crs timescrs loophole the countries should be blacklisted for providing residence by investments...

Regular

journal of

exploiting Common

Reporting Standard

weaknesses

Issue highlights

Basing tax residence on utility bill is

insane as it provides the biggest

CRS loophole

The countries should be blacklisted

for providing residence by

investments used to circumvent CRS

Clients presenting self-certified

residence of a blacklisted country,

should have their tax residency

determined using the OECD model

tax convention norms, i.e. permanent

home, centre of vital interests and

Habitual Abode and Nationality.

THE MOTHER OF ALL CRS LOOPHOLES: Besides

shifting accounts to the USA, ‘residence-by-

investment’ is the most used strategy to avoid the

CRS. The blame must fall squarely on the OECD.

this issue

to

address abuse of

residence-by-Investment

to avoid the CRS P1,2,3,4

Issue CRS Times Author : Mark Morris

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

16 September 2018

Permitting tax residence to

be based on utility bill and

government identity is a

gigantic loophole

The clause that will live in infamy is

CRS Pg. 32 par (b)(1) Residence

Address: If the Reporting Financial

Institution has in its records a current

residence address for the individual

Account Holder based on

Documentary Evidence, the Reporting

Financial Institution may treat the

individual Account Holder as being a

resident for tax purposes of the

jurisdiction in which the address is

located

The stupidest clause of the entire

CRS which makes tax evaders

celebrate is CRS page 60 par(6) The

term “Documentary Evidence”

includes any of the following:

a) a certificate of residence issued by

an authorised government body (for

example, a government or agency

thereof, or a municipality) of the

jurisdiction in which the payee claims

to be a resident.

b) with respect to an individual, any

valid identification issued by an

authorised government body (for

example, a government or agency

thereof, or a municipality), that

includes the individual’s name and is

typically used for identification

purposes.

CRS Commentary pg. 113 par (10) as

that on recent documentation issued

by an authorised government body

or a utility company, or on a

declaration of the individual Account

Holder under penalty of perjury….

Acceptable documentation issued by

utility companies relates to supplies

linked to a particular property and

includes a bill for water, electricity,

telephone (landline only), gas, or oil.

CRS pg. 114 par(12) Example 2

(Passport and utility bill): M has

account opening procedures in place

pursuant to which it relies on the

Account Holder’s passport to confirm

the identity of the Account Holder

and on recent utility bills to verify

their residence address, as recorded

in M’s systems. M may treat its

Preexisting Individual Account

Holders as being resident for tax

purposes of the jurisdiction recorded

in its systems.

The OECD is clear in the foreword of

the CRS that reporting is transmitted

to the tax residence of the beneficial

owner. Yet in a moment on insane

naivety, the CRS permits

So why is this a loophole? Let’s see

how to avoid the CRS reporting to

your tax authority if you have an

offshore account…

i. a German tax resident simply

obtains a residence through

investment, which could cost as

little as a few hundred USD (See

pg. 2 of this issue - UAE Free

Trade Zone).

ii. German rents an apartment in

UAE. Of course, the German

does not actual reside in the UAE

and remains a tax resident of

Germany.

iii. The German resident has an

undeclared bank account outside

Germany

iv. He self-certifies to be resident

for tax purposes in Dubai by

presenting his apartment utility

bill + residence certificate

v. The bank account information

for the German resident is not

transmitted to Germany (and

won’t even be transmitted to

UAE as a non-receiving exchange

jurisdiction)

So, what can the OECD

do to tackle this simple

loophole?

The solution is

already

available in the

OECD Model

tax Convention

used for

Double

Taxation

Agreements to

determine tax

residency.

Latest countr ies to

offer cheap

residence or

c i t izenship by

investment schemes

• MONTENEGRO - €250,000

plus investment

• MALDIVES - USD 100,000

Residence-by-

Investment scheme

most used to avoid

CRS

• UAE

he OECD would be

shocked to learn that

virtually every single

account holder abusing

residence-by-investment

schemes to avoid the CRS, works

in cahoots with their Financial

Institution, who are aware that

client is tax resident elsewhere.

T

It’s amazing that banks due strict AML due diligence on the source of their client’s

wealth. Yet, when it comes to residence of their client’s, FIs knowingly accept with a

nod and wink that their Russian clients live full time in Dubai, or Chinese clients live

full time in St. Kitts with no more proof than a utility bill and a procured residence

visa.

Banks, custodians, insurers, trustees or

fund managers do not ask a single

question to evaluate if their client

genuinely resides in a jurisdiction where

it is known that country sells residence

or citizenship.

Swiss, Cyprus or Caribbean banks

eagerly accept that their ultra-high net

worth clients live in a small cheap

apartment in an outer emirate. There is

absolutely no effort to try find out if

client has multiple residential properties,

or where client focus on social and

economic relationships exist. There is no

question on number of days physically

stayed in the claimed tax resident

jurisdiction. There is no follow up

whatsoever where the client’s nuclear

family or social relations are located.

Worse, still even as the latter half of

2018, banks in some jurisdictions, such

as the UAE, will attract new clients by

informing, marketing, and assisting the

individual client to rather establish an

account through an entity which will

help obtain a residence visa.

The banks know for sure that the client

will not reside in the RbI country but will

work in cahoots with the client to rent

or buy property so that the client can

provide the bank with a utility bill. That

way, the bank accepts the RbI as the tax

residence, knowing it is not the client’s

only tax residence.

The insurmountable reason why addressing residence-by-

investment schemes will be difficult to tackle: FIs are in on this ploy

There is only one way

to effectively confront

abuse of residence-by-

investment schemes

As banks are invariably in

cahoots with client to certifying

RbI to avoid CRS, FIs must be

mandated to utilise the

criterion in the OECD Model Tax

Convention (MTC) to determine

indicia of tax residency. Note,

the OECD MTC is normally used

to determine a single tax

residence. However, to address

abuse of RbIto avoid CRS, the

FIs must utilise the MTC

criterion are used to determine

all possible residences using

indicia.

As client can easily not

disclosure permanent homes,

there must be enhanced due

diligence to investigate

residencies if client self-

certified an RbI from a

blacklisted jurisdiction, such as

UAE.

The FI must determine indicia

of tax residence on centre of

vital interests using facts and

circumstances approach, with

externally observable, objective

criteria such as social relations. CRS Times 12 September 2018

UAE investor residence:

Countries like Bahamas, Turks &

Caicos, Cayman, etc. which do not levy

income tax, honestly state on the OECD

tax residency website that they do not

have a definition of an individual tax

resident.

Yet the UAE does its utmost to assist

users of their “investment scheme” to be

defined as tax-resident, even though it

is almost sure that the user is tax

resident elsewhere.

Sham UAE “investor residence” visa

Anyone, with a minimal background

check, can incorporate a company in

one of the 50 Free Trade Zones and

manage it from overseas. An owner is

required to lease an office in the FTZ to

qualify for the residence visa

Ghostly quiet: Visiting many of the fast

growing FTZ office parks, one notices a

presence of tumble weeds and crickets.

Much like

the property

rented to

foreigners in

Monaco for

residency.

So much for investing”

Assisting FTZ entities to be

tax resident in UAE

The UAE assists its untaxed entities

to be falsely tax-resident in the UAE

by three practices ensure no account

is correctly reported for CRS (A)

Fake tax residency (B) Fake TIN (C)

Categorizing Passive NFEs as Active

NFEs

A. Defining any entity incorporated in

the UAE as being tax resident in

the UAE. All other tax havens do

not consider entities incorporated

in their jurisdiction as being tax

resident. It is only the tax haven of

UAE that implements this fake tax-

residency for entities.

B. To further enhance the sham tax-

residency of untaxed entities, the

UAE assists untaxed entities to be

tax-resident in the UAE by

providing VAT Tax Registration

Numbers, deceitfully referred to as

a Tax Identification Numbers (TIN),

despite the FTZ not being liable on

VAT. This TRN / TIN is provided to

banks throughout the world to as

false evidence that the UAE Free

Trade Zone company is tax-

resident in UAE.

C. Banks in UAE, on purpose,

incorrectly categorize any company

whose income is not passive

income as an Active NFE, despite

the company holding mostly cash

as an asset. This purporting or

incorrectly allowing entities to be

categorized as Active NFE

circumvents the reporting of

controlling persons.

Facilitates offshore structures &

arrangements aimed at

attracting profits without real

economic substance

To top it all, the principle of Free

Trade Zone companies is to

encourage the foreign management

of these companies, without any

actual operation in the UAE, beside

the fake rental of an office. The UAE

facilitates companies to establish in

the UAE without any tax liabilities,

and likely not to be reported for CRS.

However, the most egregious

characteristic of UAE Free Trade

Zone companies is it allows

companies without any substantial

activity or presence to book their

profits untaxed through these

companies.

A busy FTZ office

OECD comment on

addressing abuse of

residence by investment is

useless

To a large extent, the

circumvention of the CRS through

the abuse of CBI/RBI schemes can

be prevented by the correct

application of the existing CRS

due diligence procedures.

Important in this regard are:

1. The requirement to have a

real, permanent physical

residence address (and not

just a PO box or in-care-of

address) for the application

of the residence address

rule (Useless because tax

evader will arrange a

permanent home in RbI tax

haven)

2. Instruct Account Holders to

self-certify all jurisdictions

of tax residence

3. Financial Institutions cannot

rely on a self-certification or

Documentary Evidence if

they know, or have reason

to know, it is unreliable,

incorrect or incomplete.

Forget Malta, St. Kitts

& Cyprus. Dubai is the

place for hundreds of

thousands procuring

a sham tax-residence

by merely setting up

an FTZ company for

the price of a decent

pair of shoes

CRS Times 13 September 2018

UAE has no income tax, yet its CRS guidance cynically states anyone with a

residence visa is a tax-resident, even if they are not taxed nor physically present

UAE banks are

complicit in abusing

RbI It is well known in the finance

industry, that any tax evader

approaching most UAE banks

to open an offshore account,

the bank will recommend and

assist the new client to obtain

a synthetic residence through

establish a Free Trade Zone

company to hold the account.

This is a competitive edge in

helping account holders avoid

the CRS

I. Criteria to blacklist high-risk jurisdictions

where RbI used to avoid CRS

no tax residency rules

tax residency based on weak CVI / Habitual abode

widely used to avoid CRS

low cost, tax certificate issued

no minimum stay

tax residence if not in other jurisdiction for > 183

days

no tracking of physical presence

no tax

low tax

exempt foreign income

exempt non-remitted income

non-domicile recognition

low tax on individuals using scheme remitting

income

no indication on certificate it was paid for

issue a TIN just for local income

no spontaneous exchange with previous

residence

dual nationality allowed

no CRS info received

no CRS info given

convert RbI to CbI

Medium to higher risk: Montenegro, Maldives,

Thailand, Gibraltar, Andorra, Spain, Paraguay, ,

Channel Islands, Cayman, Bahamas, Turks & Caicos,

Monserrat, Singapore, Costa Rica, Ecuador,

Guatemala, Nicaragua, Brazil, St. Maarten, Barbados,

Panama, Hong Kong, Philippines, Malaysia,

Seychelles, Mauritius, Vanuatu, Romania, Moldova,

Macedonia, Albania, Korea, Fiji, Columbia, Bosnia,

Georgia, Comoros, Serbia, Bulgaria, Ukraine,

Guatemala Botswana, Belize


How to tackle abuse of

residence by investment

I. Blacklist high-risk jurisdictions where RbI is used to avoid CRS

II. If client self-certifies their residence in blacklisted jurisdiction, FI must use OECD Model Tax Convention “tie-breaker” series of tests to find indicia of residence elsewhere

III. Give client opportunity to cure indicia, else report to all jurisdictions with indicia

II. OECD Model Tax

Convention on

Income and on

Capital provides tie

breaker rules to

determine tax

residency

Article (4)(2) provides a

descending series of

tests to determine tax

residence when

someone is resident in

several States.

a) If you are resident in

two jurisdictions,

then you are deemed

resident only in the

State where you

have permanent

residence.

b) However, if has a

permanent home in

both States (which

will be case when

using RbI to avoid

CRS), then deemed

resident only of the

State with which his

personal and

economic relations

are close (centre of

vital interests).

c) If State where he has

centre of vital

interest cannot be

determined, he shall

be deemed to be

resident only of the

State where he has a

habitual abode.

d) If he has habitual

abode in both States

or in neither of them,

he shall be deemed a

resident of the State

of which he is a

national.

Centre of vital interest is the key to discovering genuine tax residence, despite RbI

The OECD Model tax convention provides a descending series of criteria tests to determine tax

residence. To address abuse of residence-by-investment to avoid CRS, it should not up to the FI

to determine the sole tax residence. The FI should utilise the OECD model tax convention to

discover indicia of possible residences, i.e. permanent homes, Centre of Vital Interest, habitual

abode and nationality.

However, that been said, it is pragmatic to see that the tax evader utilizing RbI will surely have a

permanent home in the blacklisted tax haven jurisdiction as a utility bill is a mandatory

requirement for the bank to consider the tax haven as the client’s tax residence, albeit fake

residence.

Therefore, the key test for determining genuine multiple tax residences is Center of Vital

Interest. CVI is a preference criterion between States of which there is a permanent home.

If no

permanent

home


The first criteria of the OECD Model Tax

Convention Article 4(2)(a) for determining

tax residence is having a permanent home.

The OECD in its consultation to address

abuse of residence by investment lectures

the FI that there must be requirement to

have a real, permanent physical residence

address (and not just a PO box or in-care-

of address) for the application of the

residence address rule.

OECD MODEL TAX CONVENTION ON INCOME AND ON CAPITAL Condensed Version 21 November 2017

Commentary on Article Par(2) - Permanent Home o Residence is that place where the individual owns or possesses a

home; this home must be permanent, that is to say, the individual

must have arranged and retained it for his permanent use as

opposed to staying at a particular place under such conditions that

it is evident that the stay is intended to be of short duration.

o As regards the concept of home, it should be observed that any

form of home may be taken into account (house or apartment

belonging to or rented by the individual, rented furnished room).

But the permanence of the home is essential; this means that the

individual has arranged to have the dwelling available to him at all

times continuously, and not occasionally for a stay which, owing to

the reasons for it, is necessarily of short duration (travel for

pleasure, business travel, educational travel, attending a course at a

school, etc.). For instance, a house owned by an individual cannot

be considered to be available to that individual during a period

when the house has been rented out and effectively handed over to

an unrelated party so that the individual no longer has the

possession of the house and the possibility to stay there.

Permanent Home criteria will unlikely not reveal multiple tax residences of CRS evaders

using RbI The OECD opinion that the FI should determine real physical

permanent addresses would prevent circumvention of CRS through

RbI is wrong.

Firstly, dishonest client using RbI to avoid CRS, often in cahoots with

the FI maintaining the account, will not disclose his real permanent

homes. He will only declare his home he has secured in the RbI

jurisdiction for the purpose of providing a utility bill.

Secondly, the avoidance of OECD model tax convention’s

definition of permanent home is easy to avoid, by either fictionally

or factually renting the house out for a short time to a third party.

On the plausible assumption the CRS evader has an undeclared

permanent home in his home country, then the preference

criterion to determine true residency falls to the next test, i.e.

Centre of Vital Interest.

Permanent Home

One cannot emphasize how critical OECD Model Tax Convention Nov 2017 Commentary on Article 4(2) par(15) If a

person who has a home in one State sets up a second in the other State while retaining the first, the fact that he

retains the first in the environment where he has always lived, where he has worked, and where he has his family and

possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in

the first State.

Centre of Vital Interests (CVI)

There are a mere 138 words in the OECD MTC and its

commentary on CVI, yet most cases that require

determination of tax residence use CVI because the

individual has a permanent home in both states.

• CVI is a facts and circumstances test “It is

necessary to look at the facts in order to

ascertain…”. This should be those that are

externally observable and so the test should

depend entirely on objective criteria and should try

exclude subjective elements e.g. where nuclear

family resides. However, subjective elements likely

required e.g. asking individual who are the

members of his family with whom he kept a close

contact. Maybe individual has no not kept relations

with grown-up children, or close to wider family

• It is nevertheless obvious that considerations

based on the personal acts of the individual must

receive special attention –facts and circumstances

approach should give weight to on the subjective


intentions of the individual, as opposed to ones

which the individual had no control, e.g.

voluntarily relocate employment as opposed to

being involuntarily seconded by employer. The

Commentary does not imply individual should

have subjective choice over his CVI, but rather

as far as possible it should depend on objective,

externally observable criteria

The meaning of Personal relations: “Family

and social relations, Political, Cultural or other

activities.”

1. Family – (i) Nuclear, (ii) Wider family.

2. Social relations – Friends outside family

3. Political – Association aligned with

4. Cultural - relationship of shared group identity

which can be reasonably traced historically

5. Other – Case law in this area includes

examination where

o driving license issued

The State with which Personal and Economic relations are closer

OECD MTC Nov 2017 on Centre of Vital Interests Commentary on Art (4)(2): If the individual has a permanent

home in both Contracting States, it is necessary to look at the facts in order to ascertain with which of the two

States his personal and economic relations are closer. Thus, regard will be had to his family and social

relations, his occupations, his political, cultural or other activities, his place of business, the place from which

he administers his property, etc. The circumstances must be examined as a whole, but it is nevertheless

obvious that considerations based on the personal acts of the individual must receive special attention.

OECD Model Tax Convention Article

(4)(2)(a) If he has a permanent home

available to him in both States, he

shall be deemed to be a resident only

of the State with which his personal

and economic relations are closer

(centre of vital interests)

o cars registered

o medical insurance subscribed,

o doctors located

o leisure activities (clubs, gym)

6. Circumstances must be examined as a whole

suggests a broad examination of the

circumstances of an individual’s life.

7. Danger that individual can select and

influence outcome of what should be based

on objective criteria

The meaning of Economic relations: “His

occupation, … his place of business, the place from

which he administers his property, etc”. Caters for all

economic activity. employed, self-employed, retired.

To address CRS, the FI is not determining which

single State has the sole right to tax individual.

Rather the FI is using CVI to discover indicia of all

possible tax residencies. It will be up to client to

cure these indicia.

Detailed analysis of the expression “Centre of Vital Interests”

OECD Model Tax Convention Article

(4)(2)(b) If the State in which he has

his centre of vital interests cannot be

determined, or if he has not a

permanent home available to him in

either State, he shall be deemed to

be a resident only of the State in

which he has a habitual abode.

Requires a determination of whether the

individual lived habitually, in the sense of being

customarily or usually present, in one of the two

States but not in the other during a given period.

The test will not be satisfied by simply

determining in which of the two Contracting

States the individual has spent more days during

that period.

The meaning of “habitual abode”, a notion that

refers to the frequency, duration and regularity

of stays that are part of the settled routine of an

individual’s life and are therefore more than

transient. It is possible for an individual to have a

habitual abode in the two States, which would be

the case if the individual was customarily or

usually present in each State during the relevant

period, regardless of the fact that he spent more

days in one State than in the other.

o The individual works in State A where he

habitually lives but returns to State B two

days a month and once a year for a three-

week holiday. In that case, the individual will

have an habitual abode in State A but not in

State B. Assume, however, that over the

same period of five years, the individual

works short periods of time in State A, where

he returns 15 times a year for stays of two

weeks each time, but is present in State B

the rest of the time. In that case, the

individual will have a habitual abode in both

State A and State B.


Physical Presence and intention to stay

aspect of the willingness to remain in

such place meet the definition of

residence. Neither the continuity nor

the permanence thereof is required for

the condition of habitualness of the

abode to exist.

Mainly physical stay Is determined by

the voluntary habitual dwelling of a

person in a given place, so that both

the objective aspect of the stable

dwelling in that place and the

subjective •

Consequently, the habitualness of the

abode remains when the person works

or carries on other activities outside

the municipality of residence, provided

he keeps his abode therein, returns

thereto whenever possible, and

discloses the intention to keep therein

the centre of own family and social

ties.

Residence is not invalidated by

absences due to special needs deriving

from contemporary lifestyles, such as

study, work, care, or leisure reasons.

Habitual Abode If no permanent

home

Physical Presence and / or intention to remain or return

If homes in both States

One cannot emphasize how critical OECD Model Tax Convention Nov 2017

Commentary on Article 4(2) par(15) If a person who has a home in one State

sets up a second in the other State while retaining the first, the fact that he

retains the first in the environment where he has always lived, where he has

worked, and where he has his family and possessions, can, together with

other elements, go to demonstrate that he has retained his centre of vital

interests in the first State.

The relevant period for purposes of the

determination of whether an individual has a habitual

abode in one or both States will not always

correspond to the period of dual-residence,

especially where the period of dual-residence is very

short. This is illustrated by the following example.

o Assume that an individual resident of State C

moves to State D to work at different locations

for a period of 190 days. During that 190-day

period, he is considered a resident of both States

C and D under their respective domestic tax laws.

The. individual lived in State C for many years

before moving to State D, remains in State D for

the entire period of his employment there and

returns to State C to live there permanently at

the end of the 190-day period. During the period

of his employment in State D, the individual does

not have a permanent home available to him in

either State C or State D. In this example, the

determination of whether the individual has a

habitual abode in one or both States would

appropriately consider a period longer than the

190-day period of dual-residence in order to

ascertain the frequency, duration and regularity

of stays that were part of the settled routine of

the individual’s life.

The solution to address abuse of residence by investment

If an account holder

has, since October

2014 self-certified

residence from a

blacklisted jurisdiction

which is known for

providing RbI to avoid the

CRS, then the FI must

look for indicia that the

client is resident

elsewhere.

The FI must utilise Article

4 par(2) of the 2017

OECD Model Tax

Convention on Income

and Capital to determine

indicia of residence. This

is asking the client

regarding permanent

homes, centre of vital

interests, habitual abode

and nationality.

Also, existing electronic

search indicia must be

asked of the client.

The client will then have

an opportunity to cure any

of the discovered indicia.

Otherwise the FI must

deem the account holder

as resident in the

jurisdictions for which

indicia have been found.

.


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