Sunday, 9 April 2017

A Reflection on The Common Reporting Standards

With over 100 countries as signatories to the CRS Multilateral Competent Authority Agreement there will be little need for incidents such as the Panama papers ( for tax authorities to find out what their tax residents were squirreling away. The CRS which stands for Common Reporting Standards is in essence an automatic annual financial information exchange tool for tax authorities. It allows a tax authority to inform another tax authority of the financial accounts held by their tax residents in the first mentioned tax authority jurisdiction.

As of July 1, 2017 the Canada Revenue Agency (CRA) will share, with members of the CRS Multilateral Agreement with which the CRA has formalized a CRS partnership, details of the bank accounts held by their residents in Canada. In return, the CRA will receive information on financial accounts held by Canadian residents outside of Canada from its CRS partners. Canadians investing significant assets overseas where banks pay higher interest rates than domestic Canadian banks will now not be able to remain undetected from CRA. These Canadians who have maintained accounts overseas without disclosing the income earned on such accounts must consider the voluntary disclosure procedures to see relief from penalties that will be levied by the CRA.

The Canadian Financial Institutions will provide the non-resident's account holder's name and address, his or her date of birth, the account balance or value at year end and certain amounts credited or paid into the account during the year to the CRA. Unlike the U.S. FATCA legislation, the CRS has no de minimis amount for reporting purposes.
The United States is not a signatory to the CRS Multilateral Competent Authority Agreement as its FATCA legislation has been fairly successful in uncovering accounts held outside the US by US persons. Although the U.S. is not a signatory to the CRS – it should be noted that the U.S. has an automatic exchange relationship with 43 countries whereby deposit interest paid to non-residents are disclosed to the tax authorities of these 43 countries. See The 43 countries are: Australia, Azerbaijan, Belgium, Brazil, Canada, Columbia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Gibraltar, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Israel, Italy, Jamaica, Jersey, Republic of Korea, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Saint Lucia, Slovak Republic, Slovenia, South Africa, Spain, Sweden and the United Kingdom.

It is often thought that the U.S. by not being a signatory to the Common Reporting Standards retained the taint of a tax haven. An argument can be made that it does for the tax residents of the countries who are not part of the "automatic exchange relationship". For the tax authorities of those countries - it will be only through a formal request under the tax treaty or tax information exchange agreement that information can be obtained on deposits held by US financial institutions in the U.S.

Sunita Doobay

Shielding Non-Resident's Assets via a Canadian LP

Before December 12, 2016, a common tactic for non-Americans was to shield their assets through a Delaware LLC. On the formation of an LLC in Delaware, the beneficial ownership was not disclosed. Thus, a German individual could hold his Parisian condo in an LLC without the US, German, or French authorities knowing that he was the condo's true owner. The U.S. Treasury and the IRS sought to remove this taint of a tax haven by by issuing final regulations on December 12, 2016 that requires a foreign-owned LLC treated as a flowthrough entity (partnership) to file IRS form 5472 ("Information Return of a 25% Foreign-Owned U.S. Corporation") for taxation years that start on or after January 1, 2017. Germany can now access the condo owner's information through a treaty's information exchange article (article 26 of the Germany-US income tax treaty).

Canada has so far been silent on the similar use of an LP by a non-resident of Canada to shield offshore assets and to conceal their ultimate beneficial ownership from authorities in his or her home country. An earlier article ("Non-Residents and Partnerships," Canadian Tax Highlights, February 2012) summarizes the Canadian taxation of partnerships as follows: "If a partnership interest is not taxable Canadian property and the partnership does not carry on business in Canada, the non-resident partners are not subject to Canadian tax. If there are no Canadian partners, there is also no Canadian reporting." There currently seems to be no Canadian reporting requirement, and it is not certain whether the OECD's Common Reporting Standard (CRS) Multilateral Competent Authority Agreement will result in the partners of the home country learning about assets held in a Canadian LP.

The CRS was signed by over 100 countries, including Canada, where it comes into force on July 1, 2017. The CRS allows for an automatic exchange between tax authorities of information about financial accounts held in a signatory jurisdiction by the resident of another signatory jurisdiction. Will the tax authorities of the jurisdiction that holds the financial accounts of the Canadian LP report the Canadian LP information only to the CRA? Or does the CRS mandate the LP to report its financial account information to the tax authorities of a beneficial partner's home jurisdiction? The CRS jurisdiction governing a partnership is the jurisdiction where the entity resides. A fiscally transparent entity, such as a Canadian LP with non-Canadian partners, will be treated (per The CRS Implementation Handbook, paragraph 83) as a resident of the jurisdiction where it was formed, where it has its place of management, or where it is subject to financial supervision. Assume that Mexican partners supervise the financial accounts of the Canadian LP: the partnership is deemed to be Mexican for CRS purposes. The partnership has nothing to report for the purposes of the CRS to the Mexican tax authorities, because its partners are not non-Mexicans.

The purpose of the CRS is to facilitate the mutual exchange of financial information by tax authorities as it relates to one another's residents; the CRS is not a mechanism for informing the tax authority about its own residents. It is likely therefore that non-Canadians will continue to use the Canadian LP to shield their assets from tax authorities in their non-Canadian home jurisdictions, unless Canada enacts legislation or the OECD amends its current guidelines.

Sunita Doobay TaxChambers LLP, Toronto Canadian Tax Highlights Volume 25, Number 3, March 2017 ©2017, Canadian Tax Foundation

From a Canadian legal perspective - an argument can be made that the Canadian LP is a sham. I hope to write more about this later this month.