common · 2018. 9. 17. · untold billions escape automatic exchange due to oecd allowing...

Common

loopholes

which

circumvent

CRS

Surprisingly, many FIs and participating jurisdictions

assist the avoidance of the CRS. The tactic to is

misinterpret, misapply, exploit ambiguities or ignore

the FAQ, implementation handbook and Mandatory

disclosure Rules. If the OECD does not amend the CRS,

covert misapplication will continue unabated. Such

shenanigans include :

• Incorrectly accepting certification of Active

NFE in connivance with client, avoiding

reporting of controlling person.

1. Wrong Active NFE Type [A]: Banks invariably

accept that an entity doing a business or trade

is an Active NFE, without checking the Type [A]

Active NFE test on both income and assets. The

asset test is never done, exacerbated by

ignoring the FAQ update that cash is not a

financial asset. Tax havens also guide FIs to

ignore the FAQ update as it is not CRS law.

Banks have adopted a strange practice of

accepting an entity is an Active Entity Type [a]

if it has premises and staff and earns business

income, without checking on the asset test.

OECD needs to remind FIs to do asset test on

type [a] and clarify on period the asset test

pertains to [i.e. year end, quarterly average,

etc.

This issue highlights

1. FIs incorrectly

categorizing entity as an

Active NFE

2. No annual validation of

Active NFE status

3. Incorrect carve out of

Active NFE from

Investment entity

4. Embed investments in

untaxed Active NFE

5. Equity interest owned by

manager

6. Over the counter

derivatives

7. Surety bonds

8. Non-cash value

insurance

9. Irrevocable insurance

10. Residence by investment

11. CRS jurisdiction FI

manages assets placed

in USA

12. Non-participating

jurisdiction FIs

13. Nil report settlors of

irrevocable investment

entity trusts

14. Listing mistaken as

regularly traded

15. FIs do not identify

Controlling Persons of

listed Passive NFEs

16. Prohibited preexisting

insurance

17. Trustee-based sham

retirement funds

2. No annual validation on income or asset test.

Once an entity is categorised as a Type [a] Active

NFE, there is never another annual test on assets

and income by the FI. This categorization is not

supposed to be set in stone. OECD to remind FIs

to redo test using balance sheet and income

statement.

3. Fallacious carve-out of investment entities if

Type[D]…[G] Active NFEs is an extremely

widespread misapplication and

misunderstanding.. In a nutshell, FIs ignorantly

accept self-certification that an entity is an

Active NFE if it is a holding, reorganising, new or

treasury centre even if it is an investment entity.

Trusts are the main culprit in misunderstanding

what a holding Active NFE is versus investment

entity. OECD to remove the confusing carve-out

clause of Active NFEs in the investment entity

definition.

4. Untaxed Active NFEs embedding investments

There is absolutely no justification for the CRS to

exempt reporting of controlling persons of

untaxed NFEs, especially if investments are

embedded within these entities. The challenge

for the CRS to address this unfairness, is that

some entities with tax identification numbers do

not tax income if earned outside country (e.g.

Hong Kong) or not repatriated (Singapore).

Issue

03 August 2018

this issue

Most common CRS

loopholes P.1, 2, 3

Minimum threshold for FI

managing assets to be

Investment Entity

P. 4

Author : Mark Morris

www.the-best-of-both-worlds.com

Untold billions escape automatic exchange due to OECD

allowing ambiguities to continue unhindered and

jurisdictions ignoring the FAQ as not being CRS law

Regular

journal of

exploiting Common

Reporting Standard

weaknesses

…and

the

OECD

reaction!

• Equity interest and

investment entity in same

location

5. Investment entity owned and

managed by same person will

result in no CRS reporting. For

example, French resident

owns and manages BVI

company which is an

investment entity.

• Obscure substitute financial-

substitutes masquerading as

non-financial assets outside

scope of reportable accounts

6. Over the counter derivatives

(OTCs) a private agreement

between two parties, the

bank and the client. This is a

holdover from Swiss Banks’s

tactic to circumvent the EU

Savings Tax Directive. The FAQ

update clarifies that OTCs are

in scope, but many tax havens

authorities support the use

such primitive no purpose

products by clarifying that

the OECD CRS FAQ is not part

of CRS as it is not the

legislation.

7. Surety bonds, a product by

some Caribbean insurers, with

refundable segregated

collateral, and additional abuse

of allowing the Principal to be

the Obligee instead of a 3rd

party. This product is a total

sham.

Growl of this issue

OECD closing

loopholes via

updates to the FAQ

and implementation

handbook and

separate initiatives

are a waste of time

as tax havens ignore

these because they

are not law

The OECD is aware of most

of tacticts evaders use to

circumvent the CRS, or in

OECD terms “undermine the

policy goals”.

The OECD is addressing

these loopholes by either

updating the CRS FAQ,

subsequent editions of the

implementation handbook or

separate initiatives such as

Mandatory Disclosure Rules

or Addressing Residence by

Investment schemes.

The problem is virtually every

tax haven jurisdiction which

caused the CRS to be

implemented in the first place

due to hiding offshore

moneys, is supporting the

continued use of loopholes by

ensuring their FIs are aware

that the OECD CRS FAQ and

CRS Implementation

handbook may be ignored as

it is not CRS legislation, and

so the amendment will not be

adopted.

8. Welfare and long-term care

insurance issued by the same

insurers as surety bonds,

structured as a non-cash

value policy.

9. Irrevocable life policies where

after the insurance wrapper is

issued, the policyowner agrees

to a confidential rider that they

have no access to assets,

converting policy to non-cash

value

• Fake residence

10. Residence by Investment The

OECD must bear the full blame

for allowing this loophole

because it stipulated residency

of client is based on utility bill.

FIs should shoulder the burden

for addressing this loophole.

Dubai is by far the most

egregious supporter by issuing

residence permits to anyone

incorporating a company.

Furthermore, UAE defines a

tax resident as having a

residence visa, despite not

income tax nor requirement to

be physically located in UAE,

besides two visits a year.

Forged passport and utility

bill. To the naïve, it is difficult

to imagine that this occurs. In

China it ss easy to obtain a

forged passport and utility bill

from any country. This does

not need to be the quality to

pass airport immigration

control. This is virtually same

loophole as residence by

investment.

• Non-participating

jurisdiction FI which is not

an investment entity

11. CRS jurisdiction FI manages

accounts placed in USA. Many

CRS jurisdiction banks that

used to hold and manage

undeclared accounts advised

their clients to move the

account to a USA custodian

bank, but continue to manage

the portfolios.

12. Shift accounts to USA bank,

custodian or insurer. Most

accounts that avoided the CRS

was simply moved to the USA.

The OECD’s tepid response not

to name the USA as a non-

participating jurisdiction due

to non-existent reciprocal

information or promise to

introduce legislation for future

reciprocal exchange (zero

progress after 8 years). Worse,

the Mandatory Disclosure Rule

exempts banks from disclosing

if they merely shifted accounts

to USA on instruction of client

(nudge, nudge wink wink).

Unfairly, it now falls on the EU

to blacklist USA for not

exchanging info.

Common loopholes permitted to

continue because most tax havens

jurisdictions clarify that the OECD

addressing these through the regular

FAQ updates may be ignored because

it is not CRS legislation. These same

jurisdictions are not adopting the

Mandatory Disclosure Rules because

it is not a minimum standard. It is

doubtful they will adopt anti

residence by investment abuse.

CRS Times Issue August 2018

• Irrevocable trusts

13. Nil report for settlors of investment entity

irrevocable trusts. The OECD is hard headed in

not recognizing this as a loophole. The CRS

states unequivocally that irrevocable trusts

that are passive NFEs must have the entire

account value reported for the settlor. Yet

absurdly it provides a loophole for investment

entity trusts whereby the trustee can report a

zero value for the settlor. This makes no

sense. Residents in countries that do not have

CFC rules on individuals such as China, Brazil,

etc.

• Listing vs. regularly traded

14. Publically traded (or listed) entity incorrectly

assumed to be a non-reportable regularly

traded person: There is a vast misapplication

by FIs regards an account of a listed entity as a

non-reportable account. There is ignorance of

what regularly traded means vs listed, i.e. 10%

shares sold to unrelated parties each year,

trades on 60 days per year, etc. The OECD

must bear some blame for this

commonmissaplication because in the CRS FAQ

Sections II-VII: Due Dilligence Reuirements

Question 20 states “In case a Financial

Institution knows, based on information in its

possession or that is publicly available, that a

New Entity Account Holder is not a Reportable

Person, irrespective of its residence (e.g.

because it is a corporation that is publicly

traded)” rather than saying regularly traded.

15. FIs do not identify Controlling Persons of

Passive NFEs listed companies. FATF AML says

FIs do not have to identify beneficial owners of

listed entities. Therefore to avoid CRS, single

owners of Passive NFEs merely list their

company on a small stock exchange and

subsequently will not be reported on by the FI.

These shares are not traded and single


Minimum threshold of assets managed by a Financial Institution to be an investment entity? Answer: No minimum threshold

I’m always flabbergasted when client seek legal opinion on what percentage of assets must be managed by a wealth manager on a discretionary basis to pass the managed by test to be an investment entity. Even more amazing are lawyers who opine a random threshold, such as 5% or 20% so as not to be abusive. CRS Commentary page 162 par (17) Where an Entity is managed by a mix of Financial Institutions, NFEs or individuals, the Entity is managed by another Entity that is a Depository Institution, a Custodial Institution, a Specified Insurance Company, or an Investment Entity described in subparagraph A(6)(a), if any of the managing Entities is such another Entity. Thus, if the client manages his own portfolio and contracts a FI to manage one cent of the portfolio, this would qualify as a mix.

owmner retains 100% of the shares. This is

despite due diligence for high-value accounts

requiring entities to self-certify Controlling

Persons who own more than 25% of the

shares.

• Prohibited insurance

16. Prohibited insurance is an excluded

account. The most asinine exemption of

the CRS is insurance that is prohibited from

being sold in the account holder’s

residence. One of the most common ways

to avoid the EU savings tax was an

insurance wrapper, likely sold to you by an

offshore insurer based in a country that

was prohibited to sell insurance in your

jurisdiction, e.g. Andorran banks

established insurer subsidiaries to provide

cash value insurance policies to Spanish

and French residents, despite the EU

forbidding this. The client simply visited

Andorra and shifted his bank portfolio into

the policy. Joyously the client is exempted

from reporting by the OECD. This is similar

to the EU Commission exempting non

UCITS as it was not possible to market

across borders, so client simply visited

Luxembourg to subscribe for the fund.

Ludicrous and absurd.

• Trustee based pension plan with

segregated portfolios

17. Trustees regard themselves as non-

reporting FIs when they provide savings

plans with segregated accounts. They claim

treatment as non-reporting Fis. Gibraltar,

Hong Kong (ORSO) and Singapore trustees

promote segregated savings plans falsely

purported to be non-reporting FIs because

they are similar to Broad Participation

Retirement Plans. The June 2018 OECD

CRS FAQ update addresses this by stating

where the fund is compartmentalized into

sub-funds that are in practice working as

separated pension products, including

through the segregation of the assets, risks

and income attributed to such sub-funds,

the test of whether a single beneficiary has

a right to more than five percent of the

fund’s assets is to be applied at the level of

each sub-fund and therefore will not

qualify as a non-report FIs. However, after

the FAQ update, trustees have assuaged

their clients that this update can be

ignored as the FAQ is part of CRS

legislation.


Many practioners

mistakenly opine that if

an entity meets the

conditions of a holding

company, treasury

centre, new or

reorganising

organisation, then it

bypasses the definition

of an Investment Entity.

This is totally untrue.

Once an entity qualifies

as an investment entity,

it cannot suddenly

become an Active NFE

because it meets the

criteria of a Non-

Financial Entity

qualifying as certain

Active NFEs.

The implementation handbook shows a

flow chart in determining if an entity is a

Reporting Financial Institution CRS page 58

par (9) The term “Active NFE” means any

NFE that meets any of the following

criteria [a] … [h]- Note that is says only an

NFE can be an Active NFE.

Then under definition of investment entity

CRS page 45 par (6)(b)The term

“Investment Entity” does not include an

Entity that is an Active NFE because it

meets any of the criteria in paragraphs

D(9)[d] through [g].

There is no deviation that an

investment entity is an Active NFEE if it

meets criteria of Active NFE [d]..[g].

CRS Active NFE and Investment Entity exclusion in kindergarten language

If you are a human (reporting FI) you will be

either a Caucasian (depositary), Bushman

(custodian), Negroid (insurer) or an Asian

(Investment Entity). A moot carve-out rule states

a non-human mammal cannot be an Asian.

If you are not a human, you are a nonhuman

(NFE). A non-human can be an animal (Active

NFE) viz. bird(business), mammal (holding co),

fish (new), reptile (reorganising) or amphibian

(charity). If the nonhuman is not an animal, you

are an insect (Passive NFE)

Many practioners pervert the moot carve-out

rule that an Asian can escape being categorised

as a human if it has the attributes of a non-

human mammal. Only a nonhuman can be a

nonhuman mammal, even if a human can have

some traits of a mammal.

There is no carve out

of an Asian to be a

nonhuman mammal


Irrevocable investment entity trusts reporting nil for settlors

Singapore investment entity

irrevocable trust: Tax

planners’ favourite

avoidance scheme for

Chinese residents involves

assisting establishing

irrevocable trusts. Even if the

trust is reported for CRS,

there is no tax on the trust

income due to no CFC rules

for individuals. Even when

CFC rules are introduced

there will be no tax liability

on the trust as the settlor

has no control over the

irrevocable trust.

Furthermore, if the trust is

categorized as an investment

entity, i.e. has a corporate

trustee and the trust earns

mostly financial income,

there is no reporting on

beneficiaries until a

distribution is made. Trusts

may instead make a loan to

beneficiaries which is not

reported as a distribution.

Singapore goes the extra

length to ensure the Chinese

authorities are not aware of

the value of the trust

established by the settlor by

guiding the trustees to

report a nil value for settlors

of investment entity

irrevocable trusts.

Preventing investigation and

tax status of assets used to

establish irrevocable trusts

Listing on small stock exchange to avoid CRS

through misapplication of CRS

CRS resident lists his private investment company on small

stock exchange and bank, in collusion, accepts that the entity

is a non-reportable person because the bank misunderstands

that listed equals regularly traded.

Chinese resident clients holding offshore private companies

avoid the CRS by working with service providers and banks

who misapply or misunderstand the CRS to list their

company on a small offshore stock exchange.

The exchanges of choice for evaders are Guernsey, Malta,

Cyprus and primarily the Dutch Caribbean Securities

Exchange in Curacao where investors of any level may use

the startup exchange as there are no minimum income or

investment requirements.

Critical to the avoidance of CRS, there is ubiquitous

misunderstanding by banks maintaining the accounts of

these listed companies to accept the self-certification that

Critical to the avoidance of CRS, there is

ubiquitous misunderstanding by banks

maintaining the accounts of these listed

companies to accept the self-certification

that these companies are non-reportable

persons.

Regularly traded requires a listed stock to

satisfy four criteria to be a non-reportable

person, namely

1. Meaningful volume traded of at least

10% of shares.

2. Regularly quoted where dealers buy

and sell stock for sale to unrelated

persons.

3. On an ongoing basis of at least 60

business days per year.

4. On an established securities market

with a market cap exceeding one

billion USD.

In most cases, if not all, the CRS evasion

tactic does not meet any of the criteria to

be regularly traded yet banks are treating

these listings incorrectly as non-

reportable persons due to being regularly

traded.

List private investment

company on a small

stock exchange to be

incorrectly classified as

non-reportable, despite

not meeting regularly

traded criteria

Small stock exchanges of choice for CRS evaders


Derivatives to avoid CRS

Originally, banks created OTC products to

circumvent the definition of interest for the EU

Savings tax directive. The same banks are using

the same structures to avoid the definition of

financial accounts.

For example, a Swiss bank wraps a client’s

portfolio into a forward contract, whereby the

client instead of owning the portfolio, will own a

Despite the OECD CRS FAQ update that OTC derivatives are in scope, many FIs still regard these as non-reportable

Ask 100 banks where

they report the Non-

Financial Entity

account holder to,

and you will receive

100 incorrect replies

The author, while presenting

seminars in dozens of CRS

jurisdiction to hundreds of

Financial Institutions concludes

that not a single CRS officer

follows the tax residency guidance

of the CRS Commentary. At the

risk of being called lazy, and

without interpretation, I hereby

replicate the relevant clauses of

CRS 144 - 145

The following examples illustrate

how an Entity’s residence for tax

purposes may be determined:

Example 1: A company is

incorporated in Jurisdiction A and

has its place of effective

management in Jurisdiction B.

Under the laws of Jurisdiction A,

residence for tax purposes is

determined by reference to place

of incorporation. The same applies

under the laws of Jurisdiction B.

Thus, the company is resident only

in Jurisdiction A.

Example 2: Same facts as Example

1, except that, under the laws of

Jurisdiction B, residence for tax

purposes is determined by

reference to place of effective

management. Thus, the company

is resident in both Jurisdictions A

and B



Jurisdictions A and B, residence for

tax purposes is determined by


management. Thus, the company

is resident only in Jurisdiction B.



Jurisdiction A, residence for tax



management and, under the laws

of Jurisdiction B, residence for tax


reference to place of

incorporation. Thus, the company

is not resident in either Jurisdiction

A or B.

the OECD has facilitated easy

checkup of determining tax

residency of place of incorporation

and place of management with its

tax residency web page

derivative, which is a private contract between

two parties,

The OECD has attempted to address this abuse

1. in an update to the CRS FAQ (the definition

of Financial Asset does not distinguish

between exchange traded or listed

derivatives or over-the- counter derivatives

2. In the Mandatory Disclosure Rules

However, these banks are in tax havens which do

not consider the FAQ has part of the CRS, nor will

adopt the MDR. Hence this loophole will

continue unabated.

The OECD made a mistake when it allowed domestic law non-reporting FIs for savings plans

equivalent to a broad participation retirement scheme.

The OECD has tried to address these sham schemes in the June 2018 update CRS FAQ “In case the

fund is compartmentalized into sub-funds that are in practice working as separated pension

products, including through the segregation of the assets, risks and income attributed to such

sub-funds, does the five percent test apply at the level of the fund or at the level of each sub-

fund? In such cases, the test of whether a single beneficiary has a right to more than 5% of the

fund’s assets is to be applied at the level of each sub-fund.

However, these trustees are in tax havens which do not consider the FAQ has part of the CRS, nor

will adopt the MDR. Hence this loophole will continue unabated.

Some countries’ laws provide sham retirement

funds, such as Hong Kong ORSO or Singapore /

Gibraltar trustee pensions. Members can

contribute any asset into the retirement fund

such as shares of private companies, yachts,

properties, artwork, etc. Although a single

fund, each member has their segregated

account. Members can manage their own

investment strategy and can decide to retire

any time. These schemes do not tax the

benefits of non-resident members

this

Assume a construction company is awarded a contract to build a bridge for a Municipality. The Municipality will want a financial guarantee to complete or repair the bridge if the construction company fails to perform. The construction company (principal) does not have sufficient credit rating to provide an acceptable guarantee. So, the construction company pays a fee to a Surety provider,

Why surety bonds to circumvent the CRS is a sham?

The Surety providers which provide surety

bonds to circumvent the CRS create a sham

surety product, under the outrageous claims this

is the same as the other $30 billion surety market

The surety bond product requires a collateral to be

paid to the surety provider. This is a sham product

because

1. Collateral may be any asset including private

investment companies, yachts, property,

equities, etc. Furthermore

2. Collateral is compartmentalized where the

Principal can appoint manager to manage the

assets according to own risk profile in his

own portfolio.

3. The Obligee is the Principal or related

to the principal. This is the main sham

setup of the product. There is no purpose

to have an Obligee and the Principal to be

the same party. This is done purely to

avoid the CRS. In the normal surety

market, the Obligee is a Municipality or

government organisation

4. The Surety bond can be cancelled at

any time and the Principal will receive his

compartmentalized collateral portfolio

back-

This is unsophisticated avoidance, but legal

waffle persuades authorities where insurer is

based that this is a non-reportable product.


invariably an insurer, to pay the Municipality (obligee)if performance is not met. The Surety provider has sufficient credit rating for the Municipality. If the Surety provider ever pays to the Municipality then the Surety provider will require repayment from construction company. Therefore, a surety bond is not insurance. The construction company may be required to provide collateral to the Surety provider.

The same insurance companies

in Antigua issue welfare, long-

term care and disability policies

The insurers in Antigua and Barbados have

convinced the authorities with legal waffle that

these policies are not cash value because the

policy assets are reserves against future

liabilities

However, the insurers conveniently omit that

the policyowner can either cancel the policy or

access the asset at the end of the policy term.

Therefore, the policy should either be a cash

value, based on surrender value or if no one

can access policy assets, then policyowner is

the reportable person as per the FAQ update

on irrevocable insurance.

Tax evaders gleefully capitalize

on offshore Active NFEs not

subject to automatic exchange

of information with respect to

its controlling persons.

Unjustified exemption: The OECD did not want

to overwhelm exchange of information with

respect to legitimate businesses. However,

there is no excuse for exempting business

owners that establish offshore companies to

transact through. Tax evasion by portfolio

holders is just as criminal as undeclared

commissions, consulting, entertainer salaries,

royalties, trading profits, property churning and

intellectual property. The EU Commission

expanded the EU savings tax to include any

entity not subject to effective taxation.

Embed investments: Greek shippers embed and

billions of investment income in their Marshall

Island offshore companies. Why should the

amount of passive income not be reported?

Collusion with Financial Institutions: Many

banks assist their clients be Active NFE simply

because the company does active business or

trade. This looks at income test but not asset

test.

Fake Intangible assets: IFRS internally generated

IP expense, not an asset since cannot

distinguish expenses that developed IP from

operational expenses. Acquired IP must be

amortized – cannot grow unless show there is

an active market.

Holding company: Set up a parent company to

strip the underlying passive NFE of all its cash

on a regular interim dividend basis. The

subsidiary will then be an Active NFE if it earns

non-passive income, and the parent company

qualifies as an Active NFE even if it just holds

cash and earns 100% dividends. Crazy.

Upcoming publications

[email protected]

mark.morris@the-

best-of-both-

worlds.com


a sprinkling of topics in future issues…

FATCA reciprocal is a lie

Mandatory Disclosure rules explained in

detail

Why look through non-reportable FIs that

own passive NFE

How OECD should address abuse of

residence-by-investment to avoid CRS

The most misunderstood CRS clauses

of

Key point of issue

OECD TACTIC TO CLOSE LOOPHOLES IS WRONG

The single biggest problem with the OECD attempting to close the

CRS loopholes is that it is done via updates to the CRS FAQ,

reissued Implementation Handbooks and separate initiatives such

as the Mandatory Disclosure Rules and Addressing abuse of

residence by investment schemes.

Many tax havens where these loopholes are offered from, do not

accept that the FAQ are CRS legislation, ignore the Implementation

handbook and do have officially stated they will not adopt the

Mandatory Disclosure Rules as it is not a minimum standard.

common · 2018. 9. 17. · untold billions escape automatic exchange due to oecd allowing...

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