A Mandatory Update

What is the issue?

Any structure designed to circumvent the Common Reporting Standard, that does not have economic substance or that conceals beneficial ownership, is to be reported to the tax authorities within 30 days of implementation.

What does it mean for me?

Intermediaries will need to adhere to a new reporting regime in additional to existing reporting obligations. Some intermediaries will be required to report retrospectively as from October 2014. Both civil and criminal penalties will apply for failing to comply.

What can I take away?

Intermediaries should review client structures and identify transactions to be reported and put in place control systems to identify reportable structures.

Action 12 of the OECD’s BEPS project provides recommendations for the design of rules to require taxpayers and advisors to disclose aggressive tax planning arrangements.  On 9 March 2018 the OECD published a model of mandatory disclosure rules as part of a wider strategy of the OECD to monitor and act upon tendencies that try to avoid CRS reporting.  The EU adopted Council Directive 2018/822 (so called DAC6) imposing mandatory disclosure requirements for certain arrangements with an EU cross-border element to detect potentially aggressive tax arrangements.  DAC6 incorporates the model rules published by the OECD.

On 21 December 2018, Jersey gave a political commitment to the EU Code of Conduct Group (Business Taxation) that it would introduce a mandatory disclosure regime (MDR) by 31 December 2019. Fulfilling that political commitment, MDR regulations (Regulations) following the OECD model, were lodged on 19 December 2019 and are currently awaiting approval by the States of Jersey Assembly.

What is reportable, by who and by when?

The Regulations will require a Jersey based “intermediary” with respect to a “CRS avoidance arrangement” and an “opaque offshore structure” to provide the Jersey Comptroller of Revenue (Comptroller) with information about those arrangements and structures no later than 30 days after the intermediary makes the CRS avoidance arrangement or opaque offshore structure available for implementation or supplies “relevant services” in respect of it.  In the event there is no intermediary, the taxpayer is required to report to the Comptroller.

Key Definitions

An “intermediary” means:

a promoter meaning any person responsible for the design or marketing of a CRS avoidance arrangement or an opaque offshore structure; or

a service provider meaning any person providing relevant services in respect of a CRS avoidance arrangement or opaque offshore structure in circumstances where the person could “reasonably be expected to know” the arrangement or structure is a CRS avoidance arrangement or an opaque offshore structure.  “Reasonably be expected to know” is determined by reference to the service provider’s actual knowledge based on readily available information and the degree of expertise and understanding required to provide the “relevant services”.  “Relevant Services” means providing assistance or advice in respect of the design, marketing, implementation or organisation of the CRS avoidance arrangement or opaque offshore structure.  Therefore, an intermediary will include tax consultants, lawyers, banks and administrative service providers.

A “passive offshore vehicle” means a legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident.  It does not include an institutional investor or entities wholly-owned by one or more institutional investors or where all beneficial owners of that legal person or legal arrangement are tax resident in the same jurisdiction of as the legal person or legal arrangement.

An “opaque structure” means a structure for which it is “reasonable to conclude” that it is designed to have; is marketed as having; or has the effect of allowing, a natural person to be a beneficial owner of a passive offshore vehicle without allowing the accurate determination of the natural person’s beneficial ownership or creating the appearance that that person is not the beneficial owner.  For example, the use of nominee shareholders with undisclosed nominators; the use of means of indirect control beyond formal ownership; the use of arrangements that provide a reportable taxpayer with access to assets held by, or income derived from, the structure without being identified as a beneficial owner of such structure.

There is no definition of “reasonable to conclude” but the Comptroller may issue guidance on how to determine the expression.

Reportable Information

Information to be reported to the Comptroller includes:

• the name, address, jurisdiction, and tax identification number of: the disclosing intermediary; the client in respect of the reportable arrangement or structure; the actual user of a CRS avoidance arrangement and or beneficial owner of an opaque offshore structure; and any person that is an intermediary to that arrangement or structure (other than the person making the disclosure);
• a factual description of the features of the CRS avoidance arrangement or opaque offshore structure; and
• the jurisdiction where the CRS avoidance arrangement or opaque offshore structure has been made available for implementation.

The Comptroller will exchange that information relating to users resident in other jurisdictions with the tax authority of that jurisdiction in accordance with the terms of the Multilateral Competent Authority Agreement on the automatic exchange regarding CRS avoidance arrangements and opaque offshore structures.

An intermediary is not subject to reporting if the information has been previously disclosed to the Comptroller, or to the tax authority of a partner jurisdiction or is in respect of any information or document which a person would, in any court proceedings, be entitled to refuse disclosure on the grounds of legal professional privilege.

Retrospective Reporting

DAC6 requires retrospective reporting as from 25 June 2018, despite DAC6 not coming into force at EU member state level until 1 July 2020.  The Regulations will not require retrospective reporting from a Jersey based intermediary providing relevant services.  However, the Regulations will require a promoter to disclose a CRS avoidance arrangement implemented on or after 29 October 2014 no later than 180 days after the Regulations come into force; irrespective of whether or not that person provides relevant services to that arrangement. However, a promoter is not required to provide retrospective disclosure of a CRS avoidance arrangement if the promoter can demonstrate that the aggregate balance or value of the financial account subject to the CRS avoidance arrangement immediately prior to its implementation was less than GBP600,000.

Penalties and Enforcement

Should a person fail to comply with the disclosure requirements or report the information late or report inaccurate information, that person may be liable to a penalty not exceeding GBP3,000; particularly if they cannot satisfy the Comptroller there is a reasonable excuse for the failure.  The Comptroller may impose the penalty within a period of 6 years from the date on which the person became liable to the penalty or within 12 months from the date on which inaccurate information first came to the attention of the Comptroller.  The Comptroller must notify the person of the reasons for the penalty, the amount, the due date (not being less than 28 days after notification) and the right of appeal.  A person may appeal the penalty and/or its amount within 30 days from the date on which notification of the penalty was provided.

The Comptroller may examine and take copies of any business document or client record on, or by notice require any person to produce any specified business document or client record at, a person’s business premises for the purpose of investigating any issue relating to compliance with the Regulations (unless such documents or records are subject to legal professional privilege).  It will be an offence punishable by 6 months imprisonment and a fine, to obstruct the Comptroller or fail to provide the Comptroller with reasonable assistance.  It will also be an offence punishable by 2 years imprisonment and a fine, to intentionally alter, suppress or destroy any document or record specified in a notice from the Comptroller.

Steps to be taken

The definition of “relevant services” is potentially wide to encompass a number of Jersey-based service providers and so Jersey intermediaries should review their client structures and identify if any transactions need to be reported to the Comptroller once the Regulations come into force.  The 30 day reporting is short.  Therefore, intermediaries should put in place control systems to identity reportable arrangements or structures and ensure accurate information is reported to the Comptroller.

Any promoters should ensure they have sufficient information to make any required retrospective reporting on or after 29 October 2014 and also put in place control systems to capture required reporting information.

Conclusion

The Regulations are the latest tax transparency and anti-avoidance measures recently introduced to ensure the CRS is not circumvented. It is essential that intermediaries dedicate appropriate resources to its compliance and the provision of information to tax authorities.

1. A “CRS avoidance arrangement” means any arrangement which it is reasonable to conclude is designed to circumvent or is marketed as, or has the effect of, circumventing the CRS or exploiting an absence of legislative provisions in relation to the CRS.
2. An “opaque offshore structure” means a “passive offshore vehicle” that is held through an “opaque structure”.