It is a scenario that will be familiar to thousands of Bermuda residents — a letter arrives regarding your accounts at local institutions. It contains requests to complete a new set of forms to verify who you are, where you live, where your tax residency is, citizenship, and so forth.
Providing all the information will mean certification (or notarisation) of documents such as passports, social insurance, taxpayer identification numbers, or driving licence. Established deadlines are noted along with appropriate measures to be implemented if the account holder does not respond in a timely and appropriate manner.
Bermuda residents with local financial accounts have been providing varying degrees of these types of information to their banks for almost two decades. Needless to say, the frustration levels of continually providing repetitive information is not always well-received. “How many times do I have to tell the bank I’ve lived here 50 years?” said one exasperated client.
Why all this?
The first high-profile global tax compliance initiative, in my humble layman’s remembrance, came from the United States under the Qualified Intermediary Programme in early 2001. Foreign banks and financial institutions in other countries, Bermuda being among the first, signed on to the programme to identify investor clients in US securities, withhold taxes, and report/remit to US Internal Revenue Service. It was an audacious programme.
The introduction of US Fatca regulations followed as countries emulated and were facilitating new or improved regulations regarding anti-money laundering, Know Your Customer, and financial intelligence divisions modelling intergovernmental agreements for further tax reporting efficiency. We now have Common Reporting Standard rules.
The reasoning for this newest set of regulations, which is imposed on all manner of financial institutions, is summarised in such terms as protection of the integrity of tax systems, verifying where an individual is a tax resident, and providing such information in a sharing structure to other national tax authorities if an individual is not actually tax resident in the country where an account is held. The standard is called the Common Reporting Standard, or CRS, and it is a global finance compliance agreed by the 147 members of the Organisation for Economic Co-operation and Development.
According to the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, “its members support the fight against tax evasion by ensuring the effective implementation of the international standards on tax transparency and exchange of ownership, accounting and financial account information — both ‘on request’ and ‘automatically.’
“International tax is technical in nature and in high political focus. The media and civil society pay close attention to international tax matters, and governments are taking decisive action to tackle tax evasion and avoidance and ensure all taxpayers pay their fair share. Central to this effort is ensuring that countries implement the internationally agreed standards for co-operation between tax authorities, including providing particular information for specific tax investigations and a broad range of information automatically on financial accounts and assets held offshore. There are also further minimum standards to ensure multinational enterprises pay appropriate levels of tax.”
The OECD website provides an overview on the rules governing tax residence and applicability in jurisdictions that are committed to automatically exchanging information under the CRS.
Tax residence is determined under the domestic tax laws of each jurisdiction. There might be situations where a person qualifies as a tax resident under the tax residence rules of more than one jurisdiction, and therefore is a tax resident in more than one jurisdiction. For the purposes of the CRS, the account holder (or controlling person) must disclose all its tax residences in the required self-certification. The mere right to reside in a given jurisdiction on a permanent or temporary basis, or the fact of holding citizenship of a given jurisdiction does not automatically mean that a person shall be considered a tax resident in such a jurisdiction or that, upon obtaining residency or citizenship, the tax residency is extinguished in the former jurisdiction(s) of tax residence.
In summary, in my humble opinion all of these varying initiatives have created confusion, complexity, additional costs, and frustration for the ordinary individual financial account holder residing in Bermuda. The mere concept of declaring a tax residency in a country that does not have an income tax regime is beyond the average layman’s comprehension. And why would they want to know?
Misunderstandings and errors occur when information is incorrectly categorised, as when a foreign investor has a US rental property, for instance, files a US tax return every year to report and pay the appropriate US tax on the net rental profit. This action does not make the foreign person a US tax resident, since further computation of the US substantial presence and other tests are employed.
Confusion often arises over the correct submission of various US information forms, such as the obscurely, almost unintelligible W-8BEN and its related forms, the application for an ITIN number (not the same category as a US social security number), and more directed availability of US State Department (consulate) assistance, with some services now directed through Costa Rica.
The cost to foreign financial institutions has been enormous. It is estimated that large institutions each will spend $100 million or more for implementation of Fatca alone, with further increases for CRS.
Nevertheless, tax compliance, the sharing of tax residents’ data among countries, and discrimination against small country economies is never going to stop due to the ever moving global tax compliance goalposts.
Regardless of whether we feel positive or negative about these financial complications, they will remain with us. It is no wonder that the autonomous, cryptocurrencies have risen on centre stage. They, too, are nowhere near perfect, but that is a topic for another day.
This article is general in nature. The matters of fact it contains only touch upon the complexity of these global tax compliance initiatives.
Any information readers may wish to share with me regarding your experiences in these areas is welcomed. Confidentially and anonymously, of course.
• OECD: https://tinyurl.com/zztxx86
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. Contact: firstname.lastname@example.org