OECD 2018 guidance on 'golden passport' tax abuse and FIs raising further questions.[EDD]

The Organisation for Economic Cooperation and Development (OECD) said in 2018:-

• Financial institutions need to ask additional questions to prevent residence and citizenship by investment schemes being used as tools to hide assets from the tax authorities,.

The OECD guidance

• The OECD guidance states that if there is doubt about the residence status because the account holder or controlling person is claiming residence in a jurisdiction offering a potentially high-risk scheme, financial institutions should consider raising further questions.[EDD]
• These include whether the residence rights were obtained under a residence by investment scheme, whether the individual holds residence rights in any other jurisdictions, whether the individual has spent more than 90 days in any other jurisdictions during the previous year and in which jurisdiction the individual has filed personal income tax returns during the previous year.

The OECD guidance statement on Residence/Citizenship by investment schemes says

• While residence and citizenship by investment (CBI/RBI) schemes allow individuals to obtain citizenship or residence rights through local investments or against a flat fee for perfectly legitimate reasons, they can also be potentially misused to hide their assets offshore by escaping reporting under the OECD/G20 Common Reporting Standard (CRS).
• In particular, Identity Cards and other documentation obtained through CBI/RBI schemes can potentially be misused or abused to misrepresent an individual’s jurisdiction(s) of tax residence and to endanger the proper operation of the CRS due diligence procedures.
• Potentially high-risk CBI/RBI schemes are those that give access to a low personal income tax rate on offshore financial assets and do not require an individual to spend a significant amount of time in the location offering the scheme.
• Financial Institutions are required to take the outcome of the OECD's analysis of high-risk CBI/RBI schemes into account when performing their CRS due diligence obligations.
• Further detail is available in the OECD Frequently Asked Questions section.
• The OECD has analysed over 100 CBI/RBI schemes, offered by CRS-committed jurisdictions, identifying the following schemes that potentially pose a high-risk to the integrity of CRS.

• http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/residence-citizenship-by-investment/

The OECD guidance - CRS What should Financial Institutions do?

1. Under Section VII of the CRS, a Financial Institution may not rely on a self-certification or Documentary Evidence if the Financial Institution knows or has reason to know, that the self-certification or Documentary Evidence is incorrect or unreliable.
2. The same applies with respect to Pre-existing High-Value Accounts where a relationship manager has actual knowledge that the self-certification or Documentary Evidence is incorrect or unreliable.
3. In making the determination whether a Financial Institution has reason to know that a self-certification or Documentary Evidence is incorrect or unreliable, it should take into account all relevant information available to the Financial Institution, including the results of the OECD's CBI/RBI risk analysis.
4. As a result, where, taking into account all relevant information, the facts and circumstances would lead the Financial Institution to have doubts as to the tax residency(ies) of an Account Holder or Controlling Person, it should take appropriate measures to ascertain the tax residency(ies) of such persons.
5. To the extent that the doubt is related to the fact that the Account Holder or Controlling Person is claiming residence in a jurisdiction offering a potentially high-risk CBI/RBI scheme, FIs may consider raising further questions, including:
1. Did you obtain residence rights under an CBI/RBI scheme?
2. Do you hold residence rights in any other jurisdiction(s)?
3. Have you spent more than 90 days in any other jurisdiction(s) during the previous year?
4. In which jurisdiction(s) have you filed personal income tax returns during the previous year?
5. The responses to the above questions should assist Financial Institutions in ascertaining whether the provided self-certification or Documentary Evidence is incorrect or unreliable.

Background

1. Often referred to as 'golden passports', citizenship by investment and residence by investment schemes are offered by a number of jurisdictions. They allow foreign individuals to obtain citizenship or temporary or permanent residence rights on the basis of local investments or against a flat fee.
2. Although individuals may be interested in these schemes for a number of legitimate reasons, the OECD says that there is evidence that these schemes are being used to circumvent reporting under the Common Reporting Standard (CRS).
3. CRS is a way for countries to automatically exchange information about non-residents holding bank accounts and other financial accounts offshore in order to crack down on the use of offshore jurisdictions to facilitate tax evasion.  Over 100 jurisdictions have agreed to make annual exchanges of information under CRS.
4. Financial institutions are obliged to carry out due diligence on account holders. This includes the account holder self-certifying their residence status and providing documentary evidence.
5. The OECD said that:-
1. Identity cards, residence permits, and other documentation obtained through citizenship or residence by investment schemes can potentially be abused to misrepresent an individual’s jurisdiction of tax residence and to endanger the proper operation of the CRS due diligence procedures.
6. Jason Collins, a tax expert at Pinsent Masons, the law firm behind Out-Law.com said:-
1. "Banks and trust companies need to be aware of the OECD's latest guidance and factor it into their CRS processes to help spot 'flaky' claims to residence,"
7. The OECD says that:-
1. Potentially high-risk schemes are those that give access to a low personal tax rate on income from foreign financial assets and do not require an individual to spend a significant amount of time in the jurisdiction offering the scheme.
2. Potentially high-risk schemes are currently operated by Antigua and Barbuda, The Bahamas, Bahrain, Barbados, Colombia, Cyprus, Dominica, Grenada, Malaysia, Malta, Mauritius, Montserrat, Panama, Qatar, Saint Kitts and Nevis, Saint Lucia, Seychelles, Turks and Caicos Islands, United Arab Emirates and Vanuatu.
8. Monaco was originally listed but was removed after providing additional information to the OECD.
9. CRS rules provide that a financial institution may not rely on a self-certification or documentary evidence if it knows or has reason to know, that the self-certification or documentary evidence is incorrect or unreliable.

Conclusion

Holding more than one passport can potentially increase the risk of tax evasion, but it largely depends on how the passports are used and the individual's tax compliance behaviour.

Here are some key points to consider:

1. Concealment of Assets: Multiple passports can make it easier to hide assets and income in different countries, complicating the tracking of financial activities by tax authorities (https://www.gov.uk/report-tax-fraud).
2. Residency and Tax Obligations: Different countries have different rules for tax residency. An individual with multiple passports might exploit these differences to claim non-residency in high-tax jurisdictions while benefiting from low-tax jurisdictions (https://assets.publishing.service.gov.uk/media/5a81c595ed915d74e33fffa0/tackling_tax_avoidance_evasion_and_non-compliance.pdf).
3. Golden Passport Schemes: Some countries offer citizenship through investment programs, which can be abused to gain tax advantages. The OECD has identified these schemes as high-risk for tax evasion, especially when they offer low personal tax rates on foreign income without requiring significant physical presence (https://www.pinsentmasons.com/out-law/news/oecd-golden-passport-tax-abuse).
4. International Cooperation: Efforts like the Common Reporting Standard (CRS) have improved international tax transparency, making it harder to hide assets abroad. Countries exchange financial account information to combat tax evasion (https://assets.publishing.service.gov.uk/media/5a81c595ed915d74e33fffa0/tackling_tax_avoidance_evasion_and_non-compliance.pdf).

It's important to note that while holding multiple passports is legal, using them to evade taxes is illegal and can lead to severe penalties for both the holder and the FIs who are providing services

If you have concerns about tax compliance, consulting a tax professional is advisable.

Source:  

1. Report tax fraud or avoidance to HMRC - GOV.UK. https://www.gov.uk/report-tax-fraud.
2. Tackling tax avoidance, evasion and non-compliance - GOV.UK. https://assets.publishing.service.gov.uk/media/5a81c595ed915d74e33fffa0/tackling_tax_avoidance_evasion_and_non-compliance.pdf.
3. OECD issues guidance on 'golden passport' tax abuse - Pinsent Masons. https://www.pinsentmasons.com/out-law/news/oecd-golden-passport-tax-abuse.
4. https://www.pinsentmasons.com/out-law/news/oecd-golden-passport-tax-abuse