Passports and other documents, identity cards obtained through such schemes, can be misused to distort the jurisdiction of tax residence of a physical person and is able to compromise the compliance with the procedures under the CRS.
The country’s high-risk
In its report, the OECD requires all financial institutions to take into account the results of the analysis of such high-risk schemes residency when assessing their clients within the complex CRS. It is worth noting that the OECD has analyzed more than 100 schemes of getting investment residence and highlighted those that potentially pose a high risk to the integrity of CRS. The list includes all the popular among wealthy Russians scheme, which, according to the bankers, were widely used since the advent of the CRS rules.
Special attention is paid by analysts of the OECD countries that provide their taxpayers access to a low rate of personal income tax (less 10%) offshore financial assets and do not require significant physical presence (not less than 90 days) in the jurisdiction in programmes for investors. This is based on the assumption that most people who seek to circumvent the CRS via collective investment schemes want to avoid paying income tax on their offshore financial assets, but not ready to radically change your way of life and prefer to keep their original country of residence.
Questions from the OECD called the programme of citizenship, residence and naturalization of investors in Cyprus; citizenship for investors in the Dominican Republic and Grenada; individual investor program, residency and visa programme in Malta; citizenship and residency for investors on the Islands of St. Kitts and Nevis, residency for investors in the UAE and a number of other less popular programs.
Of course, some wealthy Russians could be interested in residential schemes for several legitimate reasons, including the desire to start a new business in the chosen jurisdiction, or to achieve greater mobility due to the wide visa-free regime, the possibility of obtaining foreign education and employment for children, or the right to live in a country with high political stability.
However, as I mentioned earlier, since the advent of the CRS rules activity in the market second citizenship was through the roof that raised questions about the possible abuse of such schemes to bypass reporting under the new standards.
How people can abuse such schemes? The script is simple: banks have recently started asking customers to fill out new forms within the framework of the CRS. These forms have the character of self-certification. In other words, a Bank customer chooses their country of tax residence and provided your banker supporting documents such as residence certificate, identity card or passport. However, some customers not only lived in the declared country but do not even claim to resident status for tax purposes.
What will change for wealthy clients
Finally, the most important thing. As this message by the OECD can have an impact on customer relationships with their banks? The message is very clearly marked what should a financial institution. In accordance with title VII of the CRS, the Bank cannot rely on self-certification of customers, if he knows or has reason to believe that the results obtained from the client’s supporting documents are inaccurate or unreliable. This applies to both new and existing customers of the Bank.
How to understand that the customer information is incorrect? According to OECD recommendations bankers should take into account all existing available information. For any doubts regarding tax residency of the account holder or controlling person, the banker should take steps for its establishment.
Now, banks have another important tool to counter the manipulation of tax residence — a list of countries from the OECD, which should be paid special attention. Then there is the fact that the account holder or the controlling person claims to reside in the jurisdiction of any of these countries, should encourage the Bank to ask the customer additional information such as:
— if you received a right of residence under the scheme of investment citizenship/residence permit;
— do you have rights to reside in any other jurisdiction;
— did you spend more than 90 days in any other country during the preceding year;
— in some jurisdictions you filed the Declaration for income tax for the previous year?
The answers to the above questions should help financial institutions to determine if customer self-certification or documentary evidence is credible and reliable. As far as I know, banks are not limited to the above list of questions from the OECD. The answers to these questions will no longer be informal in nature and will need to have a documented backup. Apparently, what many expected in the distant future has already happened. How a new tool will affect wealthy clients with the banks? I think many of them feel the change very soon.