OECD Model Mandatory Disclosure Rules for CRS avoidance arrangements

The Organisation for Economic Cooperation and Development (OECD) has issued model disclosure rules for mandatory disclosure of Common Reporting Standard (CRS) avoidance schemes. The Model Rules require promotors of such schemes and service providers involved in their implementation to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the CRS. In addition, the Model Disclosure Rules also target “opaque offshore structures” used to hold offshore assets other than financial accounts.

The Model Rules are intended as a template for jurisdictions wishing to implement disclosure obligations on promotors and other intermediaries involved in arrangements intended to prevent disclosure obligations under CRS arising. They are not mandatory for jurisdictions adopting CRS, but seem likely to form the basis of any rules that jurisdictions do put in place domestically. Indeed, the EU has recently approved even wider reporting obligations which will apply to any cross-border avoidance arrangements, as to which see “Mandatory disclosure of EU cross-border tax planning arrangements”.

Background

In 2014, the OECD published the CRS and exchanges of information under the CRS regime have now commenced. However, amidst concern that offshore structures and arrangements have been promoted to circumvent reporting obligations under CRS, in 2017 the G7 Finance Ministers called on the OECD to start “discussing possible ways to address arrangements designed to circumvent reporting under the Common Reporting Standard or aimed at providing beneficial owners with the shelter of non-transparent structures.” For more background on the CRS, see “FATCA, CRS and international automatic exchange of information”.

In response to this request, on 9 March 2018, the OECD published “Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures”. The Model Rules are designed to provide tax administrations with information on CRS avoidance arrangements and opaque offshore structures, including the users of those arrangements and structures and those involved with their supply.

However, it should be noted that the rules have not been endorsed as a minimum standard. As such, they are optional for jurisdictions to adopt. However, whilst not forming a minimum standard, the Model Rules are designed to provide a framework for mandatory disclosure rules that is based on international best practice and present tax administrations with options to address perceived risks. In this way, the OECD hopes to deter the design, marketing and use of such arrangements and schemes and bolster the overall integrity of the CRS rules.

Model Rules

The framework contained in the Model Rules contains five key elements for the design of a mandatory disclosure regime:

• a description of the arrangements that are required to be disclosed (ie the hallmarks of a disclosable scheme)
• a description of the persons required to disclose such arrangements (ie the Intermediaries that are subject to reporting obligations under the rules)
• a trigger for the imposition of a disclosure obligation (ie. when an obligation to disclose crystallises under the rules and any exceptions from reporting)
• a description of what information is required to be reported, and
• appropriate penalties or other mechanisms to address non-compliance.

It is important to note, however, that as with other disclosure rules (such as DOTAS in the UK or the recently agreed EU mandatory disclosure rules on cross-border tax planning), disclosure will not have any direct impact on the effectiveness or otherwise of the particular scheme or arrangements. The purpose of the Model Rules is to provide early warning to tax authorities of such schemes and deter the future development of such schemes.

Hallmarks

The hallmark for a CRS avoidance arrangement captures any arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS legislation. This generic test is supplemented by hallmarks that specifically identify known features of CRS avoidance arrangements, such as account conversions, use of accounts that have features substantially similar to financial accounts and transfers of accounts to non-reporting jurisdictions.

The hallmark for opaque offshore structures specifically targets passive offshore vehicles that are held through an opaque structure. An opaque structure is one which it is reasonable to conclude is designed to allow a person to be a beneficial owner while not allowing the accurate determination of such ownership by the use, for example, of undisclosed nominee arrangements. The purpose of this hallmark is to supplement the disclosure rules for CRS avoidance arrangements and to capture structures that would not ordinarily be subject to CRS reporting (such as holding structures that hold assets other than financial accounts, eg real estate).

Intermediaries

Intermediaries are defined as those persons responsible for the design or marketing of CRS avoidance arrangements and opaque offshore structures (Promoters) as well as those persons that provide assistance or advice with respect to the design, marketing, implementation or organisation of that arrangement or structure (Service Providers), such as lawyers, accountants, banks and financial advisers. However, a Service Provider should only be required to disclose where they know or can reasonably be expected to know that the arrangement or structure is subject to disclosure.

The model mandatory disclosure rules only impose disclosure obligations on intermediaries that have a sufficient nexus with the reporting jurisdiction, such as operating through a branch located in that jurisdiction or being resident in, managed or controlled, incorporated or established under the laws of that jurisdiction.

The Model Rules require an intermediary to file a disclosure in respect of a CRS avoidance arrangement or opaque offshore structure at the time the arrangement is first made available for implementation, or whenever an intermediary provides services in respect of the arrangement or structure. The Model Rules do not require disclosure of information covered by legal professional privilege or other equivalent confidentiality obligations. However, the disclosure obligation should be passed onto the taxpayer implementing the arrangement or structure in those circumstances, as well as where there is no intermediary with a reportable obligation.

The Model Rules contemplate that any information disclosed under the new reporting obligation should be shared with the jurisdiction of the taxpayer involved. For this purpose, the OECD is working towards development of an exchange of information framework to be developed under the multilateral Convention on Mutual Administrative Assistance.

Comment

The development by the OECD of Model Rules to encourage jurisdictions to implement measures designed to prevent taxpayers avoiding reporting obligations under the CRS is very much part of a wider transparency initiative. It builds on the OECD’s own recommendations under BEPS Action 12, which provided a modular framework for countries without mandatory disclosure rules to design such a regime focussed on potentially aggressive or abusive tax planning schemes and their users. Moreover, the EU has recently agreed on even wider mandatory reporting of cross-border tax planning arrangements and the OECD’s Action 12 already and there are many design similarities between the two proposals. As such, whilst the Model Rules are not mandatory under CRS, it seems likely that they will now form the basis for many other jurisdictions to implement domestic rules designed to prevent taxpayers avoiding reporting obligations under CRS.