Tightening the global tax net

Its official name is the global standard for automatic exchange of financial account information – these nine words are a simple distillation of an ambitious project to tackle global tax evasion. Known more regularly as the Common Reporting Standard (CRS), it will see government-to-government sharing of account holder information and builds upon existing legislation, notably the US Foreign Account Tax Compliance Act (FATCA) and the EU Savings Directive.

“The CRS is a paradigm shift for tax as it replaces a request for information with the automatic provision of that information,” says Nigel Barker, partner in the private client team at Deloitte. “Those family offices that have not already dealt with FATCA will now have to act. For those that have, then there is a great deal of similarity.”

But with 90 signatories, life for those family offices with complex structures that span multiple geographies is about to get harder. They will need to look carefully to see where their reporting obligations lie and whether the structures currently in place remain workable and practical before the first official exchanges in September 2017.

George Hodgson, deputy chief executive at Society of Trust and Estate Practitioners (STEP), comments: “In some cases this will mean simplifying structures either geographically, or by taking people off the beneficiary list, or changing the protector to another jurisdiction. Some might also restructure to be more diverse geographically. What is important is that any structures continue to work for the family and are appropriate.”

Barker says that bigger family offices that are already fairly corporate will have many of the same challenges as private banks and wealth managers: “The key lies in defining whether the family office is a financial institution via being an investment entity, this includes trusts and partnerships. Where an individual is taking advice only, but executes the investment him or herself then that falls outside of the scope. This could apply to an early-stage family office that has trusted advisers but does all the investment on its own.”

But for those that fall into the CRS net then reporting will now be required on total assets, incomes, names of beneficiaries, those with just an interest as well as those actually benefiting, plus the trust protectors, and settlors.

Barker comments: “The trend will be to de-layer structures, have fewer cross-border relationships and be ready for the fact that a higher and broader level of transparency will lead to a higher level of enquiries from various local tax authorities. Family offices will need to be able to evidence that their structures have substance and be able to point to settlors, beneficiaries, and protectors.”

Some family offices may even choose to move structures to alternative jurisdictions: If the CRS levels the playing field over transparency then other factors, like cost, calibre of local expertise, and the jurisdiction in general take on more importance.

The role of the US in all this remains unclear and as such, some families may bet on it not signing up and seek to move their base to the US. Indeed if there is no link to the US within any of the family office structures then the family office would lie outside of FATCA, the EU Savings Directive, and the CRS.

Daniel Lindley, head of the global fiduciary practice for family offices at Northern Trust, says a more radical step is to remove the trust from its current offshore location and into the US. 

“This is not for the fainthearted and relies on the US staying out of the CRS but I think there will be some families that will be prepared to do this,” Lindley says.

He explains that this relies on the entire trust structure, underlying holdings, and funds being brought into the US as well as making sure that there is no FATCA exposure. Either direct or underlying.

This would certainly solve concerns over data security and privacy, particularly when tax authorities in 'less established' jurisdictions are concerned.

Lindley warns that the CRS amounts to a “broadcast of information” from a security and privacy viewpoint. “Some authorities are less secure than others when it comes to data. This could place family offices in a risky or exposed position. There is the risk of criminal acts, kidnap, reputational damage, and other risks,” he says. 

The combination of 90 potential reporting jurisdictions and their security means that many family offices will be looking carefully at their current structures to see where things could be simplified, de-layered, and streamlined. Lindley points out that when FATCA came in, some family offices looked to rewrite structures to eliminate US exposure.

Barker says: “The challenge for the average family office is to ensure that the people responsible for the structures are looking again at them to ensure they are still fit for purpose and that their obligations vis-à-vis reporting are known and being dealt with. This is important as the direction of travel shows no sign of slowing. Think of this as CRS v1.0 and that action is required now to get into a good starting position for the years to come.”