Foreign investors are always taking a close look at jurisdictions with attractive citizenship application conditions. In this context, they are now interested not only in visa-free access to countries all over the world but also in the possibility to minimize tax payments.
In 2014, the Organization for Economic Cooperation and Development (OECD) approved an international standard for the automatic exchange of financial accounts information, also referred to as Common Reporting Standard, CRS. Currently, more than 100 countries around the world, including EU member countries, Canada, China, Hong Kong, India, etc., have committed themselves to automatic information exchange under the CRS standard. In 2016, Russia joined the program.
What is CRS standard?
CRS (Common Reporting Standard) is a unified reporting standard that involves obtaining information about the citizens’ capital and money transactions outside the country.
The CRS is based on FATCA, the US law on tax reporting on foreign accounts whose main purpose is to prevent tax evasion by US citizens who work or reside in other countries. However, unlike FATCA which operates unilaterally, the CRS standard calls on a mutual data transfer. Each country decides whether it will participate in one- or two-way exchange, as well and whether such exchange will be carried out with all signatory countries or only with some of them. According to official data, Russia will receive information on the bank accounts of Russian citizens abroad from 73 states, and the Federal Tax Service of Russia, in its turn, will provide data to 53 countries.
As of January 2018, Antigua and Barbuda, Austria, Canada, China, Dominica, Grenada, Hong Kong (China), Pakistan, Qatar, Russia, Saint Kitts and Nevis, Saudi Arabia, Singapore, United Arab Emirates, Vanuatu, among others, committed to start reporting in 2018.
In February 2018, the OECD published a report stating that popular schemes for obtaining a second citizenship by investment are being increasingly used to evade taxes or for money laundering. The Organization recognizes that not all the participants of passport programs use their new status to evade taxes, but often such schemes can be used specifically to conceal income.
How does it work? It is assumed that investors who obtained a residence permit or citizenship by investments may provide the bank with untrue or incomplete information about their tax residency in order to ensure that information within the framework of automatic exchange was passed to jurisdiction which is “safe” for this person or was not subject to the requirements for automatic exchange at all (if the country has not yet joined the CRS program).
The residency/citizenship programs are run in the United States, some European countries (Cyprus, Malta, UK, Australia, France, Greece, Hungary, Portugal, Spain, Latvia) and the Caribbean countries (Saint Kitts and Nevis, Antigua and Barbuda, Dominica, Grenada, Saint Lucia). For example, to obtain the passport of Saint Kitts and Nevis, it is sufficient to donate at least $150,000 to the Sustainable Growth Fund, and in order to get a Cypriot passport an applicant needs to purchase a real property object or invest at least € 2 million in a business project.
Change of tax residency
Often, the change of tax residency is one of the main motivations for wealthy businessmen to apply for citizenship of another state.
The grant of a residence permit or citizenship of another country does not allow to automatically change one’s tax residency. The important requirements are both living in the country for at least 183 days a year (in Antigua it is minimum 30 days), and the availability of a center of vital interests (determined by the location of the family, the main business or work).
Irina Shamraeva, Director for the Development of International Business Services and Compliance of Consulco Group points out that many investors acquire a Caribbean passport not only because of an impressive number of countries with visa-free entry. Often in the Caribbean, after obtaining the status, you can get a tax certificate. Then an investor shows this document in the bank, without mentioning that he spends more than 183 days in the country of principal citizenship, Russia, for example. At the same time, the country that issued the tax residency certificate does not double check where the investor resides during the year. De facto, this is a tax evasion tool.
OECD recommends tightening due diligence procedures
According to the OECD, one of the effective measures to combat the abuse is thorough due diligence check.
The OECD may only issue recommendations since it is not a legislative body. However, in practice these recommendations are becoming mandatory. The report of February 19, 2018, recommends:
- to have a real, permanent physical residence address of a resident;
- to verify information on all jurisdictions of clients’ tax residence;
- not to rely on information provided as a self-certifications but demand documentary confirmation.
If the banks simplify the procedure, this is not for the purpose of complicity in concealing the profits, but because they do not have enough time and resources to conduct a thorough check, since this is an expensive and time-consuming process.
The only effective method of combating unscrupulous taxpayers is bringing an individual to responsibility for providing incomplete information about his original residency.
In connection with the recent scandal in the Latvian banking sector, which occurred after the publication of the report of the US Financial Crimes Enforcement Network (FinCen) about money laundering and corruption within the banking system of Latvia, the countries are now forced to follow a general trend.
The OECD is seriously committed to implementing the CRS. On March 13, 2018, new rules for disclosing information came into force. Legislative innovations oblige financial advisors and intermediaries to report on any schemes of evasion from CRS, to which their clients resort.