From January 2016, financial institutions in over 50 countries around the world began collecting information on their clients and their accounts. This data will be passed onto the clients’ country of residence in 2017. Cross-border taxation can get complex for expatriates, and it is important to make sure you are correctly declaring your income and paying tax in the right country.
This exchange of information will be repeated every year, with a further 47 countries starting to collect data in 2017, ready to exchange it in 2018. It is carried out under the Common Reporting Standard (CRS), developed by the Organisation for Economic Co-operation and Development (OECD).
The loss of financial privacy affects us all. If we live in one country and have assets in another, our information will be shared between countries. Our local tax authority will automatically receive information on the financial assets we own overseas, without asking for it, and regardless of whether they have any questions about our tax affairs.
If you live in Portugal and have, for example, investments in the Isle of Man, or bank accounts in Switzerland, or pension funds in the UK, the Portuguese tax authorities will receive information on these assets.
Information to be exchanged
The information being shared about the financial assets you own outside your country of residence includes personal data such as your name and address, country of tax residence and tax identification number. You have probably received requests from banks and financial institutions to confirm these details.
The information to be reported about your accounts includes the investment income you earned over the year, such as interest, dividends, income from certain insurance contracts, annuities etc. Account balances are also reported, and gross proceeds from the sale of financial assets.
The financial institutions that need to report include banks, custodians, certain investment entities such as investment funds, certain insurance companies, trusts and foundations.
The 54 “early adopter” jurisdictions will make the first exchange by September 2017, in relation to 2016 data. This list includes Portugal, the UK, most EU countries, the Channel Islands, Isle of Man and Gibraltar, UK offshore territories and South Africa.
The countries starting the following year include Switzerland, Monaco, Singapore, Hong Kong, United Arab Emirates, Panama, Australia and Canada.
The US exchanges information globally under its FATCA initiative – the Foreign Account Tax Compliance Act.
What does this mean for you?
When local tax offices receive this information, they will be able to verify whether the taxpayer has accurately reported their income on their tax returns.
Cross-border taxation is complex. If you spend time in more than one country, it may be hard to determine where you should be paying tax. If you live in Portugal but have assets and receive income abroad, you need to know where you should be declaring them and where tax is due. You have to follow tax residency rules and double taxation treaties.
Tax residents of Portugal are liable to Portuguese tax on their worldwide income and some capital gains. This includes most income which is also taxed elsewhere. Some British expatriates believe that if income is taxable in the UK, like rental income, pensions and ISAs, they do not have to declare it in Portugal. This is incorrect; even if they are declared and taxed in the UK, you may still need to declare at least some of them in Portugal. If you have not been following the rules correctly, you should regularise your position as soon as possible.
Another aspect to consider is that if you have many different offshore bank accounts, investment products etc, each one will be sharing information with your local tax authority. For peace of mind, you could group as many assets as possible into one arrangement, so that there is much less information being passed around, and it is easier to follow what is being exchanged about you.
This is also a good time to review your tax planning arrangements. Are they approved here in Portugal? If, for example, you use non-compliant bonds, such as non-EU bonds including those from the Isle of Man, Jersey and Guernsey, provided you have been fully declaring them in Portugal, they are not illegal – but they are taxed more aggressively than Portuguese compliant bonds.
Exchange of information does not mean that we do not have the right to structure our assets in the most tax efficient way, but we have to ensure we only use arrangements which are compliant in Portugal. There are structures which can be very effective, but take specialist advice to make sure you get it right.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott
Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com