Game Over for CRS Avoidance?

As I mentioned in an e-mail yesterday, the OECD has published a discussion draft of proposed new rules requiring disclosure of CRS avoidance techniques. (The draft document, which was published only two days ago, is available here. The OECD’s press release is available here.) Among other things, the rules would:

• Target advisors and fiduciaries (“Intermediaries”) with “material involvement in the design, marketing or implementation of CRS avoidance arrangements or offshore structures” and would
• Require the Intermediaries to disclose information on the avoidance scheme to their national tax authorities.

Even more alarmingly, the rules require Intermediaries to dob in their own clients; specifically, to disclose to the Intermediaries’ tax authorities the identity of the beneficial owner (BO) involved in CRS avoidance planning. That information would then be made available to the BO’s tax authorities under the applicable CRS information exchange agreement.

First, though, it’s important to remember that:

• The document is just a draft. The OECD has asked for written feedback by 15 January. There will be no extension.
• The document as such, like all OECD publications, has no legal effect. However, you can expect that, once the document is finalised, it will be adopted essentially verbatim in most CRS countries. Indeed, in a few countries, the document will automatically become law as soon as it’s finalised. Those countries are the ones whose CRS implementing legislation (foolishly and perhaps unconstitutionally) automatically incorporates all CRS-related publications into local law once finalised by the OECD.

The document itself is 45 pages long. It’s not possible to give a detailed analysis in a blog of this nature—and besides, I’d bore you to tears given how hyper-technical the rules are. But here are the highlights. Buckle up!

• The rules target two things: A “CRS Avoidance Arrangement” and an “Offshore Structure”.
• A “CRS Avoidance Arrangement” is any “Arrangement” that it is “reasonable to conclude” is “designed to, marketed as or has the effect of, circumventing CRS Legislation or exploiting an absence thereof.” “Arrangement” is defined incredibly broadly. So broadly that it’s virtually impossible to think of any plan or step it would not cover.
  • Intent to avoid CRS is not explicitly required. However, the document uses words such as “circumventing” and “exploiting” rather than “avoiding”, which at first blush seem to imply a bad motive. Don’t be fooled though: The rules kick in if it’s “reasonable to conclude” that “circumventing” and “exploiting” was at play. This “reasonable to conclude” language adds an objective element that prevents Intermediaries from playing dumb.
  • The document gives several examples of potential CRS Avoidance Arrangements. One is moving assets or structures to non-CRS jurisdictions (think U.S.A.). But the OECD cuts banks a break here. The document says that a transfer to an account at another bank in accordance with the instructions from the bank’s customer “would not, by itself, be sufficient evidence of an arrangement between the bank and the customer to circumvent CRS legislation (or to exploit the absence of such legislation).” So banks don’t have to enquire or speculate why funds are moved to the U.S. The same should be true of offshore trustees that are replaced by U.S. trustees. But neither banks nor anyone else can advise customers to move their funds or structures to avoid CRS.
  • Another interesting example is any Arrangement that it’s reasonable to conclude is designed to, marketed as, or “has the effect of” allowing an entity to qualify as an Active NFE. However, the mere use of an Active NFE with no reasonable inference of an intent to avoid CRS should not be captured.
• An “Offshore Structure” is a “Passive Offshore Vehicle” that is held through an “Opaque Ownership Structure”. Is your head spinning yet? Mine is!
  • Without getting into the weeds, the main gist of a “Passive Offshore Vehicle”—not to be confused with the by-now-famous “Passive NFE”—is an entity that’s offshore with respect to any BO and that doesn’t have a substantive economic activity supported by staff, equipment, assets and premises. (H-E-L-L-O most client structures!).
  • And an “Opaque Ownership Structure” is a structure that it’s reasonable to conclude is designed to have, is marketed as having, or has the effect of, in essence, allowing a BO of a Passive Offshore Vehicle to hide from CRS.  Again, although intent to avoid CRS is not required, a reasonableness inference of such an intent seems necessary given the rules’ reference to “obscuring” beneficial ownership and “creating the appearance” that the BO is not in fact the BO.
  • The rules give several examples of Opaque Ownership Structure. Notably, interest-free loans are specifically mentioned as potential devices that could be used to try to hide true BOs. Therefore, if it’s “reasonable to conclude” that an interest-free loan is being used for that purpose (even though there is no ill intent whatsoever), the rules would be triggered (if the other requirements are met).
  • Putting the above together, then, an Offshore Structure is any non-brick-and-mortar entity that is offshore with respect to the BO and that a reasonable person can conclude intentionally hides the BO from disclosure. Standard Passive NFEs and FIs shouldn’t generally qualify as Offshore Structures because disclosure will normally be required in such cases so there will be no intent to hide the BO.
  • If you think it all the way through, you’ll see that an Offshore Structure would also necessarily be a CRS Avoidance Arrangement. However, the OECD was apparently concerned enough about the specific types of avoidance techniques that fall within the definition of “Offshore Structures” to address them separately.
• What’s the consequence of having a “CRS Avoidance Arrangement” or an “Offshore Structure”?
  • The rules impose disclosure obligations on “Intermediaries”. Intermediaries include both advisors (think lawyers and consultants) and service providers (think trust companies and corporate service providers). More specifically, Intermediaries must disclose CRS Avoidance Arrangements and Offshore Structures to the tax authorities of (i) their respective countries, and (ii) any other country where they offer those services through a branch located in that country.
  • And Intermediaries must act quickly—they must make their disclosures within 15 working days after the plan is hatched or implemented (the definition is much more technical than that, but that’s the basic idea)
  • It gets worse. “Promoters” (defined below) must disclose not just planning that’s implemented after the effective date of the rules, but planning that’s already happened. Subject to a de minimis exception, Promoters must disclose Arrangements implemented on or after 15 July 2014 even if the Promoter doesn’t do anything with respect to the Arrangement after the new rules go into effect. 15 July 2014 is, of course, the date the CRS “bible” was first published. It matters not when CRS went into effect in the Promoter’s jurisdiction. Wow!
  • The de minimis exception is that a Promoter does not have to make this retroactive disclosure if he or she knows that the value of the relevant “Financial Account” (read “debt or equity interest” when it comes to FI client structures) was worth less than USD 1 million.
  • A “Promoter” is “any person who is responsible for the design or marketing of a CRS Avoidance Arrangement or Offshore Structure”. This would capture advisors who hatch CRS avoidance plans but perhaps not fiduciaries who merely implement them but do not market them.
• So what exactly has to be disclosed?
  • All of the relevant identifying information (e.g., name, address, TIN) of:
    • The person making the disclosure
    • The relevant BO (technically, the “Reportable Taxpayer”)
    • Any person other than the BO instructing the Intermediary, and
    • The Intermediary
  • The details (broadly defined) of the CRS Avoidance Arrangement or Offshore Structure, and
  • The jurisdiction(s) where the CRS Avoidance Arrangement or Offshore Structure has been made available for implementation
• Believe it or not, there is some good news. Intermediaries are not required to disclose any information protected by the attorney-client privilege. But in that case:
  • The attorney-Intermediary must notify his or her home country’s tax authority that he or she has information on a CRS Avoidance Arrangement or Offshore Structure that is not required to be disclosed, and
  • The end user or BO must disclose to his or her tax authority any information on the Arrangement or Offshore Structure that is not disclosed by the Intermediary because of the attorney-client privilege. (To ensure this happens, the non-disclosing attorney-Intermediary must inform the BO of the BO’s disclosure obligation). In addition, the end user/BO must also turn him- or herself in if the attorney-Intermediary has no disclosure obligation at all (because, for example, the attorney-Intermediary is not in a CRS country). It’s not clear who would inform the BO of this duty. But one caveat applies here too: No person is required to disclose any information that would infringe that person’s privilege against self-incrimination under domestic law. The OECD does have a heart!
• Punishment for violation of the rules is left to each jurisdiction to set. However, the OECD suggests that countries “may consider setting the penalty at a fixed rate or (if greater) at a percentage of the fees paid to the Intermediary for the services provided in respect of the CRS Avoidance Arrangement or Offshore Scheme, with the percentage set at rate that removes any economic incentive for the Intermediary to avoid disclosure.”

The above is just an executive summary, if you will, of the proposed new rules. There are many nuances and some exceptions that are not mentioned. But at least now you have the flavour of what’s likely coming to a country near you very soon.

Bear in mind too that, once in effect, the above rules will work hand-in-glove with the general CRS anti-avoidance legislation that almost all CRS countries have adopted. That legislation attempts to nullify any arrangements that have a main purpose of CRS avoidance. The new rules go much further by requiring planners and other Intermediaries to proactively report the arrangements to the tax authorities.

Back to the question posed at the outset: Is it now game over for CRS avoidance techniques? It’s too early to say definitively. There are certainly some creases in the proposed new rules. But to paraphrase a holiday song, “it’s starting to look a lot like Christmas game over”. Or very close. Except, of course, for advisors in the U.S., that great CRS void. Talk about making America grate again!

And on that cheerful note: Happy Holidays everyone!

It’s been a privilege to serve you in 2017. I enjoy hearing from you, so if you get a moment, please drop me a line at peter.cotorceanu@gatcaandtrusts.com.

Thanks.