Following the successful prosecution of Bernie Ecclestone there has been some interest around offshore holdings and, in particular, the Common Reporting Standard – and the excellent Dan Neidle’s analysis of HMRC’s CRS data which he requested. Prima facie there is £570billion of UK money in tax havens. Is that accurate? Should the offshore money be taxed? Is it being taxed? The answer to all those questions is – no-one actually knows, although if £570b is accurate it is by sheer fluke!
This is clearly unsatisfactory, so let’s look at what actually gets reported and what doesn’t – and perhaps finish with a recommendation or two. This may be a little nerdy.
What is the Common Reporting Standard (CRS)?
This all started in the US with something called FATCA (Foreign Account Tax Compliance Act). So the United States has long had a “Qualified Intermediary” regime whereby the US has financial intermediaries around the world sign "Qualified Intermediary Agreements". So any of those intermediaries receiving US income on behalf of clients would obtain documents from their clients confirming whether they were or were not US persons – people familiar with US income may also be familiar with the “W” range of forms – W-8Bens, W-8Ben-Es etc etc.
“US persons” is a peculiar tax concept in that it includes US citizens who do not live in the US. This can be people born in the US, who left the US as a toddler and have no recollection at all of ever being in the US – nonetheless the US sees you as a taxpayer.
This clearly leaves a gap. How does the US know if US persons living in foreign jurisdictions are paying US tax, unless their income originates in the US? The answer is they didn’t, and the US authorities felt that US persons living overseas considered paying US tax a voluntary arrangement. So, in 2009, they invented FATCA - (actually enacted via the HIRE Act 2010).
The idea was that every financial institution in the world would sign up to enforce FATCA, and obtain something called a Global Intermediary Identification Number (GIIN) from the Internal Revenue Service (IRS). Why would financial institutions do that? The sheer financial clout of the US. So every institution was to either obtain residency declarations and documentation from their clients, as they would in the QI regime above but regardless of their income sources, or be subject to 30% withholding tax on any US sourced payments. They would report to the IRS on any client with "US indicia" (everything from a place of birth to a telephone number) and any client that doesn’t behave (“recalcitrant”) would have their accounts closed.
Why didn’t the institutions just say no? It’s almost, if not entirely, impossible to switch off from the US market. Global financial markets are a vast ecosystem and the United States is like the Amazon. Even if you don’t realise it, you’re connected to the US somehow. If you have a broker, even if you don’t have any US investments, your broker will hold them on behalf of someone else. If they don’t they will have a custodian for other non-US investments and their custodian will have US investments. It just needs someone in your income chain to have a US connection and you’re caught – and it includes just about everyone. So if the institution at the top of the chain couldn’t obtain documentation proving compliance underneath them, they could find themselves subject to US withholding tax and if they refused to close the troublesome accounts they could themselves be deemed recalcitrant. The FATCA juggernaut was well and truly in motion.
There were a number of cans of worms opened with institutions around the world. They couldn’t afford not to comply, but their own jurisdictions imposed data protection rules preventing them sending information to the US without consent. There were human rights issues – closing a person’s bank account would leave them unable to function. So the institutions pleaded with anyone who would listen to resolve the situation – and some of the larger jurisdictions, including France, Germany and the UK, said to the US, “OK, we’ll impose “FATCA” for you in our jurisdictions, but we’ll have some general and bespoke exemptions [ISAs are exempt, for example] and we won’t be closing any accounts just because they are non-compliant”. So FATCA was really replaced with dozens of Intergovernmental Agreements (IGAs) and in 2014 “FATCA” (in reality domestic legislation implementing FATCA-based IGAs) became effective in the UK and elsewhere.
About the same time the G20 were thinking FATCA sounded like a belter of an idea and requested the OECD produce a global version which they called the “Common Reporting Standard”. In an ideal world, at this point, the US says forget about FATCA, let’s all do CRS, but no – we have two very similar pieces of legislation running in parallel. The US is not a CRS jurisdiction, but every other mainstream economy is, and many non-mainstream economies are too – including most of your tax havens – BVI, Bermuda, Cayman Islands etc etc.
What does this mean in practice?
When you open a financial account with a bank, stockbroker, fund manager or other financial institution they will obtain a “self-certification” of some kind. It will ask you to confirm ALL your tax residencies. The institution will check it looks OK, and specifically look for “indicia” of a residency not declared on your form. So, if you complete your form as a UK resident but you have your address as France the institution should obtain further declarations/documentation to satisfy them that they know where you are tax resident.
If you open an account for an entity – a trust or a company – the forms will be a little more complicated and ask some strange questions – are you a financial institution? Are you an Active NFE? A Passive NFE? I’m not going to go into those here – but you will generally need to provide the “beneficial owners” or “controlling persons”. So that could be shareholders or Directors if you’re a company, or settlors, trustees and beneficiaries if you’re a trust.
A good tax compliance programme will then be able to find all the beneficial owners of a trust and reportable accounts will find themselves on an annual report, and these are then submitted to your domestic tax authority, who will exchange them automatically with the appropriate tax authorities around the world. (For geeks, this is with the exception of Model 2 IGA jurisdictions where institutions report FATCA information directly to the IRS).
So this is Bernie Ecclestone’s issue. A financial institution in Singapore has looked into a trust, probably obtained a self certification and perhaps looked through a trust deed etc, and Bernie Ecclestone has appeared – either as a settlor, a trustee or a beneficiary – or any combination. He’s a UK resident, the UK is a reportable jurisdiction, so a report went from the Singapore financial institution to the Singapore tax authorities, and the Singapore tax authorities shared that information with HMRC.
Couldn’t he have hidden this behind a company? Or a company behind a company? No – not with a good compliance programme anyway. The institution should ignore any entities and keep going until it finds “something warm” – a living human – behind the account.
What will be reported?
Only those people who are in “reportable jurisdictions”. Singapore, from the point of view of a Singapore financial institution, is not a reportable jurisdiction. So, if the trust had Bernie Ecclestone as a settlor, a number of Singaporeans as trustees, and himself, his wife and 4 kids as beneficiaries, the report will go show just those individuals resident in CRS reportable jurisdictions, and I’m going to assume one child is in France.
*what follows is entirely theoretical for illustrative purposes, I’m not in any way suggesting there is such a trust.
The value of the trust account is £400m, and it received £5m interest and £25m dividends. So those values will be reported as “Bernie’s Trust” (or whatever!) with controlling persons of Bernie Ecclestone (UK), his wife, 3 children all to the UK and 1 child reported to France.
HMRC will see Bernie, his wife and 3 kids – and the French tax authority will see the 1 child in France. Both the UK and France reports will show a value £400m, with £5m interest and £25m dividends – no apportionment happens at all, whatever gets reported is at account level.
This is an illustration of why the £570b figure is not correct – unless by pure fluke. If you try to look, from a French point of view, at the amount of money held offshore with this single example, it would look like there was £400m in Singapore held for this one beneficiary, whereas the child is one of 6 beneficiaries. If you tried to use these reports to understand how much money was in Singapore it also wouldn’t work because it would look like there was £800m.
Is the figure hugely overstated then?
Not necessarily, and the opposite is likely to be true. If the holder of a financial account is itself a financial institution then the account is not reportable. Why? Because otherwise you would end up with the same people being reported multiple times and an unworkable level of due diligence. If you had a broker with an account at a custodian, the custodian would need to obtain self-certifications and documents from the broker’s clients etc. For FATCA purposes, for example, if an account holder provides the financial institution with a valid GIIN (see above) the financial institution’s due diligence can end there.
So if “Bernie’s Trust” had an account with a UK broker, and through the UK broker had a £400m investment in a fund domiciled in Singapore, that Singapore financial institution would report nothing at all to the Singapore authorities to send to HMRC, because the account belonged to a UK financial institution.
“Well, that’s OK, the UK broker will report it to HMRC”. No, actually, they won’t. Remember earlier the Singaporean trustees are not reported for CRS to the Singapore authorities by a Singapore financial institution? Same with the UK. If you’re a UK bank or other financial institution the UK isn’t a reportable jurisdiction for CRS. So here we now have £400m “offshore” and the £570b includes none of it.
The number of accounts with UK brokers probably goes into the millions, when you consider all the retail offerings there are these days. If an account invests in collective investment schemes there’s a very good chance it includes offshore funds, and almost certainly if you include Ireland and Luxembourg as “offshore”.
So the £570b figure is vastly overstated in some circumstances, and vastly understated in other circumstances. It would take a coincidence of cosmic proportions to be anything approaching accurate.
What would I recommend?
Can we glean anything at all from this information? Well, there’s a vast amount of money held offshore! Is it all tax avoidance or evasion? Absolutely not. There are thousands of investment funds in Luxembourg alone – if you ignore them in favour of UK funds you are restricting your choice and limiting your returns. So UK residents invest billions in Ireland and Luxembourg simply because they widen their choice of funds to invest in – with no tax incentive whatsoever. It is more than likely that whatever the accurate figure is, £570b or otherwise, much of it, if not most of it, has nothing to do with reducing tax liabilities at all.
What HMRC can do is analyse a good sample of accounts, look at the actual outcomes and extrapolate. How much did those people actually hold offshore? Was there any tax incentive? What was the total tax loss if any, etc etc? Building on the analysis year on year, which they can include in their tax gap report, they could get some idea of what the actual amount held offshore is, and how much tax is avoided – and perhaps some policy recommendations can evolve from that.
But what of the UK financial institutions? Banks and other financial institutions do report information to HMRC, but it’s mainly around interest. So banks have BBSI reports, and brokers may have “Other Interest” reports etc, but they don’t report account values, and they don’t report dividends – they just report interest.
They also don’t report “UK indicia”. What does that mean? If you have an individual who has completed a self-certification for a UK financial institution declaring they are tax resident in Guernsey, but all their correspondence goes to an address in France and they have a French phone number, the institution can report that person to HMRC for onward reporting to France. If, however, their correspondence goes to a UK address and they have a UK phone number, the institution doesn’t report for CRS because the UK isn’t a reportable jurisdiction.
I would scrap BBSI and Other Interest reporting and effectively make the UK a reportable jurisdiction for CRS. It shouldn’t be too onerous for UK financial institutions because they already obtain all the information in most cases, they just don’t report it – a simple system change in most cases. They would also remove the obligation to perform BBSI and/or Other Interest reporting. Replacing them with an extension to a report they already send shouldn’t be too much of an issue in my view, and may even be welcomed by some.
Hopefully someone in the ether somewhere found this of interest. If anyone of a geeky, or even downright pedantic, disposition spots an error please let me know!