“Check with your bank what they have on record for you. Are they going to look at your passport or your residence?”
The Grid: With the introduction of the new Common Reporting Standard (CRS) into most GCC countries this year, many business families and banks will become busy dealing with this. How does CRS work and will it affect individuals in the GCC?
Deloitte: Broadly speaking, if you are resident in one jurisdiction and you have a financial account in another and both of those countries have signed up to the CRS, then the information about your financial account will be sent, annually, to the country in which you are resident.
The Grid: Which countries in the GCC have signed up?
Deloitte: The UAE, Saudi Arabia, Kuwait and Qatar have signed up or indicated their intention to sign up to the Standard. Outside the GCC, Lebanon is also implementing CRS. This means that if you are resident in one of these countries, say the UAE, and you have a financial account in say, the UK, information about that account will be sent by the UK to the regulatory authority in the UAE.
The Grid: Will the information flow in the opposite direction, i.e., from the UAE or Saudi Arabia to the UK?
Deloitte: CRS is part of the drive towards transparency, to address tax evasion and to make sure people are paying tax in the right place at the right time. Most countries have a territorial-based taxation system so if you are resident in a particular country, you could potentially be taxable on income or gains arising elsewhere in the world. That’s why the information is flowing to where you are resident as opposed to going in the opposite direction. So if you are resident in the UK, with a financial account in the UAE, the information about your account will be sent to the UK authorities.
The Grid: How will banks know where an individual is resident?
Deloitte: Tax residence is a complicated subject, and the CRS doesn’t expect banks to be expert tax advisors. In some circumstances, the regulations allow the banks to assume a customer’s residency based on the information they have on file if it’s a ‘low value account’, which is defined as being under USD1M.
For example, the jurisdiction can set a simple residence test, i.e. a UAE bank can assume proof of residential address is indicative of where a customer is resident, meaning there would not be any information exchanged outside the UAE. However, it is possible to have a UAE residential address and yet be tax resident elsewhere, which would mean you may have a tax liability elsewhere, and the reporting should be being made to that other country. To avoid the risks and reputational damage of insufficient reporting, we understand that some banks are choosing to assume residence based on an individual’s nationality, i.e. basing it on the jurisdiction of a customer’s passport, unless they can prove their tax residence is elsewhere.
The Grid: What if an expat opened a bank account five years ago with their UK residential address. How will the banks determine if they are UAE resident or UK resident?
Deloitte: That’s not as simple a question as it sounds. It depends on the value of the account, and the local jurisdiction’s guidance, as well as other evidence that the bank has on file, and as mentioned some banks will look only at the individuals’ passport. It is true therefore that under CRS, there could be an issue with banks making the wrong assumptions and sending information to jurisdictions that are not entitled to that data. Some people may not care if such errors are made, but others may be concerned about the potential loss of confidentiality. Others could find that information exchanged with the wrong country could prompt questions from the tax authorities there, even if there is no liability.
The Grid: What about for those with ‘high value accounts’ of over USD1M? How does that change the reporting?
Deloitte: For high value account holders, the bank should be leveraging off information held or otherwise known by the client’s relationship manager so it’s a more personalized approach; the banks will also individually ask those customers for their tax residence status. In addition, the regulations say that the relationship manager, must sign a declaration confirming the accuracy of the statements, to the best of their knowledge, as made by the client.
The Grid: Does CRS apply only to individuals and bank accounts?
Deloitte: No, CRS can also apply to accounts held by corporates, trusts, foundations and partnerships etc. The regulations require banks to look up the chain of ownership for the individual behind any passive entity to identify the controlling individual whose details will be reported under CRS.
Whilst bank accounts are one of the examples of the ‘financial accounts’ covered by CRS, they are not the only ones. Brokerage or custodian accounts, collective investments vehicles and some insurance contracts are also ‘reportable’.
The Grid: How can individuals find out where they are resident?
Deloitte: Tax residency is something that is complex and varies from jurisdiction to jurisdiction.
The Grid: Now how do expats find out their correct resident status?
Deloitte: Well, obviously the best way is to get professional tax advice. If you are spending any amount of time in a certain jurisdiction or have a passport from another jurisdiction or assets in another jurisdiction, now is the time to check to see if any of these ‘ties’ mean that you are tax resident there.
Most jurisdictions work on the basis of physical presence, so residence is often based on the time spent in a jurisdiction, usually on a ‘day count basis’, but as many people learned from FATCA, this is not the case for US persons who are taxed on a worldwide basis, irrespective of their residence status. The tax residence rules differ from country to country, and may change from time to time, so you cannot necessarily rely on advice provided several years ago.
As an example, the UK rules on tax residence changed recently. The number of days you can spend in the UK without becoming resident now varies depending on your recent residence history with the UK and also the number of ties you have with the UK in terms of assets, business or family links there.
So if you have any ties with any other countries, now is the time to check if you are, or ever have been, resident there. Accessing the tax authority or Ministry of Finance website of each jurisdiction is a good starting point to find out more about the more straightforward residence issues, but most importantly, you should speak to a locally qualified tax adviser.
A lot of people may have a UAE residence visa and satisfy the conditions to obtain a Tax Residence certificate from the Ministry of Finance, but may also have a tax footprint elsewhere. For example, it would be technically possible to be tax resident in the UK after spending as few as 16 days the UK in a particular tax year. That’s an extreme example though. But in the same year, you could obtain a Tax Residence certificate from the UAE showing residence here too. Now that we have a double tax treaty between these two countries the tie breaker test will help to determine residence, but individuals are likely to require professional advice.
For the banks, it will be a challenge to discern tax residency if they just depend on self-certification from their customers, since the customers may not even know the answer themselves.
The Grid: What is the most common profile of an expat who may be affected by CRS?
Deloitte: The most common profile will be the expat who is resident in the UAE but maintains a bank account in their country of origin for ongoing mortgage, utilities payments, receiving rental income, or for summer holiday spending money.
The Grid: So if you came to the UAE five years ago and opened a bank account from, say, the UK, what should you expect?
Deloitte: The banks in the UAE differ slightly in their approach, but most will look at the documents they have on file for you noting that whilst you have a British passport, if you’ve also provided them with a UAE address, they may treat you as a UAE resident.
The Grid: If FATCA was predominately about tax, what is CRS about?
Deloitte: Transparency is the key, as well as tax. Many jurisdictions are considering or are already implementing public registers of ownership of real estate or trusts. Looking behind the direct owner, to identify the beneficial owner of any asset has long been the norm for AML purposes, but the exchange of this information will be used to ensure tax compliance.
There is also the need to project a positive image abroad – it remains to be seen whether or not some countries will be blacklisted for not signing up to CRS.
The Grid: Are there loopholes?
Deloitte: Some people perceive there to be ‘loopholes’. But there is usually a downside. For example, the US haven’t signed up to CRS (because they have FATCA) and so some clients are thinking about moving structures to the US to avoid CRS. This can however give rise to US reporting and tax exposure.
There are other jurisdictions too who have not yet signed up, for a variety of reasons, and there may be clients who consider moving their structures or accounts to such non-CRS jurisdictions to avoid information exchange. However, finding an advisor to help you to restructure to avoid CRS will be difficult. Furthermore, banks may not want to lend to you unless you are in a well-governed, well-structured, well-legislated CRS jurisdiction. Finally, the OECD has recently announced created a portal to allow for anonymous (or otherwise) reporting of CRS circumventing loopholes, schemes or products.
It’s a good time to do house-keeping in terms of family governance and structuring and to look at all your accounts and understand where that information is going and if you are up-to-date with your taxes.
The Grid: Will the banks take care of everything or is there anything individuals themselves should be doing now?
Deloitte: A good start would be to do the following:
- Find out where you are tax resident.
- Think about where your financial accounts are, do not just include bank accounts. It could be insurance policies, custodians, trusts etc.
- Find out where you should be paying tax.
- If you have an undeclared tax exposure, seek advice, and pay the tax sooner than later.
- Check with your bank what they have on record for you. Are they going to look at your passport or your residence? Keep in mind though that they are not under any obligation to disclose this information to you.
The Grid: When will reporting actually start in the UAE and Saudi Arabia?
Deloitte: The UAE hasn’t signed yet although it has committed to sign up to the CRS with a view to exchanging information in September 2018. Saudi Arabia has signed up to CRS and will also be exchanging information in 2018. Financial institutions in both countries are collecting information during the 2017 calendar year in anticipation of next year’s information exchange deadlines.
The Grid: I wonder if our readers know their tax residency…
This is an extract from an interview with Fiona McClafferty, Senior Manager, Deloitte Private and Claire Dawson, Senior Manager, Deloitte
Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,000 partners, directors and staff.
Interview by May Khizam, Founder & Chief Strategist, The Grid Media Ltd
This article is provided as general information to readers of The Grid Media Ltd. It does not constitute, and should not be construed as, advice on any specific matter or advice on which you should rely, nor does it create any contractual, tortuous or fiduciary relationship. You should not act or refrain from acting on the basis of this information.