Legal Ways to Avoid the Common Reporting Standard – And Why You Should Do So!

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By Peter Macfarlane

Mishcon de Reya is a London law firm that is no stranger to controversy. Originally established in 1937, they first entered the public eye in 1995 when they represented the late Princess Diana in her divorce proceedings against Prince Charles. 

Over the last couple of years, they have been involved in a process I have been following closely – and that is blowing the lid off the political mess and scam that is Common Reporting Standard (CRS).  

CRS is all about spying on your foreign bank accounts. It works on the presumption of guilt: anyone who holds a foreign bank account is guilty of tax evasion until proven innocent. If you hold an offshore bank account, or any bank account outside your home country, you will no doubt already have been asked to fill in CRS related paperwork. 

In more legal terminology, Wikipedia defines CRS as “an information standard for the Automatic Exchange Of Information (AEOI) regarding financial accounts on a global level, between tax authorities”.

CRS has been described as FATCA on steroids. It was inspired by the US Foreign Account Tax Compliance Act (FATCA) – but while FATCA is something the USA imposed on the rest of the world, CRS was imposed by the OECD: an organization based in Paris, where its employees enjoy diplomatic tax-free status as they busy themselves trying to make sure that the rest of us pay more tax.

As of now, more than 100 countries have signed up for CRS. First reporting occurred in 2017, with many of the other countries starting in 2018, while some have still not started reporting as yet although they have committed. If you are interested you can see exactly who started reporting and when by visiting the OECD Automatic Exchange Portal.

What is wrong with CRS?  Well, first of all, it is morally repugnant! It is far from true that everyone who holds an offshore bank account is a tax evader. Why should the law-abiding majority suffer this gross invasion of financial privacy in order to catch a few people who are failing to pay what Caesar orders?

The other moral wrong is the breathtaking double standards. The European and OECD bureaucratic forces have headed in two very different directions over recent years. The pan-European General Data Protection Regulation (GDPR) affords Europeans the strongest privacy on the planet. Not that it’s very strong, mind you – it’s all relative. Even so, Europeans have greater protection than, say, their American cousins against large corporations collecting and selling their data without permission.

On the other hand, bureaucracy seems to take the view that normal expectations of privacy and data protection should not apply to the “filthy rich” who own companies or hold offshore bank accounts. It has been pushing more and more transparency, completely against the spirit of the GDPR, in the form of beneficial ownership registers and – getting back to the subject of this article – the Common Reporting Standard.

Mishcon de Reya partner Filippo Noseda has picked up on this hypocrisy and pointed out the risks associated with information exchange. As Noseda says: “The majority of UK bank account holders living in one of the 100 plus countries that have joined the CRS will be affected by this, with many of these countries having lesser standards of data protection and/or information security.”

What he is saying is that governments are notoriously bad at protecting data. It is well known that anyone from jealous business competitors to kidnap-for-ransom gangs could easily obtain access to government data in many if not most of the CRS signatory countries. 

Noseda needs to prove as part of his lawsuit that other CRS countries (places like Burkina Faso or Jamaica) have lower data protection standards than the UK. That may well be the case. I have never tried to corrupt a British official… but knowing what I do, I am confident that if I ever felt the need and desire to break the law, I could easily find some employee even in Her Majesty’s Revenue and Customs who would illegally sell me information from government databases. Corruption exists everywhere and it’s just a matter of the cost. 

My point? Governments are not trustworthy. Voluntarily putting more data than needed into their hands is just not a smart idea.

To illustrate his point, Noseda has published an 18 page report, downloadable free, entitled The Mishcon de Reya Hacking List. It identifies numerous data breaches that have already happened and are relevant in the context of AEOI, which includes FATCA and CRS. 

Given all this, it is not surprising that many people would prefer not to have their data transmitted around the world in this manner. It’s also unsurprising that the pro-tax campaigners have run a fairly successful PR campaign trying to persuade people that there is effectively “nowhere to hide.” They have been ramping up pressure on banks in safe havens from Andorra to Zurich, talking about “de-offshorization” and “squeezing the rich until the pips squeak.” 

Fortunately, however, there are two easy ways you can protect your data from CRS information exchange, without breaking any laws – and if you don’t already know what they are, I am going to reveal them to you now.

But first, a disclaimer:  while I personally distrust government efforts at data protection, and believe in minimalist government, low to zero taxation, and an absolute right to financial privacy – these are merely my personal opinions that I have every right to express freely. In no way do I advocate breaking any laws. If you choose to live or hold citizenship in a country where the law requires you to do something, you should do it.

So what are the two easy ways to protect your data from CRS information exchange?

The first is blindingly obvious: open your offshore bank account in a country that has not signed up to CRS!

The most obvious non-CRS country is the USA, and perhaps more specifically the US territory of Puerto Rico. The USA in general is the world’s biggest tax haven. 

Within USA jurisdiction, Puerto Rico is particularly interesting as it has a vibrant banking sector that allows non-residents to open smaller accounts over the internet, something that is harder – though not impossible – in mainland USA. There is also an additional technical advantage, in that it could protect you not just from CRS-based reporting, but also from FATCA bilateral reporting – that is a topic for another article, or something you should ask your professional adviser about.

Besides the USA, there are a number of other non-CRS countries you might want to look at: a few that jump out based on my offshore expertise are Botswana, Comoros, Cuba (yes, I personally have a non-resident bank account in euros in Cuba!) Nicaragua, Turkish Republic of Northern Cyprus, São Tomé and Príncipe, and Tanzania… but there are others. You can download a list of CRS signatory countries and you just have to look for countries that are not on this list.

Now, another caveat: in many “civilized” countries there exist requirements to declare overseas bank accounts, and if required you should do so. However, holding your bank accounts in non-CRS countries puts the control back into your hands – the burden to file the declaration is on you. It might require handing over data directly to your local tax department – but that is certainly the lesser of two evils compared to having your private financial data whizzing around the world out of control on opaque, multilateral government systems. 

It also allows you to take advantage of potential legal exemptions from the requirement to declare accounts – for example if the account is small, or if you earned no interest on it during the year, many countries would not routinely require you to declare at all, whereas CRS functions on a “catch all” basis. Whether you need to declare offshore accounts is something to discuss with a tax professional familiar with the laws of your country of residence.

There are also some “uncivilized” countries where holding a foreign bank account is totally prohibited, CRS or no CRS. In that case, there’s not much I can do for you, except to refer you to the second way you can legally sidestep CRS.

The second obvious way to sidestep CRS automatic reporting is to move yourself outside the scope of it by changing your residence and/or citizenship. 

Actually, for most people, changing your citizenship is not necessary and won’t impact CRS.  All countries except the USA impose tax based on your country of residence. If you happen to be a US “person” (which has a specific legal meaning – in simple terms a US passport or green card holder) who is resident for tax purposes in a CRS country, then changing your citizenship could be worthy of consideration in this context. However, this is a specialist legal topic that I won’t try to address here.

Let’s keep things simple and imagine you change your residence. Here there are three basic scenarios whereby changing your residence could be relevant within the scope of CRS:

1. You simply move your residence to a country that doesn’t participate in CRS. Once you have done this, you can maintain all the bank accounts you like in Switzerland, Austria, Cyprus, UK or any other CRS signatory countries – and there will be no automatic reporting because you are outside the scope of CRS by virtue of your residence.

2. You could move your residence to a country that does participate in CRS, but that has a tax system that is generous with foreign income. For example, move to a territorial taxation country like Panama or Uruguay; or to a country with special tax incentives for new residents like Portugal. In this case, automatic reports would be sent to your new country of residence. This would most likely NOT protect you from automatic reporting per se and you would still be exposed to the risks of your data whizzing electronically around Paris. However, it would keep your tax bill to a minimum and – importantly for many clients – you would legally and effectively stop reporting to your country of origin, which could be where the main risks remain. (For example: it would achieve your goals if you are originally Mexican and you want to avoid reporting of your wealth to Mexico because of the high incidence of kidnapping for ransom in that country)

3. You have multiple residencies. A lot of people, bank and government employees included, don’t realise that legally you can have multiple residencies just like you have multiple citizenships. That is what we will consider in the remainder of this article.

On the subject of multiple residencies, let’s first of all clarify that there are three separate concepts, which are regularly confused:

  • Tax or fiscal residency (which concerns CRS) 
  • Residency for immiration purposes (the fact of having a residency permit)
  • Tax ID numbers (TINs) – some people may wrongly assume that holding a tax ID number from a country implies you are fiscally resident there. Many countries require and issue tax ID numbers by default for any kind of bureaucratic interaction, from opening a bank account to purchasing a phone. Whilst the point of these systems is probably to keep track of people, it often has the opposite effect – they have to give out these numbers willy nilly and often by the time a local citizen reaches the age of 18 or 21 it is quite common for them to have two or three different ID numbers!

In general, countries are very keen to classify you as a resident for tax purposes (obviously because they can extract money from you that way)  but somewhat less keen on granting residency permits. 

President Trump, for example, makes a point of trying to stop illegal immigrants from obtaining the right of permanent residence in the USA – but that certainly won’t stop the IRS requiring them to file a tax return and taxing them on their worldwide income given the chance. 

If you are smart, you might be able to turn this immense bureaucratic confusion to your advantage in legal tax planning – or, at least, you can do some good for the world by overloading tax systems with useless data.

All banks’ CRS forms – without exception – ask you about all the countries in which you might be considered resident, and they normally ask you to enter your tax ID number for each country you list. If you cannot list a tax ID number then you are required to explain why (a legitimate reason that is acceptable is, for example: the country in question does not issue tax ID numbers to non-residents).

Normally bankers do not expect people to be routinely resident in more than one country. In the case of local residents, they are generally trained by their compliance department to ask only for the local tax number. 

For example, if you have a bank account and residence permit in Montenegro (as an example – but it could be any other CRS country), your Montenegrin banker will likely provide you with the form ready to sign with only your Montenegrin tax ID. If you sign it there are two important and potentially opposing consequences:

  • (Positive consequence) Since you will be considered a local resident, there will be no automatic exchange of information internationally. 
  • (Negative consequence) You might be guilty of an offence for not proactively declaring other tax residencies that you may have, that the banker doesn’t know about. 

Now, you could claim of course that the banker put documents in front of you to sign during the account opening process and you went ahead and signed them without reading them. I mean, who really reads all the small print? However, it is your legal responsibility to check what you sign. 

If you suffer damages because of this you could potentially have a legal claim against the bank because they asked you to sign a document about your tax residence without professional advice on something that is a complicated legal matter, genuinely beyond the comprehension of the average citizen… but now we are over-complicating things. 

Having a tax residency in a country can be triggered by something relatively simple, like owning an apartment or being director of a company there – or the fact that, many years ago, you actually lived there. 

Who knows, I probably have tax ID numbers from at least a dozen countries that I have collected in the normal course of my life, and from some countries (Italy and Mexico in my case) I specifically remember that I have at least two different tax numbers issued in different tax offices at different times… just because that is the way bureaucracy works (or doesn’t work).

Am I expected to declare them all? Definitely not, for the simple reason that a tax ID number does not in any way imply tax residency. Many countries routinely issue tax ID numbers to non-residents for the purposes, for example, of opening bank accounts. 

Sometimes, numbers issued to non-residents and residents have different formats – again causing much confusion with digital nomads who might be non-resident one year as they are checking out the country on a tourist visa, resident more than 180 days with a local partner the next, then they spend the third year in a monastery in Thailand. Here is a link to the OECD database of tax ID numbers that your bank is supposed to look at when preparing CRS reports. 

Anyhow, the moral of the story is that if you are uncomfortable with automatic tax information exchange under CRS, you can probably avoid it totally legally using the strategies outlined above. If you would like to discuss it in more detail, it’s important that you arrange a consultation with a suitably-qualified professional!

 

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