On a worldwide basis, countries have been engaging in the automatic exchange of financial information in order to halt offshore tax evasion and other forms of non-compliance. The Organization for Economic Co-operation and Development (OECD) has been active in facilitating an automatic exchange of information through its creation of a legal framework and development of technical standards seeking to improve this automatic exchange most practically. In February 2014, the OECD released a model Competent Authority Agreement (CAA) and Common Reporting Standard (CRS) designed to create a global standard for the automatic exchange of financial account information.
The OECD has modelled the CRS on the "Foreign Account Tax Compliance Act", (FATCA). This generally means that financial institutions should be able to harness their existing and planned FATCA processes and systems in order to implement the CRS, recognizing however that the data required as well as the volume required under each of these systems is different.
The CRS itself, has no direct legal force. Rather, it becomes effective once a country agrees to follow the model CAA and CRS when it implements bilateral agreements with other jurisdictions.
Under the terms of the CAA, the partner jurisdictions agree to exchange information about account holders which have their tax residence in the other jurisdiction. Broadly speaking, financial institutions report information to the tax administration in the jurisdiction in which they are located. This information contains voluminous details about the financial accounts held for taxpayers from jurisdictions with which their tax administration exchanges information. The tax administrations themselves then exchange that financial information.
The OECD just released a series of FAQs about the CRS (June 2016).
Part D (Reportable Account) on page 15 of the FAQ will strike fear into the heart of any Trust Protector.
Question: "Are protectors of a trust that is a Reporting Financial Institution considered to be Account Holders of the trust in all instances or only in circumstances where their powers are such that they could be regarded as exercising control over the trust?"
Answer: "The protector must be treated as an Account Holder irrespective of whether it has effective control over the trust."
Before examining the effects of this FAQ for trust protectors, let's look at some basics.
Not all trusts will have a trust "protector". It is not usual for a US trust to have one; but it is very common for a non-US ("foreign") trust to use a trust protector. A trust protector is usually an individual close to the family, an attorney or accountant. The protector generally enforces and monitors the actions of the Trustee and for example, will oversee investment decision, other important decisions concerning the trust (such as a change of trustee or a change of trust domicile), or will authorize a payment to a trust beneficiary.
Remember the FAQ applies only to trusts that are treated under CRS as Reporting Financial Institutions. Generally, for CRS purposes, the most likely scenario in which a trust will be a "Financial Institution" (FI) is when it falls within the definition of an "Investment Entity". Typically, this is the case when a trust has gross income primarily attributable to investing, reinvesting, or trading in financial assets and is professionally managed (e.g., the trustee is a professional corporate trustee whose primary business involves investing, administering or managing assets for trusts or other clients).
An "account holder" of a trust that is an FI as an "investment entity", is any person having an "equity" or "debt" interest in that trust. As a FI, the trust is required to report on any "account" that is held by a "reportable person", making it a "reportable account". A "reportable person" is any entity or individual who is a resident in a CRS signatory country. Once a "reportable account" is identified, the information to be reported will include the "reportable person's" name, address, tax identification number, date and place of birth, total gross amount paid or credited to the "account" for the relevant reporting period, the account balance as at the end of that period as well as the closure of any "account" held by a "reportable person".
Protectors residing in a CRS signatory country, for example, must now beware! It stretches the imagination to say that a "protector" has an "equity" or "debt" interest in the trust merely by virtue of being a protector regardless whether the Protector has effective control over the trust. The FAQ's appear to go well beyond the CRS in both its plain meaning and intent. Under the CRS, an "equity" interest in a trust is considered to be held "by any person treated as settlor or beneficiary of all or a portion of the trust, or any other natural person exercising ultimate effective control over the trust." The commentary makes clear that not all beneficiaries are to be treated as "Account Holders". Purely discretionary income beneficiaries (that is, those having no vested interest in the trust) are to be considered "Account Holders" in relation to a particular reporting period only if there has been a trust distribution made to them during that period. CRS is clearly trying to clarify that something other than one's designation as a beneficiary is needed before one will be treated as an "Account Holder". In line with this intent, treating all trust protectors per se, as "Account Holders" simply does not make sense and will lead to great confusion (for CRS reporting purposes, for example, what is the value of the Protector's "account"?).
For more information, the CRS Implementation Handbook can be accessed here. Treatment of trusts in the CRS begins on page 77.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
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