The Common Reporting Standard (CRS) is already well-known within financial circles, but only a small number of people can accurately define and apply it. Therefore, before discussing the registration and management of offshore companies within a CRS environment, I shall explain in simple language what CRS means for a customer who plans to register an offshore company.
A popular definition of CRS’ impact
If more than 50 percent of the revenue of an offshore company comes from dividends and interest, i.e. passive investment income, information about the controller of this offshore company will be exchanged between offshore territories and the tax authority in the country where the controller is located.
If more than 50 percent of the revenue of an offshore company comes from trade income, i.e. active income, information about the controller of this offshore company will be exchanged between offshore territories and the tax authority in the country where the controller is located.
Outlook on the issue
The distinct sense of a “cat and mouse” game may immediately be created by such a definition in simple language. Indeed, the starting point of the Organization for Economic Co-operation and Development (OECD) is to regard many international accounts as shelters for tax evaders. It is as if there are secret supervisors everywhere, who put everyone in a constant state of anxiety.
In my opinion, in this instance the OECD takes a negative starting point, which deviates from the meaning of its name, “Organization for Economic Co-operation and Development”. Instead of stimulating economic cooperation, it results in a significant increase of financial compliance costs for the operation of the economy. It is unsustainable that a bank, founded as a commercial organization, is used by tax authorities in all countries as an inspection organization. Taking a neutral position, this article discusses the impact of CRS on offshore companies from a practical point of view and aims to help practitioners and customers.
Let’s go to the USA
Based on the definition of CRS above, we know that if the revenue of your offshore company doesn’t come from active trade and service income, information about accounts will be sent back to the tax authority in the country where the controller is located. Not everyone is a tax expert. If tax authorities indulge in collecting more taxes, it may cause trouble for many people.
CRS is only valid among countries that are signatories. If passive incomes enter a country which is not a signatory to CRS, such incomes can free themselves from CRS’ entanglement. But which countries are these? You definitely wouldn’t choose North Korea or Russia. But there is good news: America is an option too, because America is not a signatory to CRS.
Since CRS became a hot topic, the real estate, immigration and securities market in America have all become prosperous. Trump is so happy – and all thanks go to the OECD, a great help in this regard. Furthermore, when those countries made efforts to recover taxes through the CRS, Trump announced a tax reduction. Even Apple will go back to America. Grandpa Trump is a wise man. He is a businessman, so he knows that encouraging businessmen will create wealth, while close monitoring of businessmen will drive them away. China is not stupid either. In 2018, China will also begin to reduce taxes. Recovering tax won’t make the world prosperous, and the gap in tax concessions will determine the flow of wealth. Is this not the case for tax competition between China’s free trade zones and provinces and cities?
Anonymity is becoming more widespread
For professionals with years of experience in tax planning, CRS rules are not difficult to understand. But for other practitioners, they are too complicated to manage or manipulate. There is a large area for discretion. According to my observations in recent years, banks are bound to find a formulated method to help them determine whether a customer’s offshore company is engaged in active or passive investment, and which jurisdiction the customer belongs to.
An offshore company operates offshore, but due to the pressure of costs, a bank cannot and has no need to carry out due diligence or have a detailed understanding of the actual controller of the company, let alone cover the cost by itself. All a bank needs is formal compliance. On the other hand, the OECD constantly introduces detailed regulations to block existing countermeasures, such as recent OECD rules for identifying methods for hiding someone’s real tax identity via passports issued by small countries. Every new supplementary provision makes CRS more complicated and harder to be implemented.
The OECD is a loose alliance in which all member states have their own tax laws. It is not a worldwide government, so when the policies are distributed between two member states, significant changes may occur. More people use simpler methods to respond to CRS, such as an anonymous proxy. With such a method, they can directly transfer their own tax burdens to another insensitive person, who may or may not come from the same tax jurisdiction. In any case, they can transform their own information into information that they deem worthless.
Simply pay some taxes
Most customers I know worry about having trouble related to the disclosure of their data, rather than about paying taxes. If there is no definite tax law which stipulates how much tax I should pay if I have one million dollars overseas, if I tell you I have one million dollars, it spells trouble. In fact, what international operators eventually want is free trade and fewer taxes.
The information transparency of CRS is indeed a hassle, but other hassles encountered by traditional offshore companies in the context of CRS are even more annoying. For example, a bank may constantly inquire about the use of some or other amount of money. It takes time to reply, and even more time to provide corresponding hard documents for the purpose of compliance. Some remittances may be suspected and blocked just because they come from or go to offshore jurisdictions. Under such circumstances, customers need free trade.
Even though some taxes being collected on a transaction is not a problem, the tax cannot be too high or it may impact on the customer’s global competitiveness. In such a circumstance, some low-tax jurisdictions with a good reputation may become better choices, such as New Zealand, the Netherlands, or Singapore. In New Zealand for instance, if a limited liability company doesn’t have customers in the territory of New Zealand, its tax burden will only be 1.4% of the total amount of its re-export sales revenue. In such a circumstance, the customer may claim that he has achieved both goals: free trade and low taxes. As for CRS, all shareholders and directors of this company are local, so there is no issue whatsoever surrounding information exchange.
What happens in the future?
Now, let’s summarize the observations above and look forward to the future.
1) CRS only has indirect enforceability and financial institutions don’t carry out thorough due diligence, so even information about funds that don’t become passive investment in America cannot be effectively exchanged, or cannot be exchanged accurately enough.
2) All countries wish for maximum access to information rather than exchanging information with other countries. If they lack the motivation to build complete infrastructure, refine standards and carry out training, information exchanges will eventually become infrequent and time-consuming, just like the tax information exchange agreements issued by the OECD before.
3) All countries will follow China and America’s example of stimulating domestic investors’ returns, and attracting investors from each other’s countries through tax reductions. In the long run, this will offset the effects of CRS.
4) Even if data is shared, a great deal of research and international tax legislation is needed to make such data valuable. Therefore, passive access to such data in anti-corruption and anti-tax avoidance cases is the most likely use of such data.
5) A customer with an offshore company still needs to know the fundamental principles, take proactive measures from the perspective of family wealth planning and long-term investment, optimize its international investment structure, and respond to changes at any time.
6) CRS may set an example and provide experience with tax transparency among different countries. Although CRS may fail as a multilateral agreement, as a bilateral agreement it may become more effective within the sphere of influence of a strong nation. For example, America’s Foreign Account Tax Compliance Act (FATCA), the EU’s internal tax directives, and Britain’s requirements for Commonwealth countries are all going strong. Although China does not yet have any enforceable bilateral agreements, sooner or later it will build its own FATCA within its sphere of influence.
