CRS Anti-Avoidance and CBI / RBI Due Diligence



Private Wealth

In recent times, Swiss and Liechtenstein banks have sent letters to foreign clients benefitting from CBI/RBI programs questioning the plausibility of their self-declared tax residence (reversal of the burden of proof). In our view, these were the first movers – with more banks to follow. The stage is set for a game change in "residence shopping".

Citizenship by Investment (CBI) and Residency by Investment (RBI) programs have become mainstream. For impoverished governments they are a substantial source of income while wealthy families see them as pathways to greater mobility, better education, jobs, reliable healthcare, and political stability.

OECD CBI / RBI Risk Analysis

Upon analyzing 100 CBI/RBI programs ("golden passports”), the OECD released in 2018 a list of jurisdictions potentially posing a high risk to the integrity of the Common Reporting Standard (CRS).

The OECD used two screening criteria in its analysis:

Criterion 1: The high-risk jurisdiction levies personal income tax of less than 10% on offshore income (that is, income sourced in a foreign country);

Criterion 2: The high-risk jurisdiction has physical presence requirements of less than 90 days in a year.

> The OECD advised banks to take into account the OECD list of high-risk jurisdictions when determining the plausibility of client CRS self-declarations, that is, when determining if the self-declaration, or documentary evidence, is incorrect or unreliable.

CRS Due Diligence

The Common Reporting Standard (CRS) has established due diligence guidelines which request a bank to screen its client database for a set of "indicia" (that is, indications, hints) pointing to the probability that an account holder may effectively be tax resident in a state different from the one in which s/he claims to be resident:

Indicium 1: Self evident (systemic)

Indicium 2: Current residence address

Indicium 3: Telephone number

Indicium 4: Standing instructions

Indicium 5: Power of Attorney

Indicium 6: Hold mail instruction

INDICIA SCREENING: In theory, reporting would need to be done to all reportable jurisdictions for which indicia were found.

CURING PROCEDURE: However, conflicting indicia may be cured with a CRS self-declaration (a unilateral client statement certifying tax residence).

REASON TO KNOW: Nevertheless, a bank may not rely on the CRS self-declaration if it knows, or has reason to know, that the self certification is incorrect or unreliable.

Implementation of OECD Guidance by Swiss Banks

The following CBI/RBI questionnaire was obtained from a Swiss bank. Its language is almost identical with the list of questions suggested in 2018 by the OECD:

1) Did you obtain residence rights under a CBI/RBI program?

No  Yes

In the following jurisdiction  ………………………

2) Do you hold residence rights in any other jurisdiction?

No  Yes

In the following jurisdiction  ………………………

3) Did you spend over 90 days in any other jurisdiction during the last year?

No  Yes

Jurisdiction ………………………

Number of days spent ………………………

OECD High-Risk Jurisdictions

Residents of these jurisdictions face enhanced bank scrutiny and must prove their self-certification is not incorrect:

Antigua and Barbuda

Bahamas

Bahrein

Barbados

Cyprus

Dominica

Grenada

Malaysia

Malta

Qatar

Saint Kitts

Saint Lucia

Seychelles

Turks

UAE

Vanuatu

(last OECD update Nov. 2018)

Conclusion

In absence of a reasonable explanation and documentation supporting the validity of the original self-certification, banks will treat the account holder as a tax resident of all jurisdictions in the questionnaire - with tax reporting into all jurisdictions.

Clients who willfully provide a Swiss bank with a wrong self-declaration, or omit to announce a change in circumstances in 90 days, incur a fine of up to CHF 10,000.

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References

OECD (2018) Consultation Document Preventing Abuse of Residence by Investment Schemes to Circumvent the CRS (here)

OECD (2018) Compilation of Documents: Public Input Received on Misuse of Residence by Investment Schemes to Circumvent the Common Reporting Standard (here)