CRS loopholes

Common Reporting Standard Weaknesses These are the most frequently used loopholes used to circumvent the CRS			Level of abuse
1.	Tax havens abuse the bilateral option using subjective, fabricated and fallacious data security concerns, or impose irrelevant preconditions: It is particularly egrigious that the Bahamas uses fake confidentiality concerns to protect its existing offshore industry, but more so, that it is aggressive in attracting new untaxed assets from around the world. It does this under the guise of being a committed CRS participant, but says it has a "unique approach" to implementing AEoI, similar to exchange on demand. Some Jurisdictions who have elected the bilateral route to implement the CRS, are refusing to consider CRS agreements based on fictitious confidentiality concerns. This is despite the update that the Global Forum AEoI Group will undertake assessments of data security and confidentiality of committed jurisdictions, reducing the need for each jurisdiction to conduct its own assessment of the information security practices of each of the many jurisdictions committed to implementing AEoI. Switzerland is similarly selecting only a few jurisdictions to exchange information with, based on inappropriate conditions, such as market access and amnesties. For example: "Bern 06.07.2016 - The eight states and territories fit the profile of countries with which the Federal Council wishes to introduce the automatic exchange of information in accordance with the negotiation mandate of 8 October 2014. They meet the international requirements in terms of tax data confidentiality and offer their taxpayers sufficient scope for regularisation. Moreover, they are prepared to look in more detail at the issue of possible ways of facilitating market access for financial service providers." Solution: The only option legal basis for the CRS should be the Multilateral Convention for Mutual Assistance regarding Tax Matters. The bilateral option should be annulled.	Description: The Bahamas constantly propagandize that they have a "unique approach" to the implementation of the Standard in the best interests of the jurisdiction and the clients they serve. Of utmost importance to The Bahamas is that the receiving country is an "appropriate" country for the receipt of such information, including that such country has in place the safeguards necessary to ensure the confidentiality, safety and proper use of the information exchanged. The Bahamas has elected to use a bilateral approach to implementing the standard "similar to the process of exchange of information upon request or the intergovernmental agreement approach used under FATCA". "The AEoI Standard and the OECD Convention are very different documents and serve different purposes. The AEOI Standard can rely on either a bilateral legal instrument or a multilateral legal instrument as its legal basis. The AEOI Standard sets out the key principles and obligations towards operationalizing the automatic exchange of information from one country to another. Unlike the OECD Convention, the AEOI Standard is not an international legal instrument." The Bahamas government delegations travel globally, sponsoring seminars, attracting new business by assuring financial industry intermediaries that Bahamas will categorically not undertake exchange of information with many countries, especially Latin America, due to bogus security concerns. "The Bahamas has chosen to embrace AEoI by entering into such treaties on a bilateral basis rather than a multilateral one. Adopting the latter approach could overwhelm the Bahamas, as it would require this nation to enter into multiple automatic TIEA agreements with different countries simultaneously. And these nations may include countries that *could misuse, or be incapable of protecting*, the private financial data belonging to high net worth clients of the Bahamian financial services industry. These concerns explain why the Bahamas has decided to embrace automatic tax information exchange on a bilateral - not a multilateral - basis".	Extremely Serious Undermines CRS in much of the world
2.	Residence planning: Fictitious tax residence certificates issued by non taxed countries, or customers with multi-jurisdiction residences certifying only territorial tax place of residence. Solution: Deeming all previous residence within the last ten years as indicia of current residence. Incorrect deemed residencies can be cured with documentation such as tax clearance certificate.	Description: To nullify the effects of AEoI, persons are obtaining tax residence certificates from jurisdictions with no tax, territorial tax, or tax holidays such as Hong Kong, Monaco, Dubai, Bahamas, Portugal, Antigua, Gibraltar, UK non-doms, etc. Alternatively, account holders are donating their assets to family members recently moved to such jurisdictions.	Extremely Serious Most commonly method to avoid the CRS
3.	Financial Institutions earn advisory fees through subsidiaries on non participating assets Financial Institution has a 3rd party advise prospect client to open an account with unrelated Custodial Institution in a non-participating jurisdiction. The flaw in this strategy is the FI motivation is to continue earning advisor fees. This is usually through a subsidiary wealth manager, resident in [a] participating jurisdiction, or [b] in the non participating jurisdiction. Solution: An entity should be a Custodial Institution if it directly or indirectly (via a subsidiary) earns advisory fees on non participating jurisdiction assets and it directly or indirectly (via a parent) has the potential to hold the assets. The account in the non participating jurisdiction should be deemed the Custodial Account, and : If the wealth manager is in a participating jurisdiction it is deemed a Custodial Institution, else If the wealth manager is in a non participating jurisdiction, the parent is deemed the Custodial Institution. The Custodial Institution can appoint a 3rd party to do the reporting. The concept of deeming a Custodial Institution if having the "potential to hold assets, and not actually holding the assets" is derived from CRS Commentary Page 160 Par(10): Income attributable to holding Financial Assets and related financial services by a Custodial Institution - "fees for providing financial advice with respect to Financial Assets held in (or potentially to be held* in) custody by the entity."*		Very Serious Although not widely practised, involves billions
4.	Irrevocable insurance wrapper: Insurers have recently created non-reportable non-cash value insurance wrappers. The policy holder is prohibited from monetizing the policy assets and the only benefit available is the mortality pay out. Solution: All investment-linked policies should be in scope, cash value or non cash value.	Description: Some insurers are issuing non-cash value policies by stipulating the policy holder cannot monetize their policy disallowing surrenders, withdrawals, pledging or assignment. This is equivalent to an irrevocable trust.	VerySerious Credible loophole as gobally well known insurer providing this product
5.	Unsupervised, untaxed Investment Entities not reporting: Unsupervised, untaxed Investment Entities should not be entrusted with reporting obligations: Untaxed Investment Entities are often deliberately structured so that the management is in the same jurisdiction as the beneficial owner. This is because Investment Entities only report on beneficiaries resident in jurisdictions different to the management. In any event, it is highly unlikely that an untaxed Investment Entity will report if is owned and manged by a tax evader. This loophole was covered by the EU Savings Tax Directive by obliging the economic operator reporting payments made to untaxed Paying Agents Upon Receipt. The CRS fails in emulating this because the Investment Entity as account holder is a non-reportable person. Solution: Effectively untaxed, unsupervised entities cannot be Investment Entities.	Description: For example: German resident with a BVI company holds a Liechtenstein bank account. The LI bank manages the investments of the account. German resident is manager and owner of the BVI company. The BVI company is therefore tax resident in Germany. The BVI company is a Financial Institution of the type Investment Entity because its assets are managed by a FI and it earns income from financial assets. Therefore: The LI bank will not report on the account holder as the Investment Entity is a non reportable person. Furthermore, the Investment Entity will not report on the German beneficial owner because the BVI company and beneficial owner are tax resident in same jurisdiction, viz. Germany. Another example: it is rampant for Mexicans to establish a Canadian LLP, where Mexicans are both the Managing Partner and General Partner. There will be no reporting by the LLP because the management and beneficial owners are in the same jurisdiction. Alternatively, the bank maintaining the LLP's assets will not report on the LLP as account holder because it is an Investment Entity non-reportable person.
6.	Insurance effectively prohibited from being sold: For pre-existing individual accounts, insurance contracts which is effectively prohibited from being sold, is exempt from reporting, despite these policies existing for numerous reasons. Solution: Repeal the exemption from due diligence of pre-existing individuals for policies which are effectively prohibited from being sold.	Description: Examples of prohibited insurance are: Spanish client goes to Andorra to buy an insurance wrapper, even though EU forbids Andorra insurers marketing in Spain. Mexican subscribes for a local insurance wrapper and subsequently moves to Europe Client uses an entity in tax haven to subscribe for a cash value policy, and then assigns the policy to himself before dissolving the entity. This is equivalent to the EU Savings Tax Directive’s loophole exempting non-UCITs because it was thought those funds could not be sold across borders.
7.	Trusts exploiting the exclusion of Active NFE holding companies from being an Investment Entity: There is industry interpretion that trusts owning Active NFE holding companies are non-reportable Active NFE holding companies. Solution: It should be clarified that the exemption of Active NFE holding Companies from being Investment Entities does not apply to trusts which own holding companies.	Description: Trusts owning holding companies are exploiting the exemption of Active NFE holding companies from being an Investment Entity. Trusts claim they indirectly hold through the holding company the subsidiary entities that do business or trade. It is questionable if a trust owning a holding company should be regarded as a holding company because a trust has a different purpose to a holding company. The OECD FAQ clarified that collective investments cannot be Active holding company NFEs because they have a different purpose. The same logic excluding trusts from being a holding company should apply as they have a different purpose.
8.	Trusts providing loans in lieu of reportable distributions: Solution: Credit Interest in an Investment Entity should be a Financial Account, subject to review in addition to Debt and Equity interest.	Description: Trust provides a loan to to beneficiary, which will never be repaid. Loans are not regarded as distributions in the CRS.
9.	Camouflaging investments in certain untaxed Active Non Financial Entities: The CRS exempts reporting untaxed entities if they are Active NFEs. Owners of untaxed Active NFEs can therefore hide their private investments within their Active NFE, without being reported. The EU Saving Tax Directive covered any entity that was untaxed, irrespective it was an Active or passive entity. Solution: Controlling persons of untaxed Active NFE (of the type 50% assets and 50% income) should be reportable persons.	Description: For instance, Greek shippers with offshore Active Non Financial Entities, embed financial investments within their treasury centres.
10.	There are twelve more loopholes, which I will elucidate here when I have time