Eesh Aggarwal was one of the panellists in our Common Reporting Standard Webinar, which was held on May 31st, 2016. For the event's full transcript, please go HERE.
This interview originally appeared on February 16th, 2016.
Taxlinked (TL): Which countries, if any, seem to be furthest along in terms of implementing CRS? Why is that?
Eesh Aggarwal (EA): Basically, all countries all struggling. The politicians want CRS, while the regulators, financial institutions and account holders do not! Ideological rules have been written by politicians and for politicians but not for financial institutions and account holders. Implementation of these rules will be very challenging.
Since CRS approval in 2014, only EU countries have managed to seriously progress in implementing it. That is to be expected as they basically wrote the law. However, guidance is very poor and financial institutions are suffering. The rest of the world basically didn’t understand what it had signed up for. The CRS is based on FATCA and, even until today, only 20% of the world complies with FATCA!
TL: What do you think will be the major challenges to the implementation of CRS across the globe? Is full-fledge implementation even possible?
EA: The CRS is a hammer being used to crack a nut. There have been no cost-benefit studies. FATCA is a huge loss maker, both for financial institutions outside the USA as well as the US tax authority. It is expected CRS will become a white elephant.
The biggest challenges will be:
- Overall understanding of the CRS meaning and of its scope - too many questions are unanswered. Financial institutions still don’t know how to implement it in a way not to lose account holders.
- Adequately trained staff – it is difficult for smaller economies not only to find and educate staff but also to educate clients on new reporting standards. The CRS has been written with big economies in mind, for economies with a sufficient supply of talented labour and well established IT architecture.
- Technical resources – smaller economies may not be as high-tech as the West and may lack financial resources. The resources of the UK government cannot be compared to those of, say, Belize. Effect on local economies – small tax havens will suffer the most. The cost of implementation of reporting standards can be too high for them, many offshore accounts will be closed and many offshore financial institutions will simply collapse.
TL: Have there been issues with the interpretation of the CRS guidelines? Are there loopholes that might make it difficult for the CRS to be effective?
EA: The CRS is a general framework with commentary that leaves many questions unanswered. Its aim is to catch everything except big business! It is funny how that could be exempt bearing in mind the biggest beneficiaries are Western companies.
OECD guidance is a mess. Most regulators have simply cut and pasted this and not expanded guidance – this may be out of ignorance or simply a desire not to offend the OECD! Thus, banks and other financial institutions have been left to work out the rules alone. This will result in different rules being applied by each bank causing distorted reporting.
Most of the world is still unaware of the scope of the CRS – this will dawn on everyone over time. For example, private holding companies may be treated like banks and will be required to report their holdings to their local CRS regulator. The same applies to trusts and separately to trustees!
Surprisingly, there are plenty of ways to rearrange the affairs of account holders so their accounts are not reported. This is in addition to various exemptions from reporting that already exist. The aim of the CRS is to target specific structures leaving certain structures as non-reportable. For example, in case certain conditions are met, trading companies are exempt from being reported.
These and many other ways of restructuring accounts are described in my book. The topic is very complex. When I first started writing my book, I thought it would take a month or so. In fact, it took 8 months of full time research and writing until the implications became clear.
TL: How has the developing world reacted to CRS and this push by the OECD? Do you see the developing world facing specific problems that will not be faced by more developed jurisdictions?
EA: It is important to differentiate between countries that are developing and hope to become economic giants (such as BRICS and countries in Africa) and offshore centres that are reliant on offshore banking business (such as island tax havens).
Large high tax economies will benefit enormously as they will receive data on accounts based offshore and they have a huge opportunity here to raise their profit by imposing taxes for these accounts. The costs of implementing CRS are not so overbearing for them, as most accounts are owned by local people.
For example, in the UK most accounts are held by UK residents. In some countries, there are minimal numbers of accounts held by overseas residents. India is a large economy but the number of foreign accounts is low compared to the UK. These countries hope to recoup the costs of the CRS implementation from additional tax receipts arising from offshore accounts reported to them by overseas governments.
Small tax havens have a real problem. Most accounts are owned by foreign residents and will be reportable. The cost of implementation will be high – some institutions may close, as they cannot afford such costs. There is expected to be little benefit to such economies.
Global banking will become distorted. If offshore accounts are disclosed, many people will close such accounts. New accounts will also not be opened. This may cause offshore banks to collapse or shrink. As these economies struggle, some countries may pull out of the CRS. Even if they are blacklisted, they were going to go bust anyway. Some compromises will have to be reached. It remains to be seen what will actually happen.
TL: What sort of reporting technology has been developed at a national or private level to help countries fall in line with CRS?
EA: Reporting will be in a standard computer format so that reports can integrate globally.
There will be a huge demand for compliance experts in the world. If you are interested, you should study the CRS in depth and offer your services to financial institutions. The world is your oyster.
TL: Any other thoughts you’d like to share on CRS with our community?
EA: There are various theories about why governments would pass a loss-making law. Here are just a couple. For example, the data may be used later to pass new tax laws to target offshore accounts. Those laws will be easy to write, as governments will know where their taxpayers have kept monies offshore. Another theory is that data is required so that governments can track all the wealth of their residents. This data could be misused to freeze overseas accounts at the whim of governments. Just think what governments could do if they knew where Julian Assange’s cash and investments were kept!
The CRS has no safeguards for account holders against misuse or incorrect reporting. This is a big weakness. Thus, if you are accidently categorised as reportable by a bank, you will be reported to your tax authority and may suffer harassment from the taxman. Expect court cases from account holders in the future. Financial institutions may be sued successfully for breach of confidentiality (albeit they acted in error or incompetence).
Data collection seems to have gotten out of control. In the EU, disproportionate data collection is illegal. Already the big Internet giants have lost EU court cases. The French government also lost a case trying to implement a national debt register. It is quite likely the CRS may be challenged as being disproportionate in the EU. If the challenge is successful, it will be ironic that the main driver for the CRS (i.e., the EU) is the place where the CRS dies!
There are so many things that are wrong with the CRS including issues of democracy, privacy, sovereignty, abuse of data, financial terrorism and blackmail, to name a few now.
I did my research over 8 months to identify ways how financial institutions and account holders could save their money and privacy. I think the research was successful; I really enjoyed the intellectual challenge of researching CRS and have found good and clear practical solutions for my clients that resulted in a real book “Common Reporting Standard: Survivor's Guide to OECD Automatic Exchange of Information of Offshore Financial Accounts.”
The CRS is multi-layered and many aspects are hidden. It has been written in a way so its implications are not clearly understood. Maybe that is why most tax havens signed up to it (they simply did not appreciate the consequences). As the implications become clear, expect resistance from tax havens. Turkeys do not vote for Christmas. Already Mauritius has delayed implementation of the CRS (announced December 2015).
All these issues and more, including detailed notes for compliance and privacy strategies for clients, are discussed at length, with detailed examples, in my book “Common Reporting Standard: Survivor's Guide to OECD Automatic Exchange of Information of Offshore Financial Accounts” (www.soctapublications.com
). After reading the book I hope you will be in a position to protect your clients’ wealth and privacy.
The final deadline for the bank accounts to be caught by the CRS is December 31st
, 2016. To avoid loss of privacy it is important for clients to be advised of the options so that they can restructure their banking well before the deadline.