By revealing where their tax responsibilities lie the Common Reporting Standard could have a dramatic impact on crew finances could impact on what many crew have so far considered to be their ‘tax free’ earnings. Frances and Michael Howorth talk with Mikaela Favill of Edge Yachts in Barcelona to find out what crew need to do to stay clean without laundering their paycheck
The leaking of documents and files from the offices of a law office in Panama has shown the spotlight on those who are endeavouring to avoid paying taxes. Clearly governments will seek to tighten regulations to slow down the advance of avoidance schemes. This on top of new changes to how tax authorities are communicating account holder information between each other, there could be far reaching implications for superyacht crew.
The Common Reporting Standard could have a dramatic impact on crew finances by revealing where their tax responsibilities lie and this could impact on what many crew have so far considered to be their ‘tax free’ earnings.
“It’s a story in yachting as common as developing the ultimate chamois technique or perfecting the best napkin fold,” says Mikaela Favill of Edge Yachts in Barcelona. You set out to see the world, avoid a mundane desk job and to save up enough money for whatever your financial aspirations might be. For some, it’s putting cash aside to buy a house, for others it’s saving up to start a dream company. But pretty much immediately after the pay slips start coming in, you need to figure out where to put the money in the most efficient and simple place possible.
Due to the nature of yachting, the community of ‘relative nomads’ often feels untied to any particular place. Thus, searching to plant roots, they find a number of financial institutions vying for their attention and hard-earned cash in a range of banking solutions, weather they are ‘offshore’ or not.
“It’s quite common for many of those employed on yachts to carry out all their banking activities on the other side of the world – probably purely electronically – to where they were born or the location of their permanent residency status,” says Mikaela. She adds, “The monthly income is paid by bank transfer from an international location, and it simply appears at the cashpoint on command.”
Recently, many of the world’s leaders have united to discuss how they can effectively communicate on the income from overseas. With this joined force and communication between countries and banks, more information is coming to the table. Each year the scope for avoidance has been reducing, with accords being signed between various countries. But this year in particular there has been a landmark shift in the pace at which countries are communicating financial information.
The Organisation for Economic Co-operation and Development (OECD) has created a Common Reporting Standard (CRS) to create a global standard on what financial information is disclosed on individuals, aimed at preventing offshore tax evasion. As of March 2016, 96 countries have signed up to the CRS, with over 50 ‘early adopter’ countries going live on the system at the start of the year, meaning that time is running out to get your ducks in a row. The full list of those who have committed can be found on the OECD website (www.oecd.org).
Financial institutions will be required to identify the residency of all their reportable customers, including for depository accounts, custodial accounts, cash-value insurance contracts, annuity contracts and some equity or debt interests. The information that will be provided by the financial institutions will include name, registered address on the account, taxpayer identification number, date of birth, account number, balance on value, gross funds paid into the account in a year and gross proceeds paid or credited to the account.
For those who think they may owe money in taxes, it’s not wise to play a game of cat and mouse; holding back can result in serious penalties beyond financial charges. For example, in the UK, Her Majesty’s Revenue and Customs (HMRC) tax authority stated in its ‘No Safe Havens’ publication, that up to 200% of the tax evaded can be the maximum civil penalty issued if you are caught, and this can extend to prosecution and custodial sentences. “Those who continue to believe they can hide wealth offshore must know that serious consequences await them,” warns the HMRC.
It is possible to come forward in many countries with a volunteer disclosure if you feel you might have been at fault. In many cases, such as in the UK, there will likely only be a minimum penalty issued alongside the bill for the taxes owed.
Roy Duns, a UK-based wealth manager commented: “Offshore tax evasion is a serious problem for governments all over the world. The exchange of financial information through the Common Reporting Standard (CRS) is seen as a critical tool to help combat tax fraud and evasion. The aim is that such information can provide timely information to tax authorities on non-compliance. The CRS introduces a global standard for the automatic exchange of financial account information between tax authorities worldwide.
“Governments around the world are determined to tackle tax evasion and the CRS is another component in this global battle. Anyone not convinced that the net is tightening on tax evaders should read HMRC’s ‘No Safe Havens’ publication”.
So, what does all this mean for superyacht crew, in real terms?
Cleraly the important thing is to consult a knowledgeable financial and tax expert at the earliest opportunity. It’s important to know how and where your money is deposited will have a knock-on effect on your tax responsibilities before it’s too late. If you have multiple registered residential addresses, then it is feasible that each country where this is the case will be exchanging information. The basic conclusion to be drawn from the CRS is that everyone financially linked to the countries that have signed up is going to be affected, and the list is growing.
“For a long time the situation has been pretty unclear for many crew as to where their financial and tax responsibilities lie,” says Mikaela Favill. “But the new CRS has made things a lot more clear, and we urge all crew to get personal advice as soon as possible.”
What is offshore evasion?
According to the UK’s rules, as an example, offshore evasion is using another jurisdiction’s systems with the objective of evading UK tax. This includes:
Moving UK gains, income or assets offshore to conceal them from HMRC;
Not declaring taxable income or gains that arise overseas, or taxable assets kept overseas; and
Using complex offshore structures to hide the beneficial ownership of assets, income or gains.
Source: ‘No Safe Havens’, HMRC, 2014.