IEIM654010 | Hallmark D1 – Undermining reporting obligations

Arrangements will be caught by hallmark D(1) if they have the effect of undermining or circumventing reporting obligations under DAC2 or equivalent agreements on the automatic exchange of financial account information, or which take advantage of the absence of AEOI. This includes reporting obligations under the Common Reporting Standard (CRS). The UK’s agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) is not an equivalent agreement since it does not provide for the same reciprocal level of reporting as DAC2 and the CRS. Therefore, an arrangement which seeks to avoid reporting under FATCA would not be reportable under these regulations. However, the arrangement might be caught by regulation 23 of the International Tax Compliance Regulations 2015, so that. those regulations would have effect as if the arrangement had not been entered into

The MDR describes a CRS avoidance arrangement as any arrangement for which it is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS legislation or exploiting an absence thereof. The commentary explains that this test of ‘reasonable to conclude’, “…is to be determined from an objective standpoint by reference to all the facts and circumstances and without reference to the subjective intention of the persons involved. Thus the test will be satisfied where a reasonable person in the position of a professional adviser with a full understanding of the terms and consequences of the Arrangement and the circumstances in which it is designed, marketed and used, would come to this conclusion”.

Arrangements which will be caught by hallmark D(1) include those employing the following features:

The test in hallmark D(1) is an objective one, but in determining whether an arrangement has the effect of undermining the CRS the intent of those involved will be relevant as it will offer a good indication as to whether the arrangement may have the relevant effect. In considering whether an arrangement may have the effect of undermining reporting obligations (or taking advantage of the absence of these) an intermediary will need to consider the effect of the arrangement as a whole. Where an intermediary only has knowledge of a particular step, and has no reason to consider that that step forms part of an arrangement that will undermine or circumvent CRS, there is no obligation on that intermediary to report.

An arrangement does not have the effect of undermining or circumventing CRS, simply because, as a consequence of the arrangement, no report under CRS is made. For example, funds held in a French bank account by a UK resident would be reportable under the CRS. If the UK resident uses those funds to purchase a property in France, this would not in itself have the effect of undermining the CRS, because real estate is specifically excluded from reporting under the CRS. As such, the fact that a report no longer needs to be made does not mean that hallmark D(1) is triggered, as it is in line with the policy intent of the Regulations. The MDR commentary makes clear that “an Arrangement is not considered to have the effect of circumventing CRS Legislation solely because it results in non-reporting under the relevant CRS Legislation, provided that it is reasonable to conclude that such non-reporting does not undermine the policy intent of such CRS Legislation.”

In contrast, a promoter advising people to move funds from a jurisdiction where the CRS is in force, to one which has not implemented the CRS, in order to ensure that the funds are not reported under the CRS to the relevant tax authorities, is clearly caught under D(1). The effect of the arrangements is that the CRS reporting obligation is circumvented, in a way that is not consistent with the policy intention of the CRS. However, a person simply processing that transaction, for example a bank transferring the money from one account to another, would not normally have insight into the arrangement as a whole or its expected effect, and so would not be required to report. This would be true where the person processing the transaction knew to which country the funds had been sent, but has no knowledge as to the underlying reason for the transfer and if an “arrangement” exists

In applying the objective test of whether an arrangement has the effect of undermining or circumventing CRS reporting, the presence of certain features would suggest the hallmark is met. For example:

• A transaction that is highly structured in such a way that the avoidance of CRS reporting is the logical explanation for that structure;

• A transaction that is otherwise uncommercial, but for the benefit of avoiding CRS reporting;

• Ownership structures which result in beneficial owners holding assets just below the threshold of reporting (e.g. beneficial owners holding 24% of an interest where local rules apply a 25% threshold), or

• The refusal by a financial account holder to provide an explanation for a transaction or structure in circumstances in which that has been requested.