The issue of international tax evasion has proved a hot topic over the last few years. The “Panama Papers” scandal earlier this year uncovered a great amount of secrecy when it comes to assets and accounts ‘hidden’ across the world from the tax authorities.
Up until recently, some countries agreed to exchange information held by their local financial institutions on the request by the other country’s tax authority, which has helped to some extent to mitigate tax evasion.
The Organisation for Economic Co-operation and Development (OECD) has driven participating countries to be part of an automatic exchange of information of account holders, so that this information is gathered as a matter of compliance and readily available to international tax authorities each year.
In 2014, a ‘Common Reporting Standard’ (CRS) was published. Essentially, this is a set of standard information as internationally agreed to be collated by each participating country for each non-resident financial account holder and exchanged with the respective countries.
Financial entities will therefore be required to file information as required by the CRS about its non-resident account holders.
The reporting requirements operate in much the same way as the US’s Foreign Account Tax Compliance Act (FATCA). However, the main difference is that charities were exempt from FATCA and they are not for the purposes of the CRS.
When does it come into effect?
The UK is one of the early adopters of the CRS.
As such, the first CRS reporting period will run from 1 January 2016 to 31 December 2016.
Information to be reported by Financial Institutions to HMRC in respect of the first reporting period must be delivered on or before 31 May 2017.
What do charities need to do?
Charities need to identify whether they are a Financial Institution or not.
If they are a Financial Institution, they will have reporting requirements.
If they are not, they will be regarded as an ‘Active Non-Financial Entity’ and will have no reporting obligations. However, they will need to self-certify this status when asked by the bank, funder or the charity’s investment manager.
There is a term ‘Passive Non-Financial Entity’, although all UK charities that are not Financial Institutions will be Active Non-Financial Entities as if they are a non-profit organisation exempt from tax, they are treated as such by default.
What is the definition of a ‘Financial Institution’?
A charity will be a Financial Institution under these rules where it meets the definition of an Investment Entity.
2 tests need to be met to be regarded as an Investment Entity:
Test 1 – Financial assets management test; and
Test 2 – Financial assets test
The first test will be met if the charity’s financial assets are managed wholly or partially by a Financial Institution (broadly a regulated stockbroker, bank or other investment entity).
Relevant financial assets are:
Trading in money market instruments
Foreign exchange, exchange interest rate and index instruments
Commodities futures trading
Individual and collective portfolio management
Otherwise investing, administering or managing financial assets or money
It is important to note that the Financial Institution engaged must have full or limited discretionary authority over any of the assets managed for the first test to be met.
Investment assets managed by an individual on the charity’s behalf will not be regarded as meeting the first test.
The second test applies where more than 50% of the charity’s income derives from financial assets. The level of financial income needs to be reviewed for:
3 year period to 31 December preceding the current reporting period; or
Period in which the entity has existed, if shorter
Certain income is not regarded as income from financial assets for this purpose:
Gift Aid donations from trading subsidiaries
Rental income from a property owned by the charity
Interest received on a bank deposit
What are charities who are regarded as ‘Financial Institutions’ required to do?
Charities falling under this heading will be required to identify ‘reportable accounts’, namely ones where the country in which an account holder is resident is in a reportable jurisdiction for tax purposes and keep this information on record for 6 years after the end of the reporting period.
A reportable jurisdiction is a country which has signed up to the CRS and whom the UK has entered into an agreement to exchange information.
The obligations imposed on charities by the Data Protection Act are overridden by the CRS regulations.
‘Account holders’ in the context of charities are any persons who hold a debt or equity interest in the charity.
A debt interest can be taken to mean its ordinary meaning, broadly any loans to the charity, excluding trade creditors.
In terms of ascertaining equity interests, this will depend on whether the charity is set up as a trust or charitable company.
For charitable companies, an equity interest is broadly the share capital or any other interest which gives an entitlement to the profits or capital of the company. Members of companies limited by guarantee or Charitable Incorporated Organisations (CIOs) are not regarded as holding an equity interest.
For charitable trusts, the settlor or beneficiaries, or any other person excising control over the trust, are regarded as having an equity interest. Interestingly, donors who make donations and impose restrictions on the way in which the donated monies can be used will be classed as settlors. Ordinary donors making outright gifts to the charity without any conditions attached will not be treated as settlors.
What information is required to be reported where reportable accounts are identified?
For each reportable account, the following information will need to be reported:
Date of birth (for individuals)
Taxpayer Identification Number
Name and identifying number of the Reporting Financial Institution
Account balance or value at end of the calendar year
Charities who are regarded as Financial Institutions must report this information using the Automatic Exchange of Information Online Service.
A link to the above online service can be found here.