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.

“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.

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 why should I use a Family Office service?

This blog explores the pros & cons of using a family office service. Current market information indicates that Family Office services are trending, with firms claiming to have doubled their client base year after year in an apparent recession. Why are Family Offices doing so well? Why is there a steady migration away from big banks and firms to custom gate keepers? Please read this interesting article called Family Office By Julie Steinberg and Kelly Greene of the WSJ

The FidPro Blog

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