Cross-border tax planning for today’s global transparency
Tax transparency has been revolutionised by the global automatic exchange of information under the ‘Common Reporting Standard’ (CRS). Now in full flow, this initiative enables tax offices across the world to keep track of taxpayers’ offshore assets and accounts.
Meanwhile, many countries have introduced additional measures to check taxpayers are making correct declarations. With such heightened worldwide scrutiny, it is more important than ever to make sure you are paying the right taxes, in the right place, at the right time.
What is the Common Reporting Standard?
The CRS came into effect in 2016, when the “early adopters” began collecting information on financial accounts held by non-residents. The first actual exchange – where the 2016 data was passed on to the taxpayers’ country of residence – took place in 2017 between 49 jurisdictions, including the UK and Spain. Another 51 began sharing information in September 2018, including perceived ‘tax havens’ such as Switzerland. Today, over 100 countries are co-operating, with more joining each year.
Financial institutions that are obligated to report information include banks, custodians, certain investment entities and insurance companies, trusts and foundations.
What information is being shared?
Focusing on the financial assets owned outside your country of residence, the data includes basic details such as your name and address, country of tax residence and tax identification number.
Financial information includes the investment income you earned over the year (interest, dividends, income from certain insurance contracts, annuities etc.), account balances and gross proceeds from the sale of financial assets.
Local scrutiny in Spain
When local tax offices receive CRS information, they can easily verify whether taxpayers have accurately reported their worldwide income on their income tax and wealth tax returns.
In Spain, the authorities have started following up discrepancies after comparing data to residents’ declarations. In the last exchange, the Hacienda received information on approximately 1.5 million offshore accounts with a total balance of €457 billion, while only €150 billion was declared through Modelo 720.
The UK’s clampdown on tax evasion
Last year, ‘Requirement to Correct’ (RTC) rules put the onus on UK taxpayers to regularise their offshore affairs by the end of September. Now, anyone found to still have undeclared offshore income and gains can face tougher penalties of up to 200% the original tax owed.
Overall, since 2010, the UK government has introduced over 100 new measures to tackle tax evasion. This enabled HMRC to recover over £2.9 billion in lost taxes even before it started benefiting from CRS data. It received 5.67 million records on UK taxpayers’ offshore financial accounts in 2018, involving around 3 million UK resident individuals (or entities they control).
HMRC uses its ‘Connect’ analysis programme to cross-check data it receives from abroad with its own (including details on salaries, bank accounts, loans, property, car ownership etc.).
The importance of getting it right
If you are tax resident in one country and have assets or earn income in another you need to follow the local tax rules, the UK tax rules and the relevant double tax treaty to make sure you are correctly declaring income and paying tax where you should be.
There are tax planning arrangements available in Spain that can help you legitimately reduce your tax liabilities, particularly on your investment capital, so take advice for the best results. An adviser with cross-border expertise can help you enjoy favourable tax treatment while offering peace of mind that you are meeting your tax obligations.
Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.