Loopholes which should be closed Updated 20.2.2016 |
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The indicia list to be expanded to include a 7th element of previous residencies changed in last ten years. Assume the individual is dual resident resident in the previous residence jurisdiction. If Account holder wishes to contest the indicia, the indicia can be cured by self-certification of the account holder and proving the account holder is no longer tax liable in the previous reportable jurisdiction by means official documentation such as tax clearance certificate. Previous residencies changed more than 10 years ago will not count as an idicia. |
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a EU mini FATCA against USA which will The IRS falsely propagates that it reciprocates information making a level playing field. However, they omit to mention that the information is restricted to interest for individuals. |
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Custodial Institution which potentially can hold assets Commentary page 160 par(10) states Custodial Institution is an entity that substantially earns income attributable to related financial services, such as "fees for providing financial advice with respect to Financial Assets held in (or potentially to be held in) custody by the entity"So banks, or other financial institutions, which potential can hold the assets and advise on accounts held by US custodian or US depository FI and subsequently earn advisory fees on those USA accounts, will be deemed to be a Custodial Institution. The USA, or other non-participating jurisdiction account will be deemed to be a Custodial Account. The bank in the CRS reporting jurisdiction will have reporting obligations on the account maintained in the USA. This deeming of a custodial institution will likely be extended to investment entities receiving advisory fees for accounts maintained in the USA and other non-participating jurisdictions. |
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The following are examples of situations where it is expected that an
anti-avoidance rule would apply: Shift Maintenance of an Account: A Reporting Financial Institution advises a customer to maintain an account with a Related Entity in a non-Participating Jurisdiction that enables the Reporting Financial Institution to avoid reporting while offering to provide services and retain customer relations as if the account was maintained by the Reporting Financial Institution itself. In such a case, the Reporting Financial Institution should be considered to maintain the account and have the resulting reporting and due diligence requirements.
The OECD will redact the word "related" so that any bank advising clients to shift account to custodians such as Pershing will maintain the account. Note importantly - this will include investment entities such as fund advisors. |
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The OECD should redact the bilateral / TIEA option that jurisdictions can base their Competent Authority Agreements on as a legal basis to automatically exchange information. These jurisdictions will be obligated to sign the Multilateral Convention of Mutual Assistance in Tax Matters. Furthermore, these countries seem unaware that they must not self-assess the data safeguards and confidentiality of information of potential partner jurisdictions because the OECD will publish a list of which jurisdictions are been deemed by the OECD to have satisfactory data safeguards and confidentiality in place for Competent Authority Agreements. Bahamas has publicly stated that the bilateral option gives them the ability to choose which partners to select based on subjective factors such as confidentiality concerns and longer time needed to implement the Standard.Panama has insisted on six unacceptable conditions before signing any common reporting standard competent authority agreement. Hong Kong states it will only sign bilateral tax treaties with countries with Hong Kong’s trading and investment partners to facilitate business and minimize the incidence of double taxation. |
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Redact the exemption of pre-existing individual Cash Value Insurance Contracts where the Reporting Financial Institution is effectively prevented by law from selling such contracts to residents of a Reportable Jurisdiction. Commentary page 110 par(2) - A Reporting Financial Institution is 'effectively prevented by law' from selling Cash Value Insurance Contracts or Annuity Contracts to residents of a Reportable Jurisdiction. This creates planning opportunities where residents can own insurance contracts the same way that cross-border residents can access non-UCITS despite the restriction on sales. |
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The OECD should include in scope irrevocable insurance policies that are investment-linked. Several offshore insurance companies created a new type of policy that never existed prior to the CRS. They advocate an irrevocable investment-linked insurance policy where the policyholder cannot access the policy assets and the only payable amount is a death benefit. This new type of insurance product is promoted as having no Cash Value and hence is not reportable under the CRS. The OECD considers these as equivalent to irrevocable trusts. The Commentary will be amended - Payments solely by reason of the death of an individual insured under a life insurance contract unless it is an investment linked policy. Note that the Standard already states if no person can access the Cash Value, the Account Holder reported is any person named as the owner in the contract and any person with a vested entitlement to payment under the terms of the contract. |
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The CRS is implemented in the EU under the Directive for Administrative Assistance (DAC). This contains additional categories of income and capital not in the CRS, . Some of these additional categories of income and capital will be included in the CRS amendments. Ownership and income of property may be reportable. However, this extra category of income and capital is only included as a payment subject to due diligence for reporting if the information is available. This if available condition may be redacted. |
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The CRS is implemented in the EU under the Directive for Administrative Assistance (DAC). This contains additional categories of income and capital not in the CRS. Some of these will be included in the CRS amendments. For instance, establishing a charitable foundation where Council directors receiving (unlimited) fees or salaries, will now be included as equity interest or controlling persons. However, this extra category of income and capital is only included as a payment subject to due diligence for reporting if the information is available. This if available condition may be redacted. |
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Untaxed entities that are not subject to financial supervision should not be an investment entity. The Standard defines which Participating Jurisdiction an untaxed entity is considered to be resident. Commentary page 159 par(4) - Where a Financial Institution (other than a trust) does not have a residence for tax purposes, it is considered to be subject to the jurisdiction of a Participating Jurisdiction and it is, thus, a Participating Jurisdiction Financial Institution if :
This will invariable be a loophole. How is the Participating Jurisdiction able to enforce reporting by the Financial Institution if it is not subject to financial supervision. For example, the Participating Jurisdiction for a German owner and director of a BVI company is Germany, due to (b) above (but not (a?)). This investment entity will invariably not report on itself. The EU Savings Tax Directive tackled this weakness by making the economic operator report on payments made to a cross-border Paying Agent Upon Receipt. |
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The Standard should follow the amended EU Savings Tax Directive which included any entity that is effectively untaxed. Effectively untaxed could be subject to tax of 5% or less. This will prevent an account holder utilising their untaxed offshore active NFE to hold investments |
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Deem loans from trusts as a reportable distribution. Trusts invariably make distributions to beneficiaries as loans. These loans are never repaid It remains to be seen how the OECD will include loans from underlying companies owned by trusts, if the underlying company is a passive NFE. |
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Include debtors as controlling persons for Passive NFEs, equivalent to debt interest for investment entities. For investment entities, debt interest is a reportable account holder. Yet controlling persons of Passive NFEs do not include debtors. This creates a loophole where debtors could provide capital to a Passive NFE owned by a trust, in lieu of a settlement to a trust and not be reportable. |
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All telephone numbers will be indicia, irrespective if one or more are in the same jurisdiction of the Financial Institution. One of the indicia is one or more telephone numbers in a Reportable Jurisdiction and no telephone number in the jurisdiction of the Reporting Financial Institution. It is simple to negate this indicia by establishing a skype forwarding number which has its country code in the same jurisdiction of the Financial Institution. |
Clarifying ambiguities and misunderstandings Updated 22.1.2016 |
Several Jurisdiction CRS guidelines incorrectly omit the income test for categorising a trust as an investment entity if the trust is administered by a corporate trustee. This error derives from some FATCA IGAs, for example, Singapore. Some authorities incorrectly consider that trusts administer on behalf of others, whereas it's only the trustee that administrates on behalf of others, not the trust. |
Updated 19.1.2016 |
1. Holding Companies and trusts
An Active NFE holding company is defined as substantially all of the activities of the NFE consist of holding the outstanding stock of subsidiaries that engage in trade or business other than the business of a Financial Institution.
2. Does closure of account include transfer of equity
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