Mandatory Disclosure Rules Response

14 March 2022

John Sandeman, 
Business Assets & International,
HMRC,
8th  Floor,
14 Westfield Avenue,
London,
NE98 1ZZ

BY email to mandatorydisclosure.rules@hmrc.gov.uk

Dear Sir,

Mandatory Disclosure Rules^[1] Consultation Publication date: 30 November 2021

Response of Caesium International LLP

We are aware that many respondents will cover many of the issues arising from the consultation. We only make points in respect of the market in which we work, which is high net worth individuals and their businesses as well as their related trusts onshore or offshore.

We have commented on Reg 3(1) separately and attach our comments in Appendix 1.

There are some elephants in the room and in this respect we ask some questions, highlighted in bold, which we would like to see addressed in any response to this Consultation or in published guidance.

The draft Regulations have adopted wholesale the OECD Rules and definitions.

Our comments focus on three points:

• USA,
• Multiple TINs and
• Personal Safety.

We recognise that HMRC and the UK Government can in reality, only respond and react to the questions as regards the UK; the other matters being a fait accomplit delivered by the USA or OECD (or should I say OCED?).

How did we get here?

Historically each tax authority’s powers stopped at their national border.   This facilitated tax evasion, and to a lesser extent, avoidance.

Countries agreed exchange of information provisions in double tax treaties, but not everyone played the game.  Mainly the USA.

The USA responded to criticism for not exchanging information by introducing FATCA (2011/2) which introduced us to concepts such as Reportable Accounts, FIs, FFIs, Active NFFEs, Passive NFFEs, covered FFIs, W8 (BENE)’s, W9’s etc.   The World recoiled in horror.

Then the UK thought that this was not a bad idea and launched UK ‘FATCA’ on the CDOTs (2013) which followed the Seoul Declaration of the Fiscal Task Force of the FATF led by the UK, and then a programme led by the OECD of TIEAs was rolled out amid calls for AEOI. Meanwhile the EU fiddled on while Rome burned as Luxembourg had banned all fire fighters.   As more information was discovered, (or more precisely, purchased from whistle blowers) it was clear that more needed to be done.

Along with this the USA introduced tax scheme disclosure, followed by the UK (2003/4) which never caught on in the EU.

Then the realisation that some tax advisers were trying to avoid reporting the disclosures, indeed preferring to risk the fines (e.g. KPMG USA – some pretty ripe emails in there), and while the EU were still putting their ATAD together (2020), the OECD and FATF moved on to getting closer to a single global tax system with global tax data sharing, namely a disclosure regime based on Financial Institutions just to check that taxpayers were making proper disclosure at home.

And now, we have the current Consultation on more rules where tax advisers and other intermediaries are being tasked with informing HMRC, thereby potentially dropping their clients in it, on pain of penalties for them, not their clients, if the adviser …

as part of his work for a client advises upon …

an arrangement …

where an intermediary with respect to a CRS avoidance arrangement or opaque offshore structure—

(a) either—

(i) makes that CRS avoidance arrangement or opaque offshore structure available for implementation, or

(ii) provides relevant services in respect of that CRS avoidance arrangement or opaque structure

and must return the required information before the end of the period of 30 days beginning with the day after the day on which the intermediary—

(a) makes the CRS avoidance arrangement or opaque offshore structure available for implementation, or

(b) supplies relevant services in respect of the CRS avoidance arrangement or opaque offshore structure.

Now that is all clear, let us consider our three points.

The USA

US funds, assets and bank accounts owned by non-US but UK resident persons

• There are two key issues in this area, first, whether the USA will comply and second, the limits of obligations on the USA as to ownership or control. Note that the USA and its states do not have the basic legal or governmental infrastructure for registration of entities, let alone a public register.   For example, there are no equivalents of Companies House.  In the UK, we have built upon the Companies House framework for PSC and for the proposed register of ownership of land.
• The USA is seeking to address this issue with their Corporate Transparency Act which is made pursuant to the National Defense Authorization Act 2020, i.e., for the USA this is a matter of national security. Broadly this requires US FIs to report to FINCEN details of US persons, those details being name, date of birth, address and a US Government given ID number.
• There are also many exclusions from reporting, basically all regulated entities, companies with a US presence which are roughly equivalent to or larger than the EU small company definition, and inherited assets.
• However, our understanding is that FINCEN is only permitted to disclose data received under the Transparency Act to, in effect, US Federal or State bodies and US Financial Institutions. It is unclear whether the IRS will feel free to share with HMRC information they have received from FINCEN, but given US data protection rules, we doubt it.
• However, the OECD’s rules, which may or may not precede the text of the US Corporate Transparency Act, say

 For example, if a Reportable Taxpayer that is tax resident in jurisdiction X transfers a Financial Account to the United States, that transfer would not have the effect of circumventing CRS Legislation, provided the account information is exchanged by the Competent Authority of the United States with jurisdiction X.

• The key word before ‘exchanged’ in that paragraph is “is”; not ‘should be’, and ‘not US has agreed that it shall’. Is that an accurate representation of the various laws in place and / or what will happen in practice?

• First, the USA has agreed to supply data, but not by adopting CRS per se. Instead, it has introduced an exchange of information add-on to the Model Type 1 IGA known as the Model 1A IGA.   Model 1A IGAs, are basically the US equivalent of a TIEA.  Interestingly the Agreements with the UK, France, Germany, Italy and Spain only impose on them obligations which match those of the USA^[2].

• Second, the Model 1A IGA imposes a host of obligations on what it calls the FATCA Party Jurisdiction, commensurate with CRS, but the USA’s obligations are limited to those shown in Appendix 2 to this response.

• Third, jurisdiction X may well have signed a Model 1A IGA with the USA, but whilst it appears to be an obligation on the IRS to disclose information, there are a multitude of exceptions and there is, and always has been, a huge difference between the USA agreeing something in an international treaty and actually doing it^[3].

• In short, the USA will tell the non-US partner how much is in an entity’s account, but not the identity of the controlling person or beneficial owner who put it there. 

Given these factors, will HMRC confirm publicly in their guidance or Manuals, as the OECD appears to have done, that they will regard the USA and its overseas territories as MDR compliant notwithstanding the terms of the Model 1A IGA and the deficiencies in the US Corporate Transparency Act?

• If HMRC’s answer is yes, great.

• If not, then the logical conclusion from must be that where any adviser is involved in a transaction with a non-US person investing in US assets etc, it will be regarded as reportable under CRS.

• Therefore, if an intermediary on behalf of his non-UK resident client, advises a non-US Trust to replace their existing Trustees with US resident Trustees, and move their investments to a US account of a fiduciary, is that Intermediary obliged to report the advice to change trustees? Does HMRC really want such disclosures? We assume it does not, on the basis that the USA is perceived (deemed?) not to be one of the ‘Bad Nations’ in all this.

• The effect of moving the residence of the Trust to the US is that HMRC will not receive any details of who the “Beneficiaries / Settlor etc” of the Trust.   The advice to change the trustees certainly has the effect of side-stepping CRS, but as this is all under the watchful eye of the OECD, it must presumably be compliant and so UK advisers need not be concerned. Is that correct?

• Ditto, advising a UK individual to hold its North American property investments in a US vehicle rather than a Canadian entity.

• Furthermore, going forward, in contrast to the position if the Trustees were in a CDOT, HMRC would not receive details of the settlor, beneficiaries and payments to any beneficiaries resident in the UK, instead it will in future receive NOTHING, because the US will see this as a US Trust with no nexus to the UK at all. 

Multiple TINs

• MDR appears to be based on the assumption that an individual only has one TIN. However, in the complex world of national tax systems, this is not always the case (ignoring those who should have multiple TINs but do not).

• For example, consider a French national living in Switzerland under a forfait arrangement, who owns a let commercial building in Madrid. He would have a TIN in France, Switzerland and Spain.  He would probably use his Swiss TIN as he is not going to pay more tax in Switzerland, regardless of what is disclosed to the Swiss authorities.

• Or a Kazakh national in the same circumstances. Or someone under the many tax residency schemes in Cyprus, Malta, St Kitts & Nevis etc?

• The Swiss will receive data, but they might not even know about the other TINs. There is no Masterfile on individuals (nor should there be in our view). 

In such cases, if a UK based adviser advises the client to use his Swiss TIN rather than a UK TIN, is this reportable?  We would assume not as some reporting is being done under CRS, albeit elsewhere, and the client is entitled to best advice.    If it is reportable, to whom, and why?

Again, in such cases, if a UK based adviser advises the client to use his Swiss TIN rather than a non-UK TIN, is this reportable?   We would assume not as again some reporting is being done under CRS, albeit elsewhere, the client is entitled to best advice and the client is not a UK taxpayer (we do have such clients).    If it is reportable, to whom, and why? 

Genuine concern for personal safety

• This is part of the wider issue of disclosure of ultimate beneficial owners (as defined for these purposes) and the reality is that staff at HMRC, CCMA 2005 section 18^[4], notwithstanding, are human and therefore not infallible^[5].

• Like many of these regimes, MDR presupposes that the Intermediary and his client have only one goal in mind. Strange as it may seem to HMRC and the OECD, clients and the world generally do not spend their entire time focusing on tax and reporting^[6].  Matters which occupy our clients’ minds include, I am happy to pay all my taxes (after claiming all reliefs which are legitimately available) BUT:-

• Will journalists and others with malicious or malevolent intent be able to find out what I own?
• Ditto kidnappers / terrorists / political enemies?
• Ditto vexatious litigants.

• Decisions are not made on a single criteria alone. For example, a US corporation wants a European HQ.  Ergo it must be in Europe.  Not only is the UK the best location from a tax perspective, people in England speak English, which is very similar to American English, plus it has quaint villages, warm beer, castles and HM The Queen.  As our colonial cousins would say, it’s a no brainer.

• Oddly enough CRS reporting did not enter that equation, but sometimes it does, not as the ONLY factor, but as part of a mix. And, of course, every client’s background and circumstances are different.

• The world is full of conspiracy theories about the deaths of various people, e.g. Steve Bing, Robert Maxwell, Alexander Litvinenko, and attempted murders e.g., Sergei and Yulia Skripal^[7] , which indicate the real threats some people do face.

• To mitigate such risks, an adviser (tax or otherwise) may recommend a private trust company in the USA, Puerto Rico etc., which as a US PTC affords privacy. In addition, it may be understood that it is difficult to bribe IRS officials to spill the beans^[8]; plus the USA has a very beneficial tax regime for non US persons with non US assets.  For some, personal safety (whether the risk is real, perceived, or imagined) will be the paramount factor.  Is there an obligation to report? 

• In other words, is privacy for a non-MDR related reason evidence that avoidance of MDR was not the primary motive? 

• Conversely, of course this should not be an excuse allowing tax debtors and criminals to avoid the consequences of their actions by excusing themselves from MDR on grounds of personal safety.

If you have any questions, please contact the writer on the email or telephone number at the top of this letter. 

Yours faithfully

S D G Coleclough

Principal

Caesium International LLP

Appendix One

Sent: 17 January 2022 18:30

To: mandatorydisclosure.rules@hmrc.gov.uk
Subject: Comment

Dear Sir

Draft regulation 3 (1) makes no sense.

It says

Obligation on intermediary to disclose

3.—(1) Paragraph (2) applies where an intermediary with respect to a CRS avoidance

arrangement or opaque offshore structure—

(a) either—

(i) makes that CRS avoidance arrangement or opaque offshore structure available for

implementation, or

(ii) provides relevant services in respect of that CRS avoidance arrangement or opaque

offshore structure,

through a branch or office located in the United Kingdom,

(b) is resident in the United Kingdom,

(c) has its place of management in the United Kingdom, or

(d) is incorporated in the United Kingdom.

Accordingly in respect of (b) to (d) this means

Paragraph (2) applies where an intermediary with respect to a CRS avoidance

arrangement or opaque offshore structure— (b) is resident in the United Kingdom,

(c) has its place of management in the United Kingdom, or

(d) is incorporated in the United Kingdom. 

Surely it should read something like

Obligation on intermediary to disclose

3.—(1) Paragraph (2) applies where an intermediary with respect to a CRS avoidance

arrangement or opaque offshore structure—

(a) either—

(i) makes that CRS avoidance arrangement or opaque offshore structure available for

implementation, or

(ii) provides relevant services in respect of that CRS avoidance arrangement or opaque

offshore structure,

And is

(b) is resident in the United Kingdom,

(c) has its place of management in the United Kingdom, or

(d) is incorporated in the United Kingdom or

(e) makes it available through a through a branch or office located in the United Kingdom.

Or do we not care anymore?

Your faithfully 

Stephen Coleclough

Principal

DL +44 20 3963 8893

Mob +44 7802878045 

Appendix Two

USA obligations under Model 1A IGA

Article 2 …

1. b) In the case of the United States, with respect to each [FATCA Partner]

Reportable Account of each Reporting U.S. Financial Institution:

(1) the name, address, and [FATCA Partner] TIN of any person that is a

resident of [FATCA Partner] and is an Account Holder of the account;

(2) the account number (or the functional equivalent in the absence of an

account number);

(3) the name and identifying number of the Reporting U.S. Financial

Institution;

(4) the gross amount of interest paid on a Depository Account;

(5) the gross amount of U.S. source dividends paid or credited to the

account; and

(6) the gross amount of other U.S. source income paid or credited to the

account, to the extent subject to reporting under chapter 3 of subtitle A

or chapter 61 of subtitle F of the U.S. Internal Revenue Code.

Appendix 3

Glossary

AEOI                           Automatic Exchange of Information

ATAD                          Anti-Tax Avoidance Directive

CCMA 2005                 The Commissioners of Revenue and Customs Management Act 2005

CDOTs                         Crown Dependencies and Overseas Territories of the United Kingdom.

EU                               European Union

FATF                           Financial Action Task Force

FATCA                        Foreign Account Tax Compliance Act

FFI                               Foreign Financial Institution

FI                                 Financial Institution

FinCEN                        Financial Crimes Enforcement Network of the USA

HMRC                         Her Majesty’s Revenue and Customs

ID                                Identity or identification

IGA                             Inter Governmental Agreement

IRC                              Internal Revenue Services, United States

KPMG                         KPMG a Global professional services firm

MDR                            Mandatory disclosure rules

Model 1                       US Model 1 type of IGA

Model 1A                     US Model 1A type of IGA in respect of exchange of information

NFFE                           Non-Financial Foreign Entity

OECD/OCED               Organisation for Economic Cooperation & Development

PTC                             Private Trust Company

Reportable Accounts     Accounts upon which FI’s are obliged to report to tax authorities

TIEA                           Tax Information Exchange Agreement

TIN                              Tax identification number

Transparency Act         The Corporate Transparency Act of the United States brought in under National Defense Authorization Act 2020

US or USA                   United States of America

W8/W9                        Compliance forms for FATCA

Appendix 4

Diagrams of data flows of financial information and information on beneficial owners

References
[1] MDR.  This area is full of acronyms.  If you do not know what most of them are, you probably will not obtain much value form reading this.  However, if you are reading this for educational purposes, a list if acronyms is attached at Appendix 3.

[2] See https://webarchive.nationalarchives.gov.uk/ukgwa/20120913103048/http:/www.hmtreasury.gov.uk/d/facta_agreement_tax_compliance_140912.pdf

[3] See historic Tax information exchange agreements; Climate Change Protocols and Treaties, and no doubt many others.

[4] Commissioners for Revenue and Customs Act 2005, s18, Duty to keep taxpayer information confidential.

[5] See for example R v Michael Allcock (1997), who is the most senior revenue person to date to be convicted of accepting bribes and was sentenced to five years imprisonment.   HMRC used to publish annually the number of staff who had accessed taxpayer files which they were not supposed to (one presumes celebrities and the like out of interest).   This has not been done for a number of years.  Why not?

[6] I once had HMRC accuse a client of launching a multi $100m bond issue in bearer form to avoid stamp duty reserve tax.  Not true, it wanted to raise multi $100m for its business.   Its putative investors wanted the bearer facility.  See the recent case of Euromoney [2021] TC08046, which above everything else, is an excellent display of common sense.

[7] Litivenko and the Skripals are not conspiracy theories.  HM Government are clear that these were deliberate acts of the Russian Federation and its cathedral loving agents (so good they saw it twice).  Although we doubt that the perpetrators are highly unlikely to have the information which they require without troubling HMRC.

[8] I have been in the international tax sphere long enough to witness tax authorities bow to political pressure from other governments and more, e.g. an EU tax authority ‘phoned up and asked the local adviser to supply all papers relating to X on behalf of a national newspaper, which the local adviser would have done had I not said ‘No’.  Example 2 : Another EU tax authority sent written questions about the resident company’s shareholders which had nothing to do with their local tax system and had clearly been written on instructions from a non-EU government.  And as for HM Government breaches of taxpayer confidentiality, let’s start with Vodaphone on the front page of the FT labelled as tax avoiders.  The subsequent HM Treasury enquiry stated that the breach did not come from them.