Russia's Federal Tax Service clarifies AEOI-CRS reporting requirements for nonresident accounts

Wed, May 29, 2019

On April 23, the Russian Federal Tax Service (FTS) provided clarification on reporting requirements for the automatic exchange of financial account information (AEOI) under the common reporting standard (CRS). According to the regulator, Russian financial institutions will be required to submit information on the financial accounts of their foreign clients for the 2018 reporting year no later than May 31.

To facilitate this, the FTS created an online filing service which allows registered organizations to submit the necessary information. For ease of use, the service’s regulatory and reference materials, such as OECD documents and FAQs, will also be updated on a regular basis. The FAQs for 2019 address a number of new topics, including requirements and methods of reporting separate subdivisions of foreign legal entities and applicability of higher tax rates for foreign tax residents. The FTS requires that information submitted on nonresident customers through the electronic service must be in accordance with OECD Standard version 5.02, which includes new fields and updates to existing fields that must be completed when submitting the required information.

Another change introduced for the 2018 reporting period is that Russian financial institutions will be required to submit information on financial accounts for both new and previously concluded contracts from July 20, 2018. In regard to new contracts, the FTS implemented stricter requirements to the analysis of nonresident customers’ financial information and reduced the monetary threshold where contract disclosure is required. Additionally, the FTS will prioritize the transmission of high quality and relevant data, omitting any information that is not related to the relevant jurisdiction.

For the 2017 reporting year, the FTS received and processed information on foreign financial accounts of Russian tax residents and their beneficiaries and controlling persons from 58 states. This included jurisdictions previously considered "nontransparent", such as the Cayman Islands, the British Virgin Islands, and Belize. The FTS sent information on the financial accounts of foreign clients to the relevant authorities of 42 states.

For the 2018 reporting year, the FTS anticipates an increase in the amount of information received from Russian financial institutions and, as a result, expects to identify more organizations that hadn’t previously reported under the CRS. Additionally, more jurisdictions are expected to join the automatic exchange of financial information with Russia, including Austria, Switzerland, the Bahamas, Hong Kong, Grenada, Monaco, and Macao.  Because of this automatic exchange of information, the number of accounts with foreign banks and controlled companies declared by Russian residents increased over the past year. The FTS is also developing a system for automatic identification and risk-profiling of data, which will allow for the use of CRS data on a systematic basis.

Nonresident Russian taxpayers that might be affected by these expanded disclosure requirements should reach out to their qualified tax advisor.

UNI: What Fiduciaries and Other Advisors Need to Understand

Wed, May 29, 2019

Everyone reading this article has probably heard a lot of lectures and / or have read a number of articles on the topic of Undistributed Net Income (UNI) of a foreign trust and the negative U.S. tax implications of accumulating income in foreign non-grantor trust (FNGT). And as we all know UNI is the accumulated distributable net income (DNI) of a trust (i.e., accumulated DNI) as calculated under U.S. tax rules (i.e., tax accounting retained earnings). This means that annual tax accounting books and records in addition to the traditional financial accounting books and records must be prepared on an annual basis.    

So why do tax books and records need to be prepared annually when U.S. tax law only requires a U.S. beneficiary to report the beneficial transactions of a FNGT when a U.S. beneficiary receives a distribution? Without annual tax accounting like annual financial accounting, it is not possible to determine the amount of UNI on a year-by-year basis.

And why is this so important? You may not remember during part of the lectures and or articles on UNI there was a component on how to determine the tax and interest on UNI (i.e., the throwback rules). “You were also probably thinking, how boring can this get and went to get a cup of coffee to keep yourself awake or were checking your e-mails. This is the accountant’s problem, not mine.” All true. Well here is the 60 second summary of why ensuring a FNGT has annual tax accounting records.

Like DNI, UNI has ordering rules. Under U.S. tax law UNI must be accounted for on a First-In First-Out (FIFO) basis. There is no other method allowed under U.S. tax law. So, to account for UNI under the FIFO method tax books and records must be prepared each year just like the accounting books and records. This means the trustee will have to maintain two sets of books and records to properly account for the distribution of UNI on a FIFO basis. This is important because the interest charge on the UNI tax is also based on the earlier years by way of a ratio of the annual weighted average UNI.

If distributions have been and continue to be made annually then a trustee not need to be concerned because the annual tax accounting should be complete, and the fiduciary should have in their files an annual DNI statement, and a weighted UNI and total combined UNI schedules in their files if there is any undistributed DNI. Where trust distributions are not made annually a fiduciary should have a DNI computation prepared annually, regardless of the fact no distributions to U.S. persons were made so they have a proper account of total UNI and weighted UNI when a distribution of UNI occurs, so the beneficiaries can properly compute the UNI tax and interest.  If the later is not the case it would be wise to have an annual tax accounting prepared for each and every year even if no distributions were made and no U.S. reporting (Form 3520) is required.  

How offshore indirect transfer policies could impact foreign investments

Wed, May 29, 2019

As part of a joint initiative, the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the United Nations (UN), and the World Bank Group (WBG), have developed a draft toolkit to assist developing countries in implementing policy options to address pressing international taxation issues.

One of the issues developing countries are facing is how to treat offshore indirect transfers (OITs), which are the transfer of indirect interests in local assets by nonresident shareholders. The draft toolkit acknowledges that it is appropriate to exempt non-claimable gains or losses (otherwise known as non-recognition transactions) from offshore indirect transfer taxes. However, the toolkit does not include specific guidance to developing countries in this area. Because of this, many countries have implemented OIT rules that are incomplete or ambiguous when it comes to tax-free reorganization exemptions. This can result in a disparity between local transactions exempt from tax and OIT transactions potentially subject to tax in similar transactions.

The essential question regarding the taxation of OITs is how to extend a country’s taxing power to these transfers in cases where that country would otherwise impose tax on gains realized from a direct disposition of local assets. Countries are seeking a mechanism to prevent taxpayers from using an offshore holding company to avoid taxes on the sale of local assets. One factor causing confusion is the absence of consistent and rational OIT taxation policies, which can create risks for individual taxpayers. While there are few jurisdictions that impose OIT taxes on moveable property, there are some – such as China and India – that impose OIT taxes on shares in companies formed in their jurisdictions or that derive substantial value in those jurisdictions.

Some jurisdictions have implemented OIT tax exemptions where the OIT is part of a tax-free reorganization. In Peru, for example, OIT tax is applied to a reorganization that diminishes the value of shares held by residents of the country. This implies that a reorganization that didn’t diminish such value wouldn’t be considered an indirect sale. While in China, some would argue that an exemption for nonrecognition transactions isn’t necessary because the OIT tax in that country only applies where there is a suspicion of tax avoidance, and it’s generally a simple matter to demonstrate that there isn’t a tax avoidance purpose by showing that the shareholder’s interest and any gains are preserved.

Investors considering how to structure asset purchases or exits in the most tax-efficient manner should talk to a qualified tax professional to find out whether and how the OIT taxation policies within a specific jurisdiction impacts you.