The Common Reporting Standard (CRS)

The Common Reporting Standard

In 2014, the Organisation for Economic Co-operation and Development (OECD) proposed a global initiative that focused on the exchange of information concerning tax matters. The premise being, the automatic exchange of information between governments should theoretically allow for more thorough scrutiny of information presented on taxpayer returns. Increased scrutiny would then act as a deterrent to tax avoidance.

To date, more than 90 countries have agreed to automatically exchange information provided to them by financial institutions operating within their borders. The Bahamas is on schedule to begin its CRS participation in 2018.

As a follow on from the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard or CRS is a definite game changer for the offshore financial services industry due to 3 main reasons:

• The cost of implementation.

• The attrition associated with implementation; and

• Offshore compliance fatigue by both clients and service providers.

Implementation costs:

After the mammoth FATCA review exercise that most offshore financial service providers conducted last year, it became very apparent that the cost associated with these types of reviews placed significant strain on the resources of some firms. Expenses were mostly associated with software upgrades, communication fees and temporary labour costs. It has been suggested that the cost of implementing FATCA, turned out to be ten times more than the revenue it generated due to compliance.

The fact of the matter is that financially, firms are not prepared to sustain yet another costly review of their client base and this has caused a paradigm shift in the way we expect to manage the introduction of the CRS.

There will always be inherent risks associated with any solution. However, in an attempt to minimize the expenses associated with a paper review, some firms have resorted to the terms and conditions by which they provide fiduciary services. Essentially, the “the devil is in the detail”. The principal contractual agreement between the client and the fiduciary service provider should allow for the disclosure of critical information to avoid noncompliance with the standard and at the same time, compel the client to self-certify that he or she has complied with all local tax regulations in their home country.

Attrition:

The CRS will no doubt reduce the volume of clients that maintain offshore trusts because the practical attributes usually associated with being offshore. I.e. Confidentiality, will no longer be available. Practitioners estimate that firms may lose up to 40% of business, with attrition focused on the directed, smaller, less sophisticated structures. Nonetheless, we will come out on the other end of the CRS with an industry that is smaller, more specialized, transparent and more costly for the client.

Compliance Fatigue:

Clients receive a copious amount of correspondence concerning regulatory changes. At some point it begs the question, why maintain the structure? The first quarter volatility in the markets, coupled with administration expenses, erode the value of having an offshore structure especially if the assets under management are relatively small. With the “Base Erosion and Profit Sharing” or (BEPS) initiative on the horizon, it has now become debatable as to whether preferential treatment will continue for offshore holding companies that use W8-BEN Forms to defer withholding; All of which support good arguments for the repatriation of offshore funds and has spurned a resurgence in the insurance industry as an alternative to offshore investment wealth planning.

Ultimately, once the CRS is fully implemented, at the very least, you know that your local tax authority will seek to verify the accuracy and completeness of your tax returns. Whilst the current tax season is underway, now is a good time to have a discussion with your planner.

FATCA & Hold All Mail

Foreign Account Tax Compliance Act and Hold All Mail

By now, most major financial institutions and service providers are winding up the review of their client base to ensure that undocumented US centric clients are properly identified as it relates to the Foreign Account Tax Compliance Act (FATCA) and its regulations.

From our own experience, this exercise allowed us to reconfirm that our clients were still non U.S. persons by obtaining new W8-BEN forms. However, we found examples of third party power holders and beneficiaries that were deemed US resident for FATCA purposes and these persons were properly documented by obtaining new W9 forms.

In an attempt to cure all inferences of US indicia, we reviewed all of our customers mailing addresses. Many of whom had Hold All Mail (HAM) addresses in the U.S. to assist with the copious amounts of mail sent to each client monthly. This inference of U.S. residency had to be cured to eliminate any doubt of the client being a non U.S. person. The cure process involved sending a letter to the client to have them confirm that the U.S. HAM address was only being used to facilitate the management of mail.

As an alternative to a US HAM address, we recommended the FidPro Hold All Mail Service, one of few Hold All Mail providers not located in the U.S. FidPro Hold All Mail clients did not require a cure letter. This turned out to be a significant saving for the firm and our clients were not required to send followup confirmation.

If there is an indication that your client is a US person, this should be explained. In the absence of a plausible explanation for the US indicia, you may want to recommend to your client that they seek independent tax advice to confirm their status before the 17th of August 2015.

For all Bahamian Financial Institutions or BFI’s the local FATCA Portal can be accessed here.

“On Why One Should Separate Duties”

Why it’s important to Separate Corporate from Legal Services

If you’re contemplating the incorporation of a local company or International Business Company (IBC), then you may wish to consider the concept of separating your corporate and legal services. The basis for this is continuity of business. More often than not, corporate services form a portion of the legal services rendered by the client’s attorney. Unfortunately, there are times when expectations are not met and the client and attorney are forced to end the relationship. If the termination is not amicable, it could lead to disruption of the registered office and agent services previously provided by the client’s attorney. I.e. Regulatory requirements such as annual fees and filings will not be maintained due to the inability to collect disbursements from the client.

By using a Financial Corporate Service Provider to act as registered agent and office exclusively, no matter how dysfunctional the relationship between the client and his legal support might become, the company is able to continue without disruption. This element of continuity is important. It saves the client money, it’s more efficient and augments the robust attribute of limiting the liability of the company’s beneficial owner.

If you’re about to start a new business and you want to hire an attorney to represent you and your company’s interest, consider meeting with your Corporate Service Provider first. Chances are, they’ll save you money in the long run.

On International Business Companies or IBCs as Split Share Companies

The Split Share International Business Company (IBC)

A Bahamian International Business Company or IBC can be used as a split share company that is both effective and affordable to administer.

The process for creating a split share company involves amending the Articles and Memorandums of the IBC so that the Ordinary shares of the company represents the future income and/ or any type of future gain of the structure and the Preferred shares represent the existing assets and liabilities that are treated as capital.

The IBC can also be split into the same class of shares as indicated above but instead of income and capital, the shares are used to delineate between a charitable purpose (ordinary shares) and a directed purpose (preferred shares).

In both examples, the setup of the IBC represents a form of planning that can shelter clients against tax exposure as well as provide succession planning. A revocable, fully directed trust owns the redeemable, preferred shares corresponding to the capital of the company, and a second irrevocable, discretionary trust is used to hold the ordinary shares corresponding to the income.

The “Split” between the income and capital of the company via issuance of different classes of shares, theoretically allows the client to segregate himself from the income generated by the holding company.

Provided that the client has fully relinquished control and benefit of such income (due to the irrevocable trust), neither the settlor or beneficiaries are subject to tax reporting obligations in their home country. I.e. No income tax reporting obligation until receipt of an income distribution.

In summary, as long as the Trustee retains full discretion on the income trust, there are no tax or reporting obligations in most jurisdictions.

On the Topic of Automatic Trust Disclosure by Fiduciaries.

Automatic Disclosure Vs Liability

Whilst most fiduciaries are willing to provide information such as trust instruments and bank account information to the donor and beneficiaries, there is a general reluctance to disclose any other information or documents to anyone else unless required by law.

The general practice is to request written approval from the donor prior to dissemination of information regardless of who the recipient might be. In yesterday’s world, the words “bank secrecy” were used as an attribute when describing reasons for establishing an offshore trust. After time, the word “confidentiality” was perceived to be more politically correct. In today’s world, anything to do with secrecy and confidentiality is discouraged.

The industry has moved toward transparency with emphasis on clients who are reporting and are compliant in their home jurisdictions. However, as tax laws change, many clients find themselves on the wrong side of the tax code almost overnight. When this happens, fiduciaries run the precarious gauntlet of disclosing clients to regulators or risk a legal battle by which the client sues for breach of confidentiality. This is why an important feature of any trust is a disclosure clause that allows the trustee to forward information to regulators with out fear of reprisal.

When disclosure without consent is imminent, trustees often seek a Beddoe Order. The order protects the trustees against claims by beneficiaries who suggest that an action should not have been brought and enables the trustees to recover the costs from the trust property.

Moral of the story, check your trust deed and review the clause on the duty to disclose…

Thinking out of the box with the Executive Entity Act

Due to the recently implemented Bahamian Executive Entity Act, financial service providers have the ability to act in the capacity of Trustee, Protector, Investment Advisor and or Appointor for existing and new trusts under consideration. Section 2. of the Bahamas Executive Entity Act provides for the functions following:

Any powers and duties of an executive, administrative, supervisory, fiduciary and office holding nature including but not limited to the powers and duties of:-

(I) an enforcer, protector, trustee, investment advisor and holder of any other office of any trust

(II) the holder of any office of any legal person

The ownership, management, and holding of:-

(I) executive entity assets; and

(II) trust assets

The use of an Executive Entity is most apparent when clients have decided to transfer trusteeship from one service provider to another and an interim trustee is required to facilitate the transfer.

If a trustee is removed or retired by Deed of Removal/Retirement and Appointment, the Executive Entity is able to be appointed as interim trustee. This allows the Settlor/Donor the ability to discern and appoint a successor trustee at their convenience.

If the Executive Entity is also a Corporate Service Provider, arguably the Executive Entity is possible of providing the same level of service offered by trust companies and where feasible, maintain the same investments and bank accounts that were previously managed by the successor trustee.

The Executive Entity Act is a fantastic fiduciary tool that provides flexibility when formulating custom solutions.

On the Role of the Trust Investment Advisor

The “Settlor” Appointed Investment Advisor

Direct investments by appointing an IA

The Trust Investment Advisor or IA is by far the most challenging of all roles to have in a fiduciary relationship. The IA of an Asset Protection Trust (APT), is tasked with the very important function of growing and perpetuating the trust fund on behalf of the beneficiaries. Once the investment suitability has been determined, the IA has the meticulous task of formulating an Investment Objective Setting and Bench Mark for the trust.

As referred to in the APT post, the investment component of an APT is usually part of the discretionary mandate of the trustee. However, due to the dynamic benefits of an APT, the investment component can be removed from the trustee and placed in the hands of a trust IA. This person has the ability to direct the trustee in regard to investments. With that being said, the other discretionary features of the APT still remain in tact. I.e. Distributions of income and capital as well as the trust period.

In most cases, the IA is located in a jurisdiction which is NOT the same as the settlor. This feature protects the integrity of the trust by eliminating any uncertainty as to the mind and management of the trust.

Last but not least, the IA should be qualified. Once an IA is appointed, the trustee will typically rely on language that fully indemnifies them against loss.

Is control of the investment piece crucial to your decision to go discretionary or directed? Have you considered the cost of appointing a professional IA as an alternative to a discretionary manager or fund?

On the Asset Protection Trust of the first part…

“The Asset Protection Trust”

The Irrevocable Protection Trust

Asset Protection Trusts have long been upheld as the gold standard for succession planning. To this day, this form of instrument remains the preferred choice among modern wealth planners.Consequently, copious amounts of jurisprudence exists in support of every conceivable client concern. The key features of this robust and dynamic form of trust include: its flexibility, its discretionary nature and its capacity to endure perpetually. The asset protection trust is always the best place to start when discerning succession planning needs.

More on this soon, in particular the use of an APT with an I.B.C.

On Brazil’s Provisional Measure MP 627 No. 627/2013

When giving advice to Brazilian clients, the most well known structure used by wealth planners is a directed trust and holding company. This method serves two main functions, succession planning and tax efficiency. Now that MP 627 has been proposed, the focus seems to be how best to protect the tax effective attributes derived from the holding company.

Will restating the directed trust so that it becomes discretionary in nature resolve the issue? It may but there’s only one small problem, Brazilians hate the word “DISCRETIONARY”.

Nonetheless, tax planners have dodged the proverbial bullet once again as the change is currently on hold and has so far excluded “Natural Persons”. However, when should we begin to consider the action plan? How long will it take for the Brazilian Cabinet to discern and agree best practices?

The sun setting of the Canadian Immigration Trust

This Blog explores the possible effects of the February 2015 abolition of the Canadian Immigration Trust. Historical events such as the liberation of East Germany, the end of Apartheid in South Africa and the return of Hong Kong to China in 1997 created arbitrage migration opportunities for many developed countries. The Canadian Immigration Trust regime was once considered an excellent means by which a wealthy non resident person could migrate into Canada and live tax free for at least five years. Now that this option is no longer available, do you foresee that more emphasis will be placed on the use of discretionary inbound trusts?

The FidPro Blog

Category Trust Administration & Tax Planning