The driving force behind this is the suppression of tax evasion by governments around the world, helped by the use of foreign bank accounts and organizations such as trusts and companies. However, this measure will also have an impact on those who are not engaged in tax evasion, including many family offices.
CRS - General Reporting Standard
Compared to the existing information sharing agreements, the General Reporting Standard (CRS) does change the rules of the game. CRS, developed by the Organization for Economic Cooperation and Development, provides automatic and mutual exchange of financial information. A total of 96 jurisdictions have already committed themselves to sharing information starting in 2017. In many jurisdictions, the exchange of information began on January 1, 2016.
What information will be shared?
We consider the process of exchanging information for residents (residents) of the UK, since it is this jurisdiction that has been the leader in terms of growth for millionaires, family offices and other consolidating ownership structures of high-net-worth clients, including from Kazakhstan and Russia, over the past decades.
In general, financial institutions (including fiduciary providers, capital managers, banks, and family offices) identify “accountable” accounts owned by UK residents (residents). This includes bank accounts, as well as accounts of investment companies (for example, companies and trusts), which are defined as debt obligations or equity interests. Unlike some previous agreements, the CRS does not differentiate between non-residents in the UK and those living in the UK. For trusts, a UK resident can be a founder, a beneficiary, or any individual with effective final control.
The main account details that are exchanged include the name and address of the UK resident, the account number and the name of the financial institution that provides the reporting. The reported financial data are the receipts credited to the account, if necessary, the share of investments (“capital gains”) and the balance in the account or value. This is relatively simple for bank accounts, but more difficult for organizations such as trusts. If the family office includes any trusts, it is necessary to establish whether the trust has any obligations in direct reporting and, if so, what is the relationship between any person living in the UK and the trust. Information to be exchanged differs between principals and discretionary beneficiaries. For the principal, the information exchanged represents the total value of the trust property and payments to the founder, and for the discretionary beneficiary, this is the amount of payments to this beneficiary.
Some trusts will have no direct reporting obligations, but will most likely keep assets in the bank that does it. As a result, the bank will have to report the data of the bank account owned by the trust and the data of controlling persons in the UK provided to them by the trust. The controlling person is defined as the founder, trustee, beneficiary, protector, and any individual who exercises full control over the trust.
In the public eye
UK authorities already have much more information regarding non-tradable British companies through the PSC. Companies must keep an internal register of those who own more than 25% of their shares or voting rights. The registry publicly displays the full name, nationality, data you are interested in and month of birth (the residential address will not be made public). Failure to comply with this requirement entails criminal penalties.
If the trust owns more than 25% of the British company, the trustees are required to register as a PSC. They are also required to disclose the names and similar personal data of any person who has “significant influence or control” over the trust, including (but not limited to) any protectors and beneficiaries. The British government tried to oblige its overseas territories to accept similar registers, but so far unsuccessfully.
In the EU, some trusts that generate tax consequences in the UK must maintain a non-public (but accessible to HMRC) registry to show the identity of the founder, trustee, advocate, class of beneficiaries, and any other individual with current control.
In England and Wales, the property worth £ 122 billion is owned by foreign companies. The UK government has announced its intention to make ownership of property more transparent and has committed that the Land Registry will publish data showing which offshore companies own land and property rights in England and Wales.
What to do now?
Family offices must first understand whether they fulfill their reporting obligations on their own. They must then examine what information will be disclosed by each organization with which they own the assets, directly or indirectly, and when. Similarly, they need to know what information will be available publicly. At least it puts the family on a par with HMRC. Most of the tone of the discussion on transparency is focused on those who have deliberately evaded taxes, while the vast majority of people who use foreign assets do so for commercial and personal reasons. Nevertheless, mistakes are often made in foreign structures that were installed correctly, but subsequently were poorly implemented. The most common examples of this are remittances from randomly mixed funds, benefits are provided by trusts and investments in source assets in the UK.
Most often, such errors are detected only as a result of the HMRC call. The big difference is that CRS will increase assets on the HMRC radar. For those who have not paid the proper amount of tax historically, intentionally or by mistake, disclosing HMRC information before it requests it is always the best strategy. The final disclosure opportunity ended in April 2018.
This is unlikely to be the end of a revolution in changes in tax transparency. We could expect more changes in the area of beneficial ownership of all British property, as well as HMRC, seeking to use all the opportunities open to it to establish beneficial owners or those interested in foreign trusts and companies.
There are already concerns about breaches of confidentiality and, in particular, the reliability of data security measures, if certain information becomes publicly available. In the end, political decisions were made to reach the entire network in order to catch a small part of the society that does not play by the rules.