1. The OECD has published a public discussion draft for Mandatory Disclosure Rules for Addressing CRS Avoidance Arrangements and Offshore Structures.

The model rules require an Intermediary (or taxpayer) to disclose certain relevant informationto its tax administration regarding (i) CRS Avoidance Arrangements and (ii) Opaque Offshore Structures. Disclosures of such information can assist tax administrations in gathering intelligence on schemes that are being used or marketed to taxpayers in their respective jurisdictions. Further, the model rules were designed to facilitate the spontaneous exchange of information where the information provided by Intermediaries relates to one or more specific Reportable Taxpayers. It is contemplated that such information would be spontaneously exchanged with the tax administration of the jurisdictions in which the concerned Reportable Taxpayer is resident for tax purposes pursuant to the applicable international legal instruments.

The OECD MDR will be virtually ineffective because the rules can only be effective in the first quarter of 2018 at the earliest. As the CRS will be fully implemented by then, no intermediary will be promoting any CRS avoidance scheme. Consequently, the OECD has proposed the mandatory disclosure rules and associated penalties for non-compliance be retroactive since July 2014, when the CRS draft was initially published.

However, most countries adopting the CRS have unambiguous legislation which absolutely prohibit retroactive legislation. Therefore it will be impossible to apply penalties on non compliant intermediaries.

Furthermore, the OECD MDR rules do not apply to intermediaries based in non-CRS territories.

Finally, the MDR does not oblige lawyers to report on taxpayers they consulted with on CRS avoidance arrangements.
3. Ex post facto law - retroactive rule possible?

The OECD would like countries to mandate reporting rules and imposing penalty for non compiance via retroactive legislation. A Promoter shall disclose a CRS Avoidance Arrangement within 180 days of the effective date of these rules where:
  1. that Arrangement was implemented on or after 15 July 2014 but before the effective date of these rules; and
  2. that person was a Promoter in respect of that Arrangement; irrespective of whether that person provides Relevant Services in respect of that Arrangement after the effective date.

Ex post facto laws are expressely forbidden in many countries
Ex Post facto law forbidden in several common law countries

An ex post facto law retroactively changes the legal consequences (or status) of actions that were committed, or relationships that existed, before the enactment of the law. In criminal law, it may criminalize actions that were legal when committed; it may aggravate a crime by bringing it into a more severe category than it was in when it was committed; it may change the punishment prescribed for a crime, as by adding new penalties or extending sentences; or it may alter the rules of evidence in order to make conviction for a crime likelier than it would have been when the deed was committed. Conversely, a form of ex post facto law commonly called an amnesty law may decriminalize certain acts. A pardon has a similar effect, in a specific case instead of a class of cases. Other legal changes may alleviate possible punishments (for example by replacing the death sentence with lifelong imprisonment) retroactively.

A law may have an ex post facto effect without being technically ex post facto. For example, when a previous law is repealed or otherwise nullified, it is no longer applicable to situations to which it had been, even if such situations arose before the law was voided.

Some common-law jurisdictions do not permit retroactive criminal legislation, though new precedent generally applies to events that occurred before the judicial decision. Ex post facto laws are expressly forbidden by the United States Constitution. In a nation with an entrenched bill of rights or a written constitution, ex post facto legislation may be prohibited.

  • Brazil: According to the 5th Article, of the Constitution, laws cannot have "ex post facto" effects
  • Canada: ex post facto criminal laws are constitutionally prohibited by the Charter of Rights and Freedoms.
  • China: Laws, administrative regulations, local regulations, autonomous regulations, separate regulations and rules shall not be retroactive, but the regulations formulated specially for the purpose of better protecting the rights and interests of citizens, legal persons and other organizations are excepted.
  • Germany: Article 103 of the German basic law requires that an act may be punished only if it has already been punishable by law at the time it was committed
  • Hong Kong: In November 2016 The Court of Appeal cited a 1999 case from the Court of Final Appeal, where it was held that Beijing’s interpretations of the Basic Law have a retroactive effect
  • India No person shall be convicted of any offence except for violation of a law in force at the time of the commission of the act charged as an offence
  • Indonesia: The constitution prohibits trying citizens under retroactive laws in any circumstance
  • Ireland: The imposition of retroactive criminal sanctions is prohibited by Article 15 of the Irish constitution. Retroactive changes of the civil law have also been found to violate the constitution
  • Italy: The Constitution, establishes that "nobody can be punished but according to a law come into force before the deed was committed", prohibits indictment pursuant a retroactive law
  • Japan: Article 39 of the constitution prohibits the retroactive application of laws
  • Mexico: According to the first and second paragraphs of the Article 14th of the Mexican Constitution, retroactive application of the law is prohibited if it is on detriment of a person rights
  • Montenegro: Prohibition of ex posto facto effect (retroactive effect) Article 147 Law and other regulation shall not have retroactive effect. Exceptionally, if required so by the public interest established in the process of law adoption, individual provisions of the law may have retroactive effect. Provision of the Criminal code may have retroactive effect only if it is more lenient for the perpetrator of a criminal offense.
  • Netherlands: Article 4 of the Law on General Provisions states that "The law has no retroactive effect"
  • New Zealand. Section 7 of the Interpretation Act 1999 stipulates that enactments do not have retrospective effect
  • Norway: Article 97 of the Norwegian constitution prohibits any law to be given retroactive effect. The prohibition applies to both criminal and civil laws
  • Pakistan: Article 12 of the constitution of Pakistan prohibits any law to be given retroactive effect
  • Philippines: The 1987 Constitution of the Philippines categorically prohibits the passing of any ex post facto law
  • Poland Retroactive application of law is prohibited by the Article 3 of the Polish civil code, and the legal rule prohibiting such retroactive application
  • Portugal: Article 18 of the constitution forbids the retroactive application of any law the restricts right; article 29 of the Portuguese Constitution forbids retroactive application of criminal law; article 103 forbids the application of retroactive taxes
  • Romania: Article 15 of the constitution provides that the law shall only act for the future, except for the more favourable criminal or administrative law
  • Russia: Ex post facto punishment in criminal and administrative law is prohibited by article 54 of the constitution; ex post facto tax laws by article 57 of the constitution
  • Spain: Article 9.3 of the Constitution guarantees the principle of non-retroactivity of punitive provisions that are not favorable to or restrictive of individual rights. Therefore, "ex post facto" criminal laws or any other retroactive punitive provisions are constitutionally prohibited
  • South Africa: Section 35 of the Bill of Rights prohibits ex post facto criminal laws, except that acts which violated international law at the time they were committed may be prosecuted even if they were not illegal under national law at the time. It also prohibits retroactive increases of criminal punishments
  • Sweden: Retroactive penal sanctions and other retroactive legal effects of criminal acts due the State are prohibited by chapter 2, section 10 of the Instrument of Government. Retroactive taxes or charges are not prohibited, but they can have retroactive effect reaching back only to the time when a new tax bill was proposed by the government. The retroactive effect of a tax or charge thus reaches from that time until the bill is passed by the parliament.
  • Switzerland: As a civil law jurisdiction, as a matter of general principle, laws are not passed and enacted with retroactive effect. There are, however, exceptions such as pertaining to marriage.
  • United Kingdom: Ex post facto laws are frowned upon, but are permitted by virtue of the doctrine of parliamentary sovereignty. Taxation law has on multiple occasions been changed to retrospectively disallow tax avoidance schemes. This means Parliament would have to amend the OECD law to be retroactive.
  • United States: Congress is prohibited from passing ex post facto laws by clause 3 of Article I, Section 9 of the Constitution

Treatment by International Organisations and Treaties

  • Universal Declaration of Human Rights and related treaties: Article 11, paragraph 2 of the Universal Declaration of Human Rights provides that no person be held guilty of any criminal law that did not exist at the time of offence nor suffer any penalty heavier than what existed at the time of offence.
  • European Convention on Human Rights: Effectively all European states (except Belarus), including all European Union and European Economic Area states, are bound by the European Convention on Human Rights. Article 7 of the convention mirrors the language of both paragraphs of Article 15 of the International Covenant on Political and Civil Rights.

The Mandatory Disclosure Rules (MDR) exemptions:

  1. Intermediaries with client-attorney confidential privelege do not have to report on the clients they advise.
    • However the lawyer would have to report and descibe the arrangement that avoids CRS without naming the taxpayer client.
    • The taxpayer client would have to self report the use of such arrangement, provided that no disclosure shall be required to the extent it would infringe that person’s privilege against self-incrimination under domestic law.

  2. Foreign intermediaries, that are incorporated, resident, managed, controlled or established in a non-CRS jurisdiction.
    • Intermediary from Kazakhstan meets Brazilian taxpayer in say, Brazil promoting the use of a Kazakhstan stockbroker to avoid CRS. The MDR does not and obviously cannot apply to the foreign intermediary.
    • Furthermore, the taxpayer using such arrangement promoted/ designed by the foreign intermediary does not fall in scope of the MDR and does not have to self report, unlike the prior point, when a CRS jurisdiction lawyer promotes such an arrangement.

  3. Institution Investor owned Offshore Structures are not Opaque Offshore Structures
    • A vehicle which is 100% owned by an entity that is regulated as a depositary or custodial institution, insurance company, collective investment vehicle or pension fund is not an opaque offshore structure.

  4. Service providers who passively act upon instruction of client to transfer to new arrangement
    • For instance transfer shares to a new entity
    • Unless the service provider reasonably knows the arrangement is used to avoid CRS
5. CRS Avoidance Arrangements

An arrangement will be treated as circumventing CRS where it avoids the reporting of CRS information, including:
  • exploiting the absence of CRS Legislation or adequate implementation of such legislation
  • exploiting the absence of a CRS exchange agreement with one or more jurisdiction(s) of residence of such taxpayer
  • undermining or exploiting weaknesses in the due diligence procedures applied by a Financial Institution under CRS Legislation
  • otherwise undermining the intended policy of the CRS

Examples of CRS Avoidance Arrangements

  1. Financial investments that are not Financial Accounts.
    • e.g. e-money, derivatives
  2. Arrangements to transfer funds outside the scope of CRS reporting
    • e.g. arrangements that shift money or otherfinancial assets to financial institutions or accounts that are not subject to CRS reporting. Unlike the first hallmark which focuses on the specific features of the product that take it outside the legal scope of the CRS, this hallmark looks to the jurisdiction where the financial product is offered and the domestic exemptions from reporting within that jurisdiction to identify arrangements that give rise to CRS avoidance risks. This hallmark would include moving money to a bank in a jurisdiction that is not exchanging CRS information with the taxpayer’s country of residence for tax purposes
      This hallmark would not capture a financial institution that simply transferred money between accounts or to an account at another bank in accordance with the instructions from its customer. Such a transfer would not, by itself, be sufficient evidence of an arrangement between the bank and the customer to circumvent CRS legislation (or to exploit the absence of such legislation). Even if the transfer formed part of a CRS Avoidance Arrangement between the customer and a third party promoter, the bank would not be an “Intermediary” in respect of the arrangement under Chapter 3 unless it could reasonably be expected to know of that arrangement and its CRS implications. The specific hallmark would apply, however, if the bank, in its role as an investment manager, advised the customer to move the funds to another jurisdiction or account in order to escape CRS reporting.
  3. Arrangements undermining the effectiveness of and exploiting weaknesses in due diligence procedures
    • Arrangements that disguise the identity of the Account Holder or Controlling Person
    • Arrangements that disguise the residency of account holders and Controlling Persons
    • Exploiting Active NFE status or avoiding Controlling Person status
    • Non-reportable payments to an Account Holder
6. Surprising arrangements in scope of MDR:

Reporting rules are retroactive as from July 2014
  • A Promoter shall disclose a CRS Avoidance Arrangement where that Arrangement was implemented on or after 15 July 2014 but before the effective date of these rules
  1. Converting Financial Accounts to Financial Investments
    • E-money and derivatives are specifically mentioned.
    • Will this be extended to include investment properties?
  2. Converting Reporting FI to non-reporting NFE
    • For instance trusts that do not take income
  3. Moving assets to non CRS jurisdiction
    • This broadens the CRS where non CRS jurisdictions remain in scope if the FI maintains relationship with client as if client never left
  4. Manipulating Passive NFE into Active NFE
    • This reduces Active NFE to entities that don't have equipment, assets, employees and staff
  5. Transfer to non reporting FI
    • This would include domestic low-risk FIs such as pension plans that are not intened to be exempt
7. Opaque Offshore Structure

An Opaque Offshore Structure means a Passive Offshore Vehicle that is held through an Opaque Ownership Structure.

A Passive Offshore Vehicle means an offshore legal person or legal arrangement that does not carry on a substantive economic activity that is supported by staff, equipment, assets and premises. A Vehicle will be treated as offshore if it is incorporated, resident, managed, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the Beneficial Owners and an offshore jurisdiction is any jurisdiction where such Vehicle is incorporated, resident, managed and controlled or established.

Exclusion: A Passive Offshore Vehicle does not include a legal person or legal arrangement that is an Institutional Investor or that is wholly owned by one or more Institutional Investors.

An Opaque Ownership Structure is an Ownership Structure for which it is reasonable to conclude that it is designed to have, marketed as having, or has the effect of allowing a natural person to be a Beneficial Owner of a Passive Offshore Vehicle while obscuring such person’s Beneficial Ownership or creating the appearance that such person is not a Beneficial Owner. An Opaque Ownership Structure includes, but is not limited to, a structure that has one or more of the following features:
  • the use of nominee shareholders with undisclosed nominators
  • the use of means of indirect control beyond formal ownership
  • the use of arrangements that provide a natural person with access to assets held by, or income derived from the Ownership Structure without being identified as a Beneficial Owner of such structure
  • the use of Legal Persons in a jurisdiction where there is:
    1. no requirement and/or mechanism to keep Basic Information and Beneficial Owner information on such Legal Persons accurate and up to date
    2. no obligation on shareholders or members of such Legal Persons to disclose the names of persons on whose behalf shares are held; or
    3. no obligation on shareholders or members to notify such Legal Persons of any changes in ownership or control
Institutional Investor means a Legal Person or Legal Arrangement:
  1. that is regulated as a bank (including a depositary or custodial institution), insurance company, collective investment vehicle or pension fund
  2. the shares or interests in which are regularly traded on an established securities market
  3. that is a governmental entity, central bank, international or supranational organisation or a legal person or legal arrangement wholly owned by one or more of the foregoing

Passive Offshore Vehicle: A passive entity is one that does not carry on a substantive economic activity that is supported by (i) staff, (ii) equipment, (iii)assets and (iv) premises. All four elements must be satisfied in order for an offshore vehicle to be treated as active (and therefore outside the scope of hallmark) under this test. A passive entity would, for example, include an entity that merely leased a furnished apartment but it would not include a hotel where the entity directly employed staff that supplied reception and other services to guests on the premises. An offshore entity established in Country A that invoices a related company for services supplied by a contractor in Country B would be considered passive under the definition.

Opaque Ownership Structure: A passive offshore vehicle will be treated as held through an opaque ownership structure where the ownership of the vehicle is structured in such a way as to obscure a person's beneficial ownership in that vehicle or create the appearance that such person is not the beneficial owner.
  • Use of Nominee Shareholders with Undisclosed Nominators
  • Indirect control beyond formal ownership
  • Arrangements that provide a person with access to assets or income without being identified as the Beneficial Owner
8. Intermediaries:

The MDR model mandates intermediaries report to their tax authorities any Arrangement or Offshore Structure that has any hallmark of a CRS avoidance.

Intermediary covers persons responsible for the design or marketing of an Offshore Structure or a CRS Avoidance Arrangement (i.e. promoters) as well as those that provide services in respect of the design, marketing, implementation or organisation of the structure or arrangement in circumstances that the service provider can reasonably beexpected to know thatthearrangement was an Offshore Structure or CRS Avoidance Arrangement.
Local Intermediaries: In order to trigger a disclosure obligation the intermediary must be resident, incorporated or managed in the reporting jurisdiction

Foreign Intermediaries providing service through a branch:Given the global nature of international tax planning, the rules need to capture the activities of foreign Intermediaries that offer their services to domestic clients through a branch. The model rules therefore apply to a foreign Intermediary that makes the arrangement or structure available, or provides relevant services in respect of such an arrangement or structure, through a branch in the reporting jurisdiction.
9. Excluded Intermediaries

The definition of Intermediary would not capture a professional advisor or lawyer who provides advice on whether an existing arrangement is subject to CRS reporting, unless that advice is in respect of the design, marketing, implementation or organisation of a CRS Avoidance Arrangement and, the advice is provided in the circumstances where the professional advisor can reasonably conclude that the arrangement has been designed or marketed as a CRS Avoidance Arrangement or that the circumvention of the CRS was one of the effects of that arrangement. If the bank, however, used that opinion to sell the CRS benefits of the scheme to its customers, then the bank could be treated as having marketed a CRS Avoidance Arrangement to its own customers thus triggering a disclosure obligation.

Foreign Intermediaries not providing service through a branch: Intermediaries resident, incorporated or managed in a non participating CRS jurisdiction.
10. Information to be reported

The information that an Intermediary is required to disclose shall include:
  1. The name, address, contact details, jurisdictions of tax residence and TIN (if any) and the date of birth of reportable taxpayer, of the following persons:
    • the person making the disclosure
    • any Reportable Taxpayer with respect to that Arrangement or structure
    • any Client or Intermediary with respect of that Arrangement or Offshore Structure
  2. The details of that Arrangement or Offshore Structure to the extent such information is within the Intermediary’s knowledge, possession or control, including;
    • in respect of a CRS Avoidance Arrangement, a description of those features of the Arrangement or Offshore Structure for which it is reasonable to conclude that they are designed to, marketed as, or have the effect of, circumventing the CRS; and
    • in respect of an Offshore Structure, a description of those features of the Arrangement or Offshore Structure for which it is reasonable to conclude that they are designed to, marketed as, or have the effect of obscuring the Reportable Taxpayer’s Beneficial Ownership or creating the appearance that the Reportable Taxpayer is not a Beneficial Owner of the Passive Offshore Vehicle.
    • the jurisdiction or jurisdictions where the Arrangement or Offshore Structure has been made available for implementation.
  3. No obligation to disclose to the extent information is covered by professional secrecy
    • The Intermediary shall not be required to disclose any information to the extent that the disclosure would reveal confidential communications between a client and an attorney, solicitor or other admitted legal representative where such communications are produced for the purposes of seeking or providing legal advice or used in existing or contemplated legal proceedings and protected from disclosure under domestic law.
    • An Intermediary that is not required to disclose information shall provide written notice to:
      1. the [Country Name] tax authority that the Intermediary has information on a CRS Avoidance Arrangement or Offshore Structure that is not required to be disclosed
      2. any Reportable Taxpayer of its disclosure obligations
11. When Intermediary must disclose arrangement or offshore structure

  • Where the person has designed the structure or arrangement and / or has begun marketing that it(i.e. making it available for implementation) to other potential Intermediaries or Reportable Taxpayers;
  • Where the Intermediary provides Relevant Services in respect of the structure or arrangement toa Client or Reportable Taxpayer in circumstances where the Intermediary can reasonably beexpected to know that the structure is an Offshore Structure and one of the benefits of thearrangement is the circumvention of CRS reporting.
Prior arrangements prior to these rules

Additionally, in respect of CRS Avoidance Arrangements entered into prior Arrangements entered into after 15 July 2014 but prior to the effective date of the rules with respect to financial accounts with an aggregate balance in excess of USD 1,000,000. Unlike the ordinary rules described above, this rule applies even where a Promoter does not provide Relevant Services in respect of the Arrangement after these rules have come into effect.

Non participating Intermediary and previous arrangements

If the Intermediary who was involved in these prior arrangements but is now resident on a non CRS participating jurisdiction, then the disclosure obligations falls onto the tax payer who utilised these arrangements.