Are you thinking that you have created an ingenious reporting avoidance scheme that no one can detect? Two words: disgruntled employee. As many violators of the U.S. Foreign Corrupt Practices Act (FCPA) have discovered, it is possible for a disgruntled employee or competitor to provide damaging information through a simple click.

The OECD’s Common Reporting Standard’s (CRS) anti-avoidance rule prohibits schemes that intend to circumvent reporting under CRS. In order to assist participating CRS jurisdictions in detecting such schemes, the OECD set up an online system through which anyone can anonymously report abuses.

Anti-Avoidance Rule

CRS includes a rule known as the “anti-avoidance rule.” The anti-avoidance rule is one piece of the overall CRS approach to achieving global tax transparency. The rule directs jurisdictions to develop general or specific rules within their implementation legislation and regulations with the goal of limiting opportunities for taxpayers to circumvent CRS due diligence and reporting.

Circumvention Examples

Intelligent rule breakers can be very creative. Below are examples including those outlined in the CRS Commentaries:

• Manipulation of year-end amounts, such as account balances, to avoid reporting or being reported upon.

• Advising a customer to maintain an account with a Related Entity in a non-Participating Jurisdiction while offering to provide services and retain customer relations as if the account was maintained by the Reporting FI itself.

• Parking money from other Reportable Accounts with a Qualified Credit Card Issuer for a short period at the end of the year to avoid reporting.

• Deliberately failing to create any electronic records (such that an electronic record search would not yield any results) or maintaining computerized systems purposely unlinked to avoid the account aggregation rules.

• Advising a customer with multiple residencies only to include non-CRS jurisdiction on a self-certification.

• Advising a customer to obtain residency in a non-CRS jurisdiction through a residency for purchase scheme.

Working with Participating Jurisdictions, the OECD is seeking to limit the opportunities for taxpayers to circumvent the model by engaging in the above activities. The means by which avoidance schemes are being stopped is through:

• Ongoing sharing amongst governments regarding products, structures and arrangements used to circumvent CRS.

• Providing information to governments to enable them to carry out targeted audits and/or engage in enhanced information exchange and collaboration.

• Creation of the OECD Disclosure Facility.

OECD Disclosure Facility

The OECD announced in May that it launched a facility to disclose CRS avoidance schemes. The facility is part of the OECD’s process to systematically analyze actual or perceived loopholes. It provides an additional layer of monitoring for Participating Jurisdictions’ tax authorities.

The disclosure facility can be accessed through the OECD Automatic Exchange Portal.

Anyone can access the portal and report information on potential CRS avoidance schemes – and this reporting can be done anonymously. The message, as with the FCPA, is that we will catch you.

There is always an employee willing to report an avoidance scheme either because they want the organization to follow the rules or they are embittered toward the organization. Thus, it is important to be compliant and to ensure that your employees are compliant.

Steps to Take

It is important to take steps to protect your organization and employees against purposeful or accidental avoidance schemes.

• Train employees - especially Relationship Managers. Help employees be compliant by providing practical training relevant to the employees’ functional areas.

• Draft policies and procedures and actually implement them. It cannot be a matter of papering the file in case of audit.

• Determine whether creating an internal reporting program would be useful. It is critical to be alerted to potential problems so that steps can be taken to correct the problem and provide additional training or other appropriate corrective action.

The risk of civil and criminal sanctions and reputational damage outweighs the benefits of avoidance schemes. It is better to be CRS compliant.

For assistance, please contact me via my contact page or at elizabeth@elizabethmcmorrowlaw.com.

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