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What financial transparency means in Panama Papers era

Thursday, 05 May 2016   (0 Comments)
Posted by: Authors: Andrew Knight and Anthony Markham
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Authors: Andrew Knight and Anthony Markham (BDlive)

The Common Reporting Standard (CRS) is a new international system for the automatic exchange of tax information promoted by the Organisation for Economic Co-operation and Development (OECD), and modelled on the US Foreign Account Tax Compliance Act.

For some taxpayers including South Africans, the CRS is already "live"; for others it is imminent.

The CRS potentially involves reporting on residents of any country that has signed up to the CRS where those residents, or an entity deemed "controlled" by them, holds a "financial account" in another country that has also signed up to the CRS. About 100 countries have signed up, SA among them. The full list can be seen on the OECD website. About 56 of those that have signed up are so-called early adopters, which means financial accounts held with financial institutions in those countries as of December 31 and new accounts opened after that date will eventually be the subject of reporting.

Although that reporting may only start happening next year, with reporting by later adopters starting a year later, residents of participating jurisdictions should already be taking steps to understand what the CRS will mean for them in concrete terms.

The international political climate has been affected significantly by the disclosures arising from the leak of the Panama Papers. In this environment, the reality is that every individual who has any international investment in any form, direct or indirect, needs to get to grips with whether they may be the subject of reporting and what the consequences would be.

One of the side effects of the CRS has been the introduction by a number of countries of an amnesty or voluntary disclosure programme to enable taxpayers to regularise their tax or exchange control positions in relation to assets in foreign accounts. A number of people have embarked on a regularisation process in advance of the inevitable flow of tax-related information to their tax authorities. One might be tempted to take the view that, having gone through such a process or at least having committed to do so, the eventual reporting of financial information to one’s tax authority becomes of secondary importance, but this would be unwise as the level of reporting may well go beyond what is strictly necessary for purposes of tax compliance and have other consequences for the individuals concerned.

As the existence of a "financial account" is the starting point for potential reporting, the critical thing each resident of a CRS jurisdiction must understand is whether one is the holder of, or a person deemed to be controlling, a "financial account". The term "financial account" is a much wider concept than one might imagine. Up until now, only US taxpayers have been obliged to get to grips with the full meaning of the term.

Even if a taxpayer completes a particular regularisation process successfully, or even if their tax affairs were always entirely compliant, that does not mean the effect of the CRS ceases to be of concern. It will not be uncommon for information reported under the CRS to be surprising and irrelevant to a person’s tax affairs. Thus, in all cases it will be important to understand whether one will be treated as the holder or controller of a "financial account".

It will come as no surprise for individuals holding a bank account or an interest in an investment fund in their own name that they hold a financial account. But individuals with some sort of involvement with a trust may find themselves subject to reporting as, believe it or not, a trust in many cases will be a financial institution. The following people will be regarded as a having a financial account with a trust:

  • Settlors, even if the trust is irrevocable — and, while we consider the position taken by the OECD to be incorrect, the value of that account reported against the name of the settlor may be the entire value of the trust. The OECD even indicates it is considering whether a settlor who is dead should continue to be the subject of reporting!
  • Protectors, where their powers are such as to give them ultimate effective control over the trust, a not uncommon situation. Again, the value of the account reported may be the entire value of the trust, even where the protector is excluded from benefit. Let us consider the case of a person who, while living in the UK, was appointed as protector and then takes retirement in France while remaining the protector. It is likely that the French tax administration will be very interested in someone who is considered to be in control of a trust that holds significant assets and whose value would give rise to a significant French net wealth tax charge.
  • Vested beneficiaries and, in the years in which a discretionary award is made, also discretionary beneficiaries. In the latter case, only the value of the award would be reported as the account value.

The position is more complex where a financial account, such as a bank or investment account, is held by an underlying company of a trust. The existence of this additional financial account may result in another layer of reporting, in addition to the reporting on the trust.

This is because the bank or investment fund may need to identify the controlling persons of the underlying company, and that may require an examination of the controlling persons of the trust that is the sole shareholder of the company. The controlling persons are not the same as the financial account holders in the trust.

The following are potentially affected:

  • Settlors — this time the reported amount will be limited to the value of the account of the underlying company in question, but it will mean that the trust and the bank or fund will be reporting on the same person.
  • Protectors — this time it is irrelevant what powers of control are given to the protector in question as protectors are, by definition, controlling persons even if they do not exercise control.
  • Trustees — if the trustee is a corporate trustee, this will involve a further inquiry as to who the controlling person of the trustee is, which may in turn result in the disclosure of its senior managing official.
  • Vested beneficiaries and discretionary beneficiaries — but in this case the latter may be treated as controlling persons even if they do not receive an award.
  • Potentially anybody else the bank or fund might consider to be the beneficial owner for anti-money laundering purposes.

Bear in mind that the complexities of reporting will increase as the complexity of the structure increases, including where there are multiple trusts involved, as well as trusts with individuals or private trust companies as trustees.

The key for holders of financial accounts, and persons who may be regarded as "controlling persons" of a company, is to recognise well in advance where they may be subject to reporting. Based on that assessment, consideration can be given in good time to dealing with the consequences.

  •  Knight and Markham are partners in legal and tax advisory firm, Maitland

This article first appeared on 



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