The challenges of CRS for the expatriate population & global mobility manager
Common Reporting Standard (CRS): Luc Lamy of Tax Consult in Belgium explains the complexities for expatriates of this international initiative which aims to stamp out tax evasion.
"Global mobility managers need to be aware of CRS. The
company’s expatriation policies should include provisions
that relate to tax residency, personal income (i.e. tax
equalization) and the impact of bank accounts. Actions
such as failing to close a bank account at the end of an
assignment could lead to a bank exchanging information
with the wrong country."
Luc Lamy, Partner, Tax Consult, Belgium
In the spring 2017 issue of The Expat Post, we explained the complexities of the Common Reporting Standard (CRS). This new framework is an internationally coordinated initiative designed to stamp out tax evasion, with financial institutions around the world committed to automatically exchanging account information. This is a real ‘game changer’ for expatriates (and for those who are responsible for looking after their affairs). In this article, Luc Lamy of Tax Consult in Belgium reviews the scope of information addressed under CRS and the tax issues faced by the expatriate population.
Summary – Why global mobility and tax directors need to know about CRS!
- The days of banking secrecy are over – 101 governments worldwide are signed up to CRS and will be exchanging information automatically about the assets and accounts held in their jurisdictions by foreign individuals/expatriates – some assignees will get tangled up
- The expatriate’s tax residence is critical to the workings of CRS. However, the laws determining tax residency are complex- it is not just about tracking the days
- Misunderstanding the implications of CRS and the steps that need to be incorporated into a company’s expatriation policy could have negative financial and reputational impact.
The background to CRS
The automatic exchange of information has been taking place within the EU since 2005 and enables interest
payments made in one EU member state to residents of another member state to be taxed in accordance with the
laws of the individual’s country of residence.
A major step in implementing the CRS was taken in October 2014 with the signing of the CRS Multilateral Competent Authority Agreement (‘CRS MCAA’) which provides the mechanism for the automatic exchange of information under the CRS. 101 jurisdictions have signed the CRS MCAA and committed to exchange information. Over 2,600 bilateral exchange relationships have already been activated by the jurisdictions committed to the CRS.
Following this, the EU adopted Directive 2014/107/EU (“DAC2”) which implements the 2014 OECD Global Standard on the automatic exchange of financial account information within the EU. The scope of this is not only interest income, but also dividends and other types of capital income, and the annual balance of the accounts that create such income.
Determining tax residency
CRS has been designed to ensure that taxpayers pay the right amount of tax to the right jurisdiction. If you are
resident in a particular country, you are usually taxable in that country on your worldwide income. Therefore, the
information which is exchanged automatically needs to go from the source country to the country of residence.
In terms of reporting obligations, financial institutions must identify the country of residence. Tax residence is a
complex tax issue and the OECD model convention does not provide a definition of tax residence. The model convention and the bilateral tax treaties adopting the model refer to the domestic laws of the contracting states.
In the event of conflict between an individual’s two residences, the OECD model convention contains special rules with alternative criteria (a tie-breaker rule) to determine which country is to be given preference. The first criterion is the individual’s permanent home: the individual is deemed to be a resident only of the state in which he/she has a permanent home. In those cases where the individual has a permanent home in both states or in neither state, the other criteria may need to be applied i.e. the centre of that individual’s vital interests, abode and/or nationality.
To assist taxpayers and financial institutions to comply with their obligations under the CRS, jurisdictions have also made available information related to their Tax Identification Numbers (TINs) and their tax residency rules.
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Information to be exchanged across jurisdictions
The information to be exchanged relates to the individual’s personal (e.g. name, address, account number and the name and identifying number of the reporting financial institution) and financial information. The latter includes the account balance or value at the end of the relevant calendar year, the total interest and dividends, other income generated from assets held in the account as well as proceeds from the sale or redemption of financial assets paid or credited to the account.
Once again, most bilateral tax treaties contain rules regarding the taxation of interest, dividends and capital
gains. In most cases, the beneficiary’s state of residence will tax the interest and dividends. However, this type of
income usually also attracts tax in the source state, i.e. where the individual’s income is paid. The rate of tax that is paid will be limited to a certain percentage (e.g. 10-15%) by the tax treaty that is in place.
The amount and nature of payments applicable to a reportable account will be determined in accordance with the tax laws of the jurisdiction which is exchanging the information.
Compliance requires good advice and changes to company policies
It is really important that banks have the correct information. Sending information to the wrong jurisdiction will provoke questions from the tax authorities in these locations, even if there is no tax liability. Expats moving to different countries around the world need to ensure they receive the right advice which enables them to correctly determine their tax residency and receive the right tax treatment. Those assignees earning interest and dividends in their home country will need to provide a certificate of tax residency to the state of source in order to obtain the reduced tax treaty rate. Meetings with tax professionals in the home and the host countries will help to ensure compliance with CRS.
Global mobility managers need to be aware of CRS. The company’s expatriation policies should include provisions
that relate to tax residency, personal income (i.e. tax equalization) and the impact of bank accounts. Actions
such as failing to close a bank account at the end of an assignment could lead to a bank exchanging information
with the wrong country.
CRS must start with the efficient and correct exchange of information between the expat, the global mobility manager and the tax adviser.