxes on the previously undeclared insurance policy assets as the policy is irrevocable.


OECD reviewing the recent practise of listing private investment companies on small stock exchanges such as Malta and Dutch Caribbean exchange,, without any trading occuring, to exploit the FATF AML rules taht FIs do not have to identify beneficial owners of listed entities. CRS can override this by requiring FIs to identify significant shareholders owning more than 5% by obtaining this info directly from stock exchange.


OECD reviewing jurisdiction CRS guidance which wrongly opine that cash is not a financial asset, merely because it was omitte dfrom the CRS list of financial assets. This affects teh categorisation of Active NFE type A and investment entities.


Latest Questions Sent by web visitors for issues to be covered in CRS TIMES newsletters

1.
Investment Entity failing income test: If a collective investment has not earned anything since inception, will the fund qualify as an Investment Entity or is it a Passive NFE becauyse it fails the income test?
2.
Interest as Active Income: Is interest earned by a microfinance business passive income or active income.
3.
Ignoring OECD closure of loopholes via FAQ: OECD closes a CRS loophole via FAQ updates, e.g. segregated savings plans, irrevocable insurance. Can domestic law non reporting FI ignore this if the jurisdiction where FI is based does not refer to the FAQ and Implementation Handbook as being legislation to follow.
4.
Holding FIs as Active NFE: As corporate trustee, can we categorize our trust as an Active NFEs if the trust holds subsidiaries engaged in business.
5.
Entity with dual tax residency: How do we treat entity account holders which have dual residencies due to place of incorporation and different place of effective management. Where is such entity located as an investment entity.
6.
Fake residency: How will OECD oblige FIs to determine genuine tax residence of individuals, to address their concerns on abuse of residence by investment (RbI) by black listed jurisdiction such as UAE, Malta, St. Kitts, etc. Will utility bills from RbI black-listed jurisdictions no longer be used for due diligence.
7.
Intangible assets in balance sheet:, can an NFE load their balance sheet with intangible assets, such as IP, to pass the asset test as an Active NFE type [A] business, assuming they earn non-financial income such as commissions.
8.
Halt look-through of nominee: Can a non-participating nominee change its-self into a non reportable custodial institution
9.
Halt reporting on controlling persons: Is it possible to not report on reportable controlling persons of a Passive NFE by simple restructuring
10.
Listing: Is a public company on Malta exchange an Active NFE or a non-reportable person or both



OECD Publications on CRS



Common Reporting Standard and Commentary


Second edition of Implementation Handbook provides new guidance related to effective implementation.


CRS-related Frequently Asked Questions


List of jurisdictions committing to CRS by 2020, including developing members of Global Transparency Forum but not yet set the date for automatic exchange.
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List of signatories of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and intended Information Exchange Date.


Pascal Saint Amans quoted that the Model Disclosure Rules will be submitted to the G7 presidency and are part of a wider strategy of the OECD to monitor and act upon tendencies in the market that try to avoid CRS reporting and hide assets offshore.


Mandatory Disclosure Rules on avoidance of CRS
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List of members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.
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List by jurisdiction of specific the steps taken and choices made in the context of implementing the Standard.


Definition of tax residency rules for individuals and entities by jurisdiction.

Breakdown of updates by country
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CRS Guidance by Jurisdictionas per OECD AEoI Exchange Portal.

Not yet updated by OECD
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Tax Identification Number rules and formats by Jurisdiction as per OECD AEoI Exchange Portal.


Newsworthy Updates


  • 19 October 2018 * China detains Ms. Rebecca Lin, Singapore based Executive Director, UBS for assisting covert outflows of Chinese residents as well as establishing CRS avoidance structures. Subsequently, other International banks such as Julius Baer, plying similar wealth management trade to Chinese residents have recalled staff travelling to China and forbade future travel.
  • 16 October 2018 * OECD OECD publishes initiative against 21 blacklisted jurisdictions providing residence and investment by investment schemes used to circumvent CRS.
  • 9 October 2018 * OECD updates list of 107 jurisdictions committed to CRS by 2020 and 42 Global Forum Members but not yet set date to implement automatic exchange of Financial Account Information
  • 18 September 2018 * Hong Kong revokes non reporting FI status for providers of ORSO pension plans
  • 15 September 2018 * Update 153 members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes
  • 14 September 2018 * Update format of Tax Identification Numbers by jurisdiction
  • 31 August 2018 * IRS publishes Revenue Procedure 2018-36 list of jurisdictions to reciprocate interest data to countries deemed safe, ignoring FATCA limited reciprocal data promises.
  • 7 August 2018 * Update 103 signatories of the Multilateral Competent Authority Agreement
  • 5 July 2018 * EU votes for a resolution for EU Members to suspend FATCA due to non reciprocity
  • 4 June 2018 CRS FAQ update closes loopholes concerning Hong Kong ORSO, Gibraltar QNUPS and other trust-based retirement funds, as well as irrevocable insurance.
  • 31 May 2018 * EU Commission Director General Taxation warns USA will be blacklisted in 2019 if it does not adopt CRS. Three out of seven blacklisted nations are US territories
  • 25 May 2018 * EU Council updates uncooperative tax havens list - blacklists 7 and greylists 65 jurisdictions
  • 19 April 2018 * OECD publishes feedback on abuse of residence consultation
  • 17 April 2018 * OECD publishes Public Comments on Consultation on abuse of residence by investment schemes.
  • 6 April 2018 * 2nd OECD CRS Implementation Handbook
  • 3 April 2018 * US Supreme Court declines to listen to case from 6th circuit court of appeals court unsuccesful effort to repeal FATCA
  • 29 March 2018 * Determine tax residences based on Centre of vital Interest
  • 13 March 2018 * EU Council amends Mutual Assistance and Cooperation Directive (DAC) to EU Council amending DACM include OECD MDR for addressing CRS avoidance arrangements and offshore structures (see pg. 38).
  • 10 March 2018 * OECD releases final Mandatory Disclosure Rules
  • 9 March 2018 * OECD MDR PDF document FAQ on Mandatory Disclosure Rules.

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