IEIM730020 - CRS avoidance arrangements

An arrangement will be a CRS avoidance arrangement if it is reasonable to conclude that the arrangement has been designed to circumvent or is marketed as or has the effect of circumventing reporting obligations or exploiting an absence thereof under the Common Reporting Standard (CRS). The UK’s agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) is not an equivalent agreement since it does not provide for the same reciprocal level of reporting as the CRS. Therefore, an arrangement which seeks to avoid reporting under FATCA would not be reportable under these regulations. However, the arrangement might be caught by regulation 23 of the International Tax Compliance Regulations 2015, so that those regulations would have effect as if the arrangement had not been entered into

The OECD commentary in section III of the Model Rules (page 23) explains that this test of ‘reasonable to conclude’, “…is to be determined from an objective standpoint by reference to all the facts and circumstances and without reference to the subjective intention of the persons involved. Thus, the test will be satisfied where a reasonable person in the position of a professional adviser with a full understanding of the terms and consequences of the Arrangement and the circumstances in which it is designed, marketed, and used, would come to this conclusion”.

Arrangements which will be caught include those employing the following features:

(a) the use of an account, product or investment that is not, or purports not to be, a Financial Account, but has features that are substantially similar to those of a Financial Account;

(b) the transfer of a Financial Account, or the monies and/or Financial Assets held in a Financial Account to a Financial Institution that is not a Reporting Financial Institution or to a jurisdiction that does not exchange CRS information with all jurisdictions of tax residence of a Reportable Taxpayer;

(c) the conversion or transfer of a Financial Account, or the monies and/or Financial Assets held in a Financial Account to a Financial Account that is not a reportable account;

(d) the conversion of a Financial Institution into a Financial Institution that is not a Reporting Financial Institution or a Financial Institution that is resident in a jurisdiction that does not exchange CRS information with all jurisdictions of tax residence of a Reportable Taxpayer;

(e) undermining or exploiting weaknesses in the due diligence procedures used by Financial Institutions to correctly identify:

(i) an Account Holder and/or Controlling Person; or

(ii) all the jurisdictions of tax residence of an Account Holder and/or Controlling Person;

(f) allowing, or purporting to allow:

(i) an Entity to qualify as an Active NFE;

(ii) an investment to be made through an Entity without triggering a reporting obligation under the CRS Legislation;

(iii) a person to avoid being treated as a Controlling Person; or

(g) classifying a payment made for the benefit of an Account Holder or Controlling Person as a payment that is not reportable under CRS Legislation; allowing, or purporting to allow:

where it is reasonable to conclude that such Arrangement is designed to circumvent or is marketed as, or having the effective of CRS Legislation or exploiting an absence thereof.

The test is an objective one, but in determining whether an arrangement has the effect of undermining the CRS the intent of those involved will be relevant as it will offer a good indication as to whether the arrangement may have the relevant effect. In considering whether an arrangement may have the effect of undermining reporting obligations (or taking advantage of the absence of these) an intermediary will need to consider the effect of the arrangement as a whole. Where an intermediary only has knowledge of a particular step and has no reason to consider that that step forms part of an arrangement that will undermine or circumvent CRS, there is no obligation on that intermediary to report.

An arrangement does not have the effect of circumventing CRS, simply because, as a consequence of the arrangement, no report under CRS is made. For example, funds held in a French bank account by a UK resident would be reportable under the CRS. If the UK resident uses those funds to purchase a property in France, this would not in itself have the effect of undermining the CRS, because real estate is specifically excluded from reporting under the CRS. As such, the fact that a report no longer needs to be made does not mean that CRS legislation is circumvented, as it is in line with the policy intent of the Regulations. The OECD commentary makes clear that “an Arrangement is not considered to have the effect of circumventing CRS Legislation solely because it results in non-reporting under the relevant CRS Legislation, provided that it is reasonable to conclude that such non-reporting does not undermine the policy intent of such CRS Legislation.”

In contrast, a promoter advising people to move funds from a jurisdiction where the CRS is in force, to one which has not implemented the CRS, in order to ensure that the funds are not reported under the CRS to the relevant tax authorities, is clearly caught as a CRS avoidance arrangement. The effect of the arrangements is that the CRS reporting obligation is circumvented, in a way that is not consistent with the policy intention of the CRS. However, a person simply processing that transaction, for example a bank transferring the money from one account to another, would not normally have insight into the arrangement as a whole or its expected effect, and so would not be required to report. This would be true where the person processing the transaction knew to which country the funds had been sent, but has no knowledge as to the underlying reason for the transfer and if an “arrangement” exists

In applying the objective test of whether an arrangement has the effect of undermining or circumventing CRS reporting, the presence of certain features would suggest a CRS avoidance arrangement has been made. For example:

• A transaction that is highly structured in such a way that the avoidance of CRS reporting is the logical explanation for that structure;

• A transaction that is otherwise uncommercial, but for the benefit of avoiding CRS reporting;

• Ownership structures which result in beneficial owners holding assets just below the threshold of reporting (e.g. beneficial owners holding 24% of an interest where local rules apply a 25% threshold), or

• The refusal by a financial account holder to provide an explanation for a transaction or structure in circumstances in which that has been requested.

Where a scheme has been designed as a CRS avoidance arrangement it is reportable by the intermediary, even if the eventual user does not seek to avoid CRS reporting. It is the fact that the scheme was designed to circumvent legislation that is important. Similarly, an arrangement that was not designed to circumvent the CRS but is used by a taxpayer to achieve that effect, is reportable because it has the effect of circumventing the CRS. However, the intermediary may not have knowledge of this, and so would not necessarily have to report, in which case the reportable taxpayer would.

CRS reporting requirements often fall away when moving assets into a territory that does not require CRS reporting. This does not necessarily mean that this is a CRS avoidance arrangement. However, if moving of assets to non-reporting jurisdictions is part of the design, or is marketed as, or has the effect of, circumventing the CRS legislation then it will be a reportable as a CRS avoidance arrangement.