From now on, information about your financial assets will be automatically passed on to the relevant tax authorities, as Rob Kay explains
The new global automatic exchange of information regime that started this January affects everyone who holds financial assets outside their country of residence. It means that your local tax authority will automatically receive information from financial institutions about all your assets worldwide.
The definition of ‘financial institutions’ that must report is broad, and besides banks includes insurance companies, certain investment vehicles and trusts. Almost 100 jurisdictions around the world have signed up so far. More than 50, including France and the UK, start collecting data in January, while many others, including Switzerland, Monaco and Singapore, join a year later.
WHAT DOES THE NEW REGIME MEAN?
Tax authorities will automatically receive information on all the financial assets their taxpayers own overseas without having to ask for it. So, for example, the French tax authority will receive information on every resident of France’s offshore assets and income, regardless of whether they have declared everything correctly. Tax authorities will compare data received against tax returns, and where they find discrepancies, will have good reason to launch a tax audit. This could result in the taxpayer having to pay unpaid tax, plus interest, plus penalties. In some cases they could face criminal prosecution.
HOW IS THIS DIFFERENT FROM BEFORE?
The EU pioneered automatic exchange of information with its 2005 Savings Tax Directive. This is limited to savings income, but over recent years, the EU has sought to include other types of income.
The US Foreign Account Tax Compliance Act (FATCA) was the more recent catalyst for global information sharing. Foreign financial institutions have to report all accounts held by US persons to the US authorities. The US has developed ‘intergovernmental agreements’ with countries around the world to allow for reciprocal automatic exchange of information.
The game changer, however, is the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard. Issued in July 2014, and closely modelled on FATCA, it is the technical standard for automatic exchange of information that all signatories will now follow.
WHY DOES RESIDENCY MATTER?
Tax residency determines where you are liable to pay tax and what taxes you are obliged to pay. If you are buying, or already own, a property in France and spend time there each year, you need to understand what would make you resident in France and what would make you resident in the UK, so that you comply fully with the correct tax regime. Getting it wrong could open up a lot of complications later on.
You are automatically considered French tax resident if your main home (or foyer fiscal) is in France. You would also be considered resident if you spend more than 183 days in France in any calendar year, or if your principal activity (for example, job) is in France, or if France is the country of your most substantial assets.
In the UK, the Statutory Residence Test determines whether you are liable for UK income and capital gains tax on your worldwide income. In summary, this is a combination of day counting and the number of ‘sufficient ties’ you have with the UK. Whether or not you were resident in the UK in the previous tax years also plays a part.
For example, you are not treated as resident for tax purposes if you spend less than 46 days in the UK in a tax year and were not resident the previous three years. You are treated as tax resident if you spend 183 days or more in the UK or your only, or main, home is there.
RESIDENCE AND THE UK/FRANCE DOUBLE TAX TREATY
You can be resident in both the UK and France at the same time. In this case, ‘tie breaker’ rules in the UK/France Double Tax Treaty will determine where you are resident for tax purposes.
This is only a brief summary of complex legislation, so you must take professional advice to determine your residency.
WHAT INFORMATION IS SHARED IF I’M A FRENCH RESIDENT?
If you have financial assets outside France, financial institutions will collect and provide the French tax authorities with the following every year: your name, address and date of birth your tax identification number account numbers account balances