The legal and regulatory requirements of offshore trust reporting

Offshore trusts and holding companies are obliged to adhere to regulatory reporting requirements and global reporting standards. In this article, we unpack the background to the development of these reporting standards and what is required of those involved.

According to the Common Reporting Standards (CRS), when setting up a foreign trust, the trustees are responsible for identifying the settlor, beneficiaries, and any other natural persons relevant to the trust. The trustees are then obliged to report the necessary financial information of these persons to the foreign revenue authority of the jurisdiction in which the trust is being created. If any of these persons are identified as South African residents, the information received by the authority will then automatically be exchanged with the South African Revenue Services (SARS), a process known as the Automatic Exchange of Information. Early adopters of this initiative commenced the exchange of information in 2017, and the ‘fast followers’ committed to commence the process in 2018. Those countries that did not follow this process at the time could still exchange information on request in respect of a specific tax investigation, or spontaneously in respect of information foreseeably relevant to a competent authority of another jurisdiction, such as SARS. As such, the three methods of information exchange between tax authorities are (i) spontaneous exchange, (ii) exchange of information on request (EOIR) and (iii) automatic exchange of information (AEOI).

In 2010, with the idea of enhancing tax compliance by US citizens in foreign jurisdictions or those with offshore accounts, the United States introduced the Foreign Account Tax Compliance Act (FATCA). In terms of this Act, foreign financial institutions are required to report information pertaining to US account holders to the US Internal Revenue Service (IRS). In order to make this agreement binding with other authorities, the US introduced a model intergovernmental agreement (IGA) which is an agreement between the tax administration of the US and those of other countries. As the South African government signed this agreement, reporting South African financial institutions have been obliged to comply with the requirements and obligations set out in this agreement since 1 July 2014. It is important to note that this agreement works both ways in that the US is required to provide the same information to SARS in respect of South African residents with offshore assets, including foreign trusts.

In addition to the above, the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the Standard) was developed in 2014 by the Organisation for Economic Cooperation and Development (OECD) – a document that encompasses the OECD’s Common Reporting Standard (CRS). In terms of this agreement, Financial Institutions of CRS countries (called participating jurisdictions) are required to determine and report financial account information of account holders that may be tax residents in a jurisdiction foreign to their tax authority, excluding the US which is regulated by FATCA. Information gathered is then automatically exchanged annually between SARS and its CRS exchange partners. There is an OECD portal that provides a comprehensive overview of the work of the OECD. To put the above initiative into perspective, there are currently more than 100 countries that exchange information under the CRS.

The due diligence procedures applied by financial institutions will generally be sufficient to identify the account holders and controlling persons. For example, a bank that opens a bank account for a trust with foreign beneficiaries could be expected to request a copy of the trust deed which reflects the identities of the named beneficiaries; or a share broker who maintains a share trading account for an offshore entity could expect that entity to provide information on its shareholders or other evidence that the entity is a financial institution.

 The following information in respect of each reportable person must be reported:

  • Name
  • Address
  • If an individual, their date of birth
  • If an individual, their place of birth i.e. town
  • Taxpayer identification numbers (TINs) issued by the jurisdiction(s) of residence

nil return must be filed by a reporting financial institution (RFI) that did not maintain any reportable accounts during the relevant reporting period.

Relative to the CRS and FATCA (US agreement), submissions are due annually by 31 May of each year. If not adhered to, penalties may apply. The reporting financial institutions are required to submit the returns in the prescribed form and manner. The above practices have been adopted by many countries, although the United States has their own rules regarding the process that differs. The US was also the country that started the initiative.

While offshore trusts are commonly used to create an opaqueness around financial activities, and hence the CRS and FATCA agreements, offshore holding companies can also be used for these purposes. A holding company is a company that owns at least 70% of another company’s shares and has the authority to make management decisions, influence and control the company’s board of directors. Its purpose is to hold the controlling stock or membership interests of the trading company, although the holding company does not conduct any operations, ventures or other tasks for itself. It is these holding company structures that are often used to avoid having CRS reporting shed light on the underlying financials of an individual or a business.

As such, the Model Mandatory Disclosure for CRS is designed to provide tax administrations with intelligence on both the design and supply of CRS Avoidance Arrangements and Offshore Structures and acts as a deterrent against the marketing and implementation of these types of schemes where they are being used to circumvent CRS reporting or to obscure or disguise the beneficial ownership in an offshore vehicle. By way of explanation, note that a CRS Avoidance Arrangement is any arrangement which is designed or has the effect of circumventing CRS legislation or exploiting the absence thereof.

In terms of the Model Mandatory Disclosure for CRS rules, all steps and transactions that form part of the arrangement, including relevant details pertaining to the underlying investment, organisation and individuals involved in the CRS Avoidance Arrangements or Offshore Structures must be disclosed. Disclosure must also include the relevant tax details of the Clients, Reportable Taxpayers and any Intermediaries involved. It is important to note that the obligation to disclose such information automatically attaches to every person who is an Intermediary to the structure, although such disclosure is limited to that information which falls within the ambit of their knowledge, possession or control. In this regard, there are limited rules designed to mitigate the compliance costs and administrative burdens associated with duplicate disclosures, and these have been set out below. Any information that can be obtained by asking for it will be treated as within a person’s control, although an Intermediary is not expected to go beyond the requirements of the applicable professional standards and existing KYC rules when collecting and reporting information under these rules. Information required would include:

Information required:

  1. Tax Details of Clients, Intermediaries and Reportable Taxpayers
  2. Description of Arrangement
  3. Jurisdictions where Arrangement has been made Available

To make sure that SARS know of companies created in South Africa, it is important to register a company with the Companies and Intellectual Property Commission (CIPC) in South Africa, which is an agency of the Department of Trade and Industry in South Africa – with such registration being mandatory in terms of the Companies Act. When a company is registered with the CIPC, it is not required to perform a separate SARS tax registration for income tax as the company will automatically be registered via a direct interface with the CIPC. Businesses that are not required to be registered include sole proprietorships and partnerships as these are not separate legal entities.

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