Contextualising the OECD CRS report and clarifying the legal distinction between immigration status and tax residence.
A short OECD publication entitled “OECD clamps down on CRS avoidance through RCBI Schemes” (16 October 2018) considers the possibility of depositors misrepresenting their country of tax residence to financial institutions for the purpose of circumventing established CRS rules on the exchange of information relating to foreign assets. The report lists a number of jurisdictions that grant residence or citizenship rights through investment, whose documentation may be misused in this context. This publication examines the OECD paper in its proper legal and regulatory setting, clarifying what it does – and does not – say, with specific reference to Malta, and addressing the distinction between immigration status and tax residence.
A short OECD publication "OECD clamps down on CRS avoidance through RCBI Schemes" (16 October 2018) homes in on the possibility of depositors misrepresenting their country of tax residence to their bankers for the purposes of circumventing established CRS rules for exchange of information in relation to foreign assets. The report lists a number of countries that grant residency or citizenship rights through investment, whose travel documents may be misused for this purpose.
The highlights
- OECD recognises legitimacy of Citizenship and Residency by Investment programmes.
- OECD lists legitimate investment migration programmes that may be misused in CRS compliance.
- OECD confuses Citizenship / Residency by Investment programmes with Tax Residence.
- OECD Recommendations are for Financial Institutions NOT for RCBI countries.
OECD recognises legitimacy of RCBI programmes
The OECD lists what it considers the main reasons for obtaining citizenship and residency by investment. The “legitimate reasons [for citizenship & residency by investment programmes], includ[e] the wish to start a new business in the jurisdiction, greater mobility thanks to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability.” This statement has been received as an important step in recognising the importance of the RCBI industry in providing legitimate ways of improving lives and globalising the world's citizens.
OECD lists legitimate investment migration programmes that may be misused in CRS compliance
In its Report, the OECD proceeds to indicate that:
"Residence and citizenship by investment (CBI/RBI) schemes... can create the potential for misuse as tools to hide assets held abroad from reporting under the OECD/G20 Common Reporting Standard (CRS)... In particular, Identity Cards, residence permits and other documentation obtained through CBI/RBI schemes can potentially be abused to misrepresent an individual’s jurisdiction(s) of tax residence and to endanger the proper operation of the CRS due diligence procedures."
Colleagues I have spoken to, lawyers and tax consultants alike, fail to see the real danger here. It is already the responsibility of financial institutions to diligently implement CRS. Multinational banks have dealt with the world's affluent for long enough to understand the mobile nature of the global citizen and that their clients often maintain homes in more than one country or continent. I'm sure that the mere presentation of an identity card will not be sufficient evidence for banks to record account holders as tax resident in that country for information reporting purposes.
OECD confuses Citizenship / Residency by Investment programmes with Tax Residence
The OECD's statement continues:
"Potentially high-risk CBI/RBI schemes are those that give access to a low personal tax rate on income from foreign financial assets and do not require an individual to spend a significant amount of time in the jurisdiction offering the scheme."
Speaking for Malta and Cyprus, the two countries I follow more closely due to my firm's active presence there, I can confirm that the Investment Migration programmes of the two European member states do not have any impact on the tax residence status of investors obtaining citizenship or residency by investment. In both countries, tax residence requires either 183 days of actual presence on the island or a strong connection with the country to justify it being considered the individual country of tax residence.
The Malta Individual Investor Programme (MIIP) is completely tax neutral and only has the effect of granting citizenship after the relevant residence and investment criteria are met. The Citizenship programme does not automatically bestow tax residence status. Like all other Maltese nationals and foreigners alike without distinction, beneficiaries of the MIIP who meet the requisite tax residency criteria in any given fiscal year are eligible for the grant of a tax residence certificate on following the appropriate procedure and after a thorough review by the Maltese tax authorities. Those who do not meet the requirements of tax residency do not qualify as tax resident in Malta, irrespective of their nationality or immigration status.
The Malta Residence Visa Programme is also completely tax neutral and only grants immigration rights, specifically the right of permanent residence in Malta. This does not automatically render new Maltese residents tax resident in Malta, nor entitle the beneficiaries to tax residence status. Such beneficiaries who meet the requisite tax residency criteria in any given fiscal year are eligible for the grant of a tax residence certificate on following the appropriate procedure and review by the tax authorities.
Is there an OECD black list of RCBI Programmes?
In the international context, a 'Black List' is a list of countries that are in default of their obligations under international treaty law or some other principle in international law. Such countries remain on that black list until their demonstrate to the international community that they've rectified their defaults and returned to compliance with international law. This is not the case here.
The OECD report in question is not a black list. It identifies a risk (the use of identification documents to circumvent financial reporting obligations) and makes recommendations to financial institutions in mitigating this risk. The report doesn't make any recommendations to the countries listed therein. Nor does it condemn any default by any country or any of the programmes but simply identifies the potentially high risk of abuse of such programmes. All things created for good reason can be misused and the OECD does well in identifying the risk and taking risk-mitigation measures. We just need to ensure such measures are not misconstrued as fault on the part of countries listed in such reports.
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