ZAC LUCAS, FOUNDER OF CENTENAL PTE LTD.

Taxing Times: Why the OECD Didn’t Get it Right

Zac Lucas talks about the Common Reporting Standards, the OECD’s blacklist and the need to bring immigration consultants into the regulatory fold.

How would you describe the current environment and tax implications for high-net-worth individuals and their advisers?

High-net-worth individuals are on the radar of tax authorities around the world, and they have to navigate a difficult and complex landscape since the introduction of the OECD’s Common Reporting Standard (CRS). Many wealthy individuals who are doing business internationally are facing the issue that they are involved in structures that are not recognised by tax authorities in their home countries. For instance, many civil law countries do not recognise the concept of a trust, which then in turn creates significant issues once that information is reported under CRS to the tax authorities. In addition, affluent individuals are sometimes advised to set up certain structures and are told that these are not reportable, but this might not always be true.

On the advisory side, the situation is equally complex. The proposed Mandatory Disclosure Rules (MDR), designed to supplement the CRS, are intended to be retroactive, and the OECD has put October 2014 as the start date. This means that a lot of the activities that happened in the run-up to the implementation of the rules will need to be looked at. One suggested method of enforcement would involve a name and shame mechanism, which would be a threat to the professional reputation of advisers. This could easily result in advisers being taken aside by government officials when they fly in to see their clients, based on prior MDR reports. It is now becoming a personal security issue for tax advisers. In my opinion, we have seen a rollout of mass surveillance measures, and the CRS is one of them, supplemented of course by the proposed MDRs. All of this should be viewed in the context of the big privacy push that is going through the EU at the moment, including the General Data Protection Regulation (GDPR). The GDPR and the CRS are complete opposites, and not easily compatible. It is ironic that the OECD was the organisation that actually championed privacy guidelines in the early 1980s, but they seem to have forgotten about that. The European Court of Justice (ECJ) has already ruled against an infringement in privacy with respect to police retention of records, and I am almost certain that should there be a case ‘GDPR versus CRS’, the OECD will have to significantly amend the CRS rules.

In your opinion, can residence and citizenship programmes potentially be used to misrepresent an individual’s jurisdiction of tax residence and endanger the proper operation of the CRS due diligence procedures?

The CRS is filled with loopholes, and there are much simpler methods for individuals who want to circumvent the CRS to use than misuse of a residence and citizenship scheme. I’ll give you an example. The CRS contains an “Active NFE” classification (Active NFE means an entity that holds a financial account where the relevant financial institution cannot report the ultimate beneficial owners of the entity), termed a “Start Up” Active NFE. Account holders may take advantage of this classification in order to avoid reporting under the CRS for a period of up to two years, when in fact they never had a real intention to start a business. The other area of abuse, which some think is rampant at the moment, involves the misuse of what is termed “Managed Investment Entities”, which are typically owner-managed personal investment companies that grant some discretionary portfolio management to either a bank or external asset manager. A Managed Investment Entity is not subject to CRS reporting by the various banks and/ or assets managers that are connected to the entity. Instead, the Entity itself is supposed to do its own reporting, which some believe is not then occurring.

But do you believe it is possible to use the residence route to circumvent tax?

In my opinion it is very difficult. We now have the OECD’s high-risk jurisdiction list, and most countries that are involved in the investment migration industry are on that list. If clients from any of these jurisdictions seek to open a financial account, a modestly trained compliance team will be difficult to fool. The moment the client produces proof of residency from any of those jurisdictions, some fundamental questions will be asked. Some three or four years ago, the situation might have been different, but today the large banks are very careful and actively protect their reputation. To make it through, high-net-worth individuals would have to build up a chain of collusion that includes their bankers, lawyers, advisers and so on. However, ultra-high-net-worth individuals are not putting themselves in such a precarious position, and high-net-worth and mass affluent individuals simply don’t have the resources to achieve this level of collusion.

So why is it that the investment migration industry and high-net-worth clients are being discussed in this context?

Here we need to talk about the sloppiness of the industry. The industry is made up of a lot of advisory firms. They seem to know their own jurisdiction very well but they might not be familiar with the legal implications in other countries. Furthermore, while there are many knowledge-able advisers, there are still some ‘cowboys’ in the industry who might not even ask what the true intention of the applicant is, or the underlying purpose.

Besides, in many markets the immigration adviser is not necessarily the first point of contact for high-net-worth individuals. Let’s look at China or India. These countries do not have open markets; you don’t get in that easily, unless you are a brand. So consultants need to network their way through to be introduced to a high-net-worth family. The immigration specialist might be the third or fourth supplier that these families get introduced to. This also means that in many instances the immigration consult-ant just doesn’t know what happens next, and why a residence or passport was sought.

What’s your suggestion to address this issue?

The industry needs to bring immigration specialists into the regulatory fold, where this is not yet the case. I don’t think self-regulation will work, due to the lack of enforcement power. Once consultants are regulated and subject to Anti-Money-Laundering laws, many of the current issues will disappear.

What’s your outlook for the industry?

I think we will see more regulation. We need to keep in mind that there are two things that don’t win any votes: being soft on terrorism and being soft on high-net-worth individuals. So it might become a lot harder to access EU countries in the future, and I think things like a simple speeding fine will be held against applicants. We might also see a curtailing of certain benefits, such as visa-free travel, that these programmes offer. I would not be surprised if the Caribbean countries that are currently enjoying access to the European Union might not get these kind of perks in the future. However, all of this depends on whether the industry will experience continuous scandals. From a tax perspective, the future is more uncertain as a lot of the issues that I have flagged have yet to hit the market. Tax authorities around the world are only now waking up and starting to understand the information they have received from the CRS process, and deciding how they should react to it. A major game changer would be if non-financial assets, such as land and property, would be included in the CRS. Many ultra-high-net-worth individuals are currently investing in these asset types, basically transforming reportable capital into non-report-able capital.

BIO: Zac Lucas is the Founder of Centenal Legal Technology Group. Zac is a practicing lawyer with over 20 years legal experience, admitted to practice in England and Wales, and is a former Partner of various international law firms advising on all areas of international private client law. Zac has particular expertise in relation to the OECD Common Reporting Standard (CRS). He has been engaged by a number of leading private banks, trust companies, wealthy individuals and families, and a governmental authority, to advise on the practical implementation of the CRS.