looking through a hole

The common reporting standard (which we recently spoke about in another article on the CRS) has greatly changed the landscape of the offshore world. What you could do earlier by simply opening an offshore bank account is now not that easy.

Here at Tax Free Today, we have never championed tax evasion. Not because it seems unethical or anything like that, the extreme amount of taxes is in itself unethical, but because it does not seem like a smart choice: the price of tax-evasion is simply much too high.

However, there may be many reasons, including completely legal ones, for not wanting the state in which you live to know about your finances and, as always, everyone has to decide for themselves, as we usually say here, your life is yours!

So let’s explain how you can avoid the CRS.

One obvious way to avoid exchanging information about your bank accounts is to choose to deposit your money in countries that have not implemented the Common Reporting Standard (CRS), but there are more options than the ones we are going to speak about here (for example, with a bank account for private individuals or for companies like the one we offer in Georgia).

Nevertheless, keep in mind that the CRS is not the only problem for those wanting to protect their financial privacy, there are also other unilateral or multilateral information exchange agreements, such as the “European FACTA” whereby the majority of European countries (and also some from further afield) continuously share information about all types of accounts.

In today’s article, you can read about 35 opportunities we have found to escape the exchange of information.

One of the government’s objectives with the CRS is, of course, to frighten us. Make us afraid to take our money out of the country, afraid to set-up companies abroad, afraid to do business with countries on their blacklists, afraid to do anything to protect what is ours from their infinite greed.

Ultimately, however, like everything else, the exchange of information isn’t perfect (in fact far from it) and has numerous legal loopholes that allow anyone wanting to maintain their privacy to escape from that desire for control.

The common reporting standard is not a big deal and, in reality, only affects a few: the major tax evaders, those reaching 6 figures, are the ones who really should be worried.

Now we move on to the 35 legal loopholes that I mentioned before, which we can divide into 6 categories:

  1. 8 loopholes that involve the relationship between the reporting and recipient countries (you can only influence them indirectly)
  2. 6 loopholes regarding the non-participation of certain financial institutions
  3. 5 loopholes that involve the banks’ new due diligence requirements (vetting of the client)
  4. 8 loopholes involving the regulations concerning affected accounts and assets
  5. 6 loopholes concerning claimants (account holders)
  6. 2 loopholes concerning the overall effectiveness of the CRS

As we already said, you cannot directly influence all of the legal loopholes. However, just as you can choose the suitable countries, you can also choose the most worthwhile financial institutions, distribute the money from your accounts before the balance is too high or change the account holder.

Some rules are very technical but I have tried to make them brief and understandable, let me know if I managed it 😉

8 legal loopholes that involve the recipient countries

1. There is no multilateral agreement between all countries

In the CRS framework, bilateral agreements are the standard choice. However, the option of a multilateral agreement is also available.

Bilateral means that only two countries sign agreements with each other to enforce the exchange. On the other hand, multilateral implies that more than two countries are involved. This means that instead of making a global and universal exchange of information, the countries sign agreements with each other. This costs time and money.

When signing multilateral agreements, there is a greater likelihood that jurisdictions will refuse to cooperate with each other, which defers the agreement for everyone. There may be good reasons for this refusal, for example, a lack of confidence in the data protection assurances made by a contracting party.

The inconsistencies between different agreements increase costs even more. This is not necessarily a good thing since the taxpayer will be charged but it does have the advantage of significantly delaying the signing of agreements.

Anyway, you already know that you can get rid of your problems by relocating to the right country (one that does not charge taxes nor wants to know everything about your finances).

2. The possibility of refusing the request for information from another country

For the moment, there is nothing in the agreement that prohibits a country from refusing to exchange information with another, even if the latter complies with the data protection regulations.

Therefore, the CRS would practically be useless, since the countries can freely decide with whom to exchange information.

In this case, it is more likely that receiving information depends on the country’s power. States that depend on development aid from or economic exchange with the recipient country will, of course, be more willing to share information.

Naturally, high-taxation countries will exchange information among themselves without any problems. This is not the case for small, independent tax havens like Switzerland, Panama, Singapore or Hong Kong who could refuse to share information with other countries (like Spain), provided that there are no other pre-existing agreements for the exchange of tax information.

3. The required consensus for the admission of new jurisdictions

Under the multilateral agreements model, the decision to admit new jurisdictions must be made by consensus. Once one country has rejected the jurisdiction, the majority of the other countries will no longer have a voice or a vote.

4. There is no reciprocity with developing countries

The exchange of information is only truly effective when there are no legal loopholes and all countries participate. Nothing could be further from the truth, as you will be able to read in this article.

For many developing countries, implementing the technical conditions of the Common Reporting Standard is a challenge. These countries will collect information and relay it to the high-taxation countries but they are not able to receive the information.

This means that the taxpayers of these countries will find escaping the CRS relatively easy because the information provided by high-taxation countries is not usually very useful, since those wanting to evade taxes will not usually have their assets there.

Since developing countries (i.e. some offshore jurisdictions) are not able to receive information, tax evaders will be safe there. Often, it is not specified whether full reciprocity is required.

5. Transferring residency to tax havens to take advantage of the non-reciprocity

Tax havens (countries without income tax) are encouraged in the multilateral agreement to send information without receiving it.

This may sound like a problem at first but, in reality, only means a change in the offshore jurisdictions’ trade. Now, instead of focusing on opening accounts for foreign nationals, these countries specialise in issuing residency permits for foreigners, which in turn can be used to open accounts in the country, where no information is shared.

In corrupt countries, there is a risk of false residency permits being issued in order to open local accounts easier. After all, if you register as a local resident, the bank will not send any information to other countries.

As long as these jurisdictions do not receive information from other countries, they cannot uncover and prosecute money laundering cases because they will lack information about the financial situation of the tax evaders residing in their country.

6. Privacy policy

Every country can decide to reject another if it thinks that it does not comply with the data protection policies. Although there is an international standard of data protection in the contracts, in the end, the decision about how to apply it is in the hands of the country in question.

7. Information from before the common reporting standard came into effect is not collected

According to the model agreement, there will be no exchange of information unless both jurisdictions comply with the other party’s privacy policy.

Since the contracts do not accept the retroactive exchange of information, tax evaders are safe until possible problems with the privacy policy between countries are solved. This can often take many years.

8. (False) residence certificates

We have already considered the possibility of escaping the CRS by moving your residence to another country (or even simply renting accommodation for a few months there) and opening a bank account.

But often you do not even have to relocate: in many countries, you are issued a tax certificate for your investments there, even if you are not a resident and, of course, you can use this certificate to open your tax account as a registered resident in that country (so that the information is not sent to the place where you actually fiscally reside).

Of course, there will also be people who choose the “easier” way and try to forge the official certificate. Often, banks are not able to distinguish between a counterfeit and an official certificate. Of course, in doing so, we would be getting mixed up in rather shady stuff,

6 legal loopholes regarding the non-participation of certain financial institutions

9. Exceptions for trusts

The protection of assets through offshore trusts is already a very interesting topic but it can be more so if we take into account that they are not subject to the CRS.

The only trusts included in the CRS are those that invest heavily in financial assets (this does not include real estate interests) and are also managed by a financial institution.

If your trust has income from real estate or is managed by a private trustee, you have nothing to worry about.

Even if a financial institution manages the trust, there are situations where not all related persons are identified, so, with an intelligent structure, the true beneficiary of the trust would remain anonymous.

10. Exclusion of registers and institutions with tangible assets

The common reporting standard focuses on financial assets and ignores many other asset types.

For example, in addition to not including some trusts (as we explained in point 9), information on the following assets is also not exchanged: property, yachts, aircrafts, luxury cars, safe deposit boxes in banks, art collections, gold held in free trade zones and the sale of jewellery.

11. Exclusion of commercial registers and records of foundations

Commercial registers are not public in all jurisdictions, actually far from it. Fittingly, offshore jurisdictions usually attract customers through the anonymity of their records.

Since it is not clear whom the beneficiary partner of a company, trust, etc. is, neither the banks nor the financial authorities will be able to know for sure if the information that their clients provide them for the opening and maintenance of the accounts is correct.

This means that if you have structured your offshore company properly, nobody has to know who the final beneficiary is.

In fact, the reality is that financial authorities generally identify tax evaders by monitoring them individually, not because of the exchange of information.

12. Exception of certain credit card providers

Credit card providers that do not allow payments of more than $50,000 or those that offer the possibility of reimbursing the money to the customer within 60 days after the transaction escape the effects of the CRS.

For example, since the account details are usually shared on the 31st December, you could charge a large sum to your account on the 30th December and refund it within the next 60 days.

Although the authorities may find it strange that an account with little or no funds is accruing large interest amounts, this information would never be shared.

Since there is a €250,000 limit for business accounts before information must be shared about them, by doing this you can avoid exceeding this threshold at the key moment and then later refund the money.

13. Exclusion of individual brokers

According to the CRS, in terms of stockbrokers, only institutions or investment companies are included in the automatic exchange of information. If your broker is a single individual, bank secrecy will remain in force. In other words, in this case, only information about the administrators, and not the owners of the accounts, would be shared.

14. Exclusion of investment companies with free movement of investors

In cases where the investment company of a financial institution only offers non-binding advice about investment possibilities, or the financial institution does not have the authority to decide on the assets of their investors, this will not be included in the automatic exchange of information. In these cases, it will no longer be a “managed” account.

If we combine this with the 13th legal loophole, we could create a trust operated by an individual broker who receives “non-binding advice” from the financial institution.

Officially, the individual broker makes his own decisions but, in practice, the financial institution is the one in charge. In such a case, the trust would remain exempt from the exchange of information.

5 legal loopholes that involve the banks’ new due diligence requirements

15. Registering your date of birth or your tax identification number is not always mandatory

One of the main consequences of the exchange of information is that accounts abroad will be increasingly difficult to open since more information will be requested. Of course, this depends entirely on local laws.

It is difficult for tax authorities to organise the information received if they cannot allocate it based on certain criteria such as a tax identification number or date of birth. And, for accounts opened in the past, this is information that was never requested.

This may be the case because there was no legal requirement in the past or because the beneficiaries of the accounts did not have such a tax number. Anyway, it has never been difficult to forge a tax identification number.

16. New accounts opened by former customers are classified as if they had existed before the CRS.

All business accounts opened before the date on which the common reporting came into effect will remain under the bank secrecy rules (provided that they do not exceed the maximum amounts).

But there’s more: if the same client opened another account in the same bank, no new information would be requested and the new account would also not be subject to CRS.

17. Linking accounts only if technically possible

It may seem incredible that this is a problem in the 21st century, but in reality, automating the old systems poses a major challenge for many banks.

When a holder has several accounts, it is up to the bank to link them. If it does not have the technical resources or if, for whatever reason, it decides not to enforce this, the CRS will not be able to do anything.

18. Linking accounts manually by the manager for individual accounts only

In the absence of technical resources (as we saw in point 17), the managers of the bank accounts will be asked to manually link the accounts of their private customers. The account manager is not obligated to link company accounts even if they know about them.

19. Exclusion of entities without tax liability

Some types of companies, like LLCs and LPs, are “fiscally transparent”, i.e. are not considered as companies but are taxed on a personal level. This means that they are not subject to taxes anywhere, provided that their owner is not also.

In these cases, the CRS states that the place from where the company is managed will be its residence.

The owners of said LLCs could remain anonymous, as long as they have a manager for their company.

8 legal loopholes involving the regulations concerning affected accounts and assets

20. Business accounts that existed before the CRS came into effect and are under $250,000 are not included

This is one of the larger legal loopholes. All business accounts opened before the CRS came into effect will continue to be protected by bank secrecy. At least if the bank and the country decide to do so, which is to be expected.

In other words, if you prefer to keep your accounts private, you would have to open as many company accounts as you need in a country where the CRS is not yet in effect.

21. The CRS does not include certain existing private accounts

If the private account is a Cash Value Insurance Contract or an Annuity Contract, it does not enter into the exchange of information, provided that the financial institution is not authorized to sell the contract.

22. The account balance is only exchanged on the agreed date

The exchange of information does not provide a complete picture. In other words, information about the account balance and the accrued interests is only exchanged on the set date, which is the 31st December.

Therefore, if your business account existed before the CRS came into effect, you could transfer the money to another account before the deadline (to a bank account in a country without the CRS, for example) and return the money a few days later.

This way, the business account would remain outside of the common reporting standard.

23. Investment in property is excluded

As I already mentioned, investments in property are not covered by the CRS. It does not matter whether you manage them under your own name, under a fake name or through a company.

24. Advantages for undocumented accounts (without an address)

Accounts for which an address could not be verified show as undocumented. In these cases, information cannot be exchanged since the accounts cannot be assigned to any country.

Accounts may appear undocumented because the financial institution (at that time) did not ask for an address or because the information could not be found manually.

In these cases, there are no penalties nor is the account closed.

25. Closed account status

According to the Common Reporting Standard, closing an account only requires conveying the fact that it has been cancelled but the amount deposited in the account has not.

In this way, the systematic opening and closing of bank accounts in order to make a single large transaction would escape the exchange.

26. Leeway when an account is considered closed

We must add to point 25 that each jurisdiction determines when an account is considered “closed”.

Tax havens could opt for a more flexible definition of this term so as to avoid the exchange of information in cases where the account is still available but without any transactions.

The account could also be closed on the date chosen for the exchange and then reopened immediately after.

For tax havens, it is a good way of avoiding the common reporting standard.

27. There will be no public statistics of the different types of financial accounts

No public statistics on the accounts exchanged are available. Particularly the values of accounts that are closed, undocumented or not included in the CRS as they could provide information that would make linking these accounts to specific individuals or entities easier.

6 loopholes concerning claimants (account holders)

28. Exchange limited to shares over 25%

One of the key points when sharing information is the level of control that the person has over the company and its assets.

For the CRS, the level of shares you have to have in order for your information to be shared is still quite large. Only those who hold more than 25% of the shares or holdings of a company are considered to be persons with control.

Therefore, even with four partners or a group with at least four members, the exchange could easily be avoided by splitting the shares so that no one has more than 25%. The more shareholders, the better. This is, after all, the reason why companies that invest in the stock market are not included.

A dummy manager could also be recorded as the beneficiary of a company, thus leaving the person in control of the company hidden. It is true that this option is mentioned in the documents of the agreement, but the means to prevent it are not actually provided.

29. Only information about people with control in passive non-financial entities (NFE) is shared

Only information about people with control in passive NFE companies is shared.

Although it is true that, when in doubt, all NFEs should be treated as passive (those with income from royalties, dividends, interests, etc.), it is relatively easy to prove that it is an active company.

Passive income can be disguised in such a way that it appears as active income by adding an additional income branch: through the active distribution of services or products.

Furthermore, anyone who owns a company with active income (for example, a restaurant, an agency or a shop) could easily open an additional business account and put the passive income in the name of the active company, thus escaping the CRS. This is a large legal loophole that is far from being fixed.

Por cierto, el CRS clasifica ciertas compañías automáticamente como activas. Este es el caso de los holdings NFE, startups, empresas en concurso de acreedores o en quiebra, y asociaciones sin ánimo de lucro. Es decir, no se intercambia información sobre las personas que controlan dichas empresas.

The CRS automatically classifies certain companies as active. This is the case for NFE holdings, start-ups, companies that are in receivership or are bankrupt, and non-profit organisations. In other words, information is not exchanged about the people that control these companies.

The only thing that may be problematic is the definition of and difference between active and passive income, which ultimately depends on the individual jurisdiction.

30. Exclusion of trusts without bank accounts

Provided the trust does not have bank accounts nor invests in financial assets, it could own (itself or through an intermediary company) real estate, automobiles or boats, and remain exempt from the exchange.

31. Exclusion of companies listed on the stock exchange, governmental corporations and financial institutions that are subject to exchange

Publicly traded companies, governmental corporations and financial institutions that have to exchange information are considered low-risk in terms of tax evasion and are therefore exempt from the CRS with their own accounts.

However, shareholders do have plenty of leeway if they want to evade taxes since they are not identified as beneficiaries. This is especially true if they own shares of companies in countries without the CRS.

32. Exclusion of inherited assets with a death certificate or a will

Inheritance left by the deceased will only be subject to the exchange of information when there is no will or death certificate.

This means that the successors could indefinitely delay the official receiving of the heritable property and use assets that are not subject to the CRS.

33. Exclusion of certain special account types

There is a whole range of account types that are exempt from the CRS. These include, for example, pension accounts, accounts with certain tax advantages, life insurance, accounts of the deceased, escrow accounts, and accounts relating to a legal determination.

Therefore, for example, with escrow accounts, you could fake the purchase of a property and leave a sum of money in an account as a security deposit. Similarly, a court ruling could be used to secure the money.

2 legal loopholes concerning the overall effectiveness of the CRS

34. Exchange of information only for “tax purposes”

The common reporting may only be used for “tax purposes”. Therefore, each jurisdiction can freely choose how and to what extent it exchanges information.

In fact, according to the signed contract, a tax haven could choose to prohibit tax authorities from sharing information with other institutions, such as the prosecutor’s office (which is ultimately responsible for enforcing the law by taking evaders to trial). If the tax authorities do not comply with this ban, the tax haven could follow the breach of contract and terminate the information exchange agreement with the country.

35. USA as a tax haven

In the past, we have written about the United States and how it is a tax haven (at least for those that do not live or come from there).

In the USA, not only do the company accounts there remain exempt from the CRS, but nor do they share any information about the bank accounts of investment companies based in non-CRS-participating countries that are controlled by US financial institutions.

The great advantages of anarchy and international disorganisation

And those are our 35 legal loopholes.

Once more, I would like to point out that tax evasion is not advisable and often leads to very unpleasant situations. What I do want to demonstrate with this article is how, ultimately, great intentions and international proposals are usually obsolete because of the very diverse (and partly opposing) interests of the different participating countries.

And this not only happens with the CRS, but also with the TTIP and many other international agreements.

One of the things that, for me, is seen clearly here is the big advantage that anarchy and international disorganization create. Better yet, instead of anarchy, let’s refer to it as global tax competition.

There are 206 jurisdictions in the world and it is practically impossible for them to reach an agreement in full. Even among the 91 countries that, at the time of writing my article, are part of the CRS already have their differences, and the enormous 35 legal loopholes are proof of this.

Despite how much the OECD has been able to work on negotiating a framework agreement like the Common Reporting Standard, in the end we can see that it is not all that useful.

While there is still (fiscal) competition between the world’s countries, there will still be freedom and only then will we continue to find advantages in internationalising our life or business.

That is why I am a big fan of decentralisation and division. The more countries there are, the better. After all, they also offer other advantages, which we will talk about in due course.

And this is where we leave it for today. If you have any queries or you want us to help you escape from the tyranny of the states, you can request a consultation here.

And, if you have not already done so, don’t forget to subscribe to Tax Free Today so that we can keep you updated with new information.