Your Assets Have Nowhere To Hide - What You Need To Know About The CRS

Tax planning for international investment is an extremely complex subject and you should always get expert advice to suit your circumstances. The following article is designed to give only a brief overview of the topic, and is not tax advice.

Pirate-Treasure

Essential information about AEOI (Automatic Exchange of Information) and the CRS (Common Reporting Standard)

Background

Professional expatriates - engineers and scientists, business managers, consultants, and entrepreneurs, have for decades travelled the world following their careers. Taking international opportunities as they come along. Sometimes staying put where they land, but more often moving on again in a few years. When one project or career phase is complete, it’s time to seek out the next. Sooner or later, ending up back home; in line with the demands of children’s education, career or retirement objectives, or perhaps the need to care for parents.

In planning for the future, it is perfectly normal that as expats we seek to put our hard-earned money to work for us. Bank savings and deposits. Investment accounts. Stocks, shares, funds. After a few years as an expat, we might have multiple investments in multiple countries.

Life is busy, and each year when it comes time to submit our tax returns, it’s not unusual to absentmindedly forget about some of those growth assets that are from a few years ago and in another country. ‘No harm done,’ we say to ourselves, and once that might have been true. Unfortunately the global taxation landscape is now completely different.

Capital Gains Tax vs Income Tax

Most of us have a good understanding of how income tax works. If we have an income from employment or commercial activity, then a slice of that income is duly payable in the jurisdiction where we reside or where we carried out the income-earning activity (as a typical generalisation). Because our income is usually a matter of record, we resign ourselves to making our contribution to society via income tax.

Tax on capital gains is a more complex story, and can vary substantially from country to country, both in terms of tax rates and the methodology by which is it applied. The concept of capital gains is simple - if you buy an investment, and then after a time sell it again to realise a profit, you have made a capital gain. Some countries have no capital gains tax (CGT), but the majority of developed nations do. Some examples (most recent data available, February 2017):

  • In the UK, CGT is 20% on gains (after an allowance of £11,100).
  • In Australia the tax is applied at your marginal income tax rate to 50% of your gains (income tax being 37% on income over $87,000 and 45% on income over $180,000 - i.e. a potential net tax on gains of 22.5%).
  • Canada has a similar 50%-of-gains regime to Australia, with the top tax rate of 43% yielding a net capital gains tax of 21.5%.
  • In France the full marginal tax rate is applied to capital gains (up to 45%).
  • In Norway capital gains tax is 27%.
  • In Sweden it’s up to 30%.
  • In Germany it’s 25%.

Worldwide Governments Are Desperate To Tax Your Capital Gains

Unless you’ve been living on Mars for the last few years, you’ll know that governments everywhere are working harder to raise every penny they can in tax revenues. In particular, they want their slice of your capital gains, which in most CGT jurisdictions is legally due on assets you hold worldwide.

But historically tax on capital gains from international assets has been under-collected, because so many people just kind of ‘forget’ about their investment accounts overseas… ‘Fortunately’, starting this year - 2017 - your relevant taxation authority will be able to remind you about every single one of your overseas investments. They will know the bank and investment details, account balances, your passport and tax identification number, even your date and place of birth.

Your tax authority will know this because governments will be swapping your financial information with each other, through the regime known as AEOI - Automatic Exchange of Information. This regime was proposed and agreed by the OECD (Organisation for Economic Cooperation and Development) and the G20 (Group of Twenty major economies). The regime is implemented in two parts:

(i) MCAA - a multilateral competent authority agreement - this is the formal agreement that countries sign up to, creating the legal framework by which they exchange information with each other; and,

(ii) CRS - a common reporting standard - this is the technical standard that lays out the information to be exchanged and how it is reported by every financial institution to the relevant authority. The CRS thus affects every bank, asset manager, investment company, and financial institution in every country that has signed up.

Because the CRS represents the practical implementation of AEOI and impacts every person in the financial industry, ‘CRS’ has become the general term used to refer to the regime. The documentation is downloadable here.

More Than 100 Countries Have Already Signed Up

Well over 100 countries have signed up to the AEOI framework, and 53 countries have already implemented domestic CRS legislation to start exchanging financial information for 2017. You can track the CRS ‘participating jurisdictions’ here.

Under the CRS MCAA, the AEOI framework provides for countries to sign bilateral Competent Authority Agreements (CAAs) with each other, giving the legal basis for exchange of individuals’ financial information. As of December 2016, there were already 1300 such relationships in place.

The first two CAA’s that Singapore signed? UK and Australia.

Dozens more have already followed - for 2017 reporting. Singapore IRAS updates it’s CRS and CAA status here.

How Does CRS Affect YOU?

CRS affects each of us, if he or she has any kind of financial asset in a country other than their current tax residence. The purpose of CRS is to minimise unreported tax evasion, and encourage full tax reporting on individuals’ overseas assets.

CRS is here, and for practical purposes will be worldwide for most investors. Under CRS our financial assets have nowhere to hide, and gone are the days when we can be a bit forgetful as we fill in our tax returns.

The Important Steps To Take - Gross Roll-Up

For expats and mobile professionals, CRS makes planning for future tax liabilities all the more essential. The ideal way to mitigate or defer certain tax obligations is to use a structure or wrapper that provides ‘gross roll-up’. Gross roll-up is the term applied when your investment grows free of income tax (for example on dividends) or capital gains (on realised profits) tax at source.

Compounded year on year, the effect of gross roll-up can be enormous. As a simplistic example, suppose you invest $100,00 for the long term, and investment profits are 8% per annum. Suppose tax is due at 20% on those gains, and the remainder is reinvested annually. In this scenario, over twenty years your initial $100,000 would grow to $345,806.

On the other hand, if you used a tax-efficient wrapper that provides gross roll-up: all profits are reinvested annually with no tax deductions. The end result would be your $100,000 growing to $466,096 in twenty years. That’s a massive 35% increase in the size of your final value, just by using the right investment wrapper.

The value of gross roll-up can be significant, and should not be ignored when you are considering international investments.

As a financial adviser working with clients of every nationality, one of the first steps I take is to identify the right form of investment structure, to best match the current and future situation of the client.

Fortunately, there exists a very good range of MAS (Monetary Authority of Singapore) regulated investment products - for both regular savings (for example for retirement) and also lump sums. If you want your money to grow in the long term free of capital gains tax, and are likely to be moving on from Singapore sooner or later, then tax-efficient investment wrappers are an important tool.

Finally, for many of us busy people, having to work out chargeable investment gains for tax purposes so that we can correctly fill in our tax returns… well, it’s just a painful experience (or expensive if we want to give the task to our accountant). Happily, in most situations, holding our investments in a gross roll-up account will obviate the need for that annual headache.

Popular Posts

How to Read a Fund Fact-Sheet

Image
Has your adviser given you a factsheet on a recommended fund, and you need to understand what the terms mean? If so, read on … The fund factsheet is an essential document for the private investor. Unfortunately, the information contained in a factsheet - and the way it is presented - is not controlled in the same way as it is in a fund prospectus (a prospectus is a legal document). In essence a factsheet is marketing literature. Only a tiny fraction of investors ever read the formal prospectus for a fund, that’s why it’s especially important to be able to read a fund factsheet correctly, and if necessary to read between the lines. Key Contents Of A Factsheet Most fund factsheets will contain some or all of the following: Fund Name Many funds are commonly referred to by a short or abbreviated version of the full fund name. Hence it’s important to make use of the identifying codes (see below). Fund Management Company & Domicile The fund management company is structured and reg...
Read more

Understanding Compound and Annualised Growth

Image
Across fund manager houses, there is little standardisation of how performance figures are presented on fact sheets. Percentage returns are usually presented as either (i) discrete (or calendar) annual, (ii) cumulative (for example a total return figure for 3 years or 5 years) or (iii) annualised (the equivalent annualised return for a period such as 3 or 5 years, sometimes called compound annual return). This tutorial shows you how to convert from discrete annual performance figures, to cumulative or annualised figures, over a period of your choice. As an example, we’ll look at some USD fund performance data presented in an October 2010 factsheet. The performance data are presented to us in a very clear way, but may not be the complete picture we are looking for. The table directly above shows the discrete annual returns - ie. net of fees the fund delivered 7.46% in 2009, -4.90% in 2008, 9.82% in 2007, etc. But let’s suppose you ask yourself (or your advisor) “What was the total growt...
Read more

Tax Free Savings Plans for Australians?

Image
Question: How can returning Australians (and expats moving to Australia) make MASSIVE tax savings by using offshore investment bonds and investment-linked life policy wrappers? Answer: Set it up while you’re an expat working abroad, and keep it running at least ten years (even if you go back home) for maximum tax benefits. (Note: this article is relevant to expatriate Australians working in Singapore and other overseas locations, as well as other nationalities who may be moving to Australia in the future.) Click to download a copy of this information in PDF format. Background - Repeal of Foreign Investment Fund legislation For several years the Australian Tax Office (ATO) had very defined, and perhaps harsh, rules for how foreign insurance bonds were treated in respect of capital gains for tax residents in Australia. In effect, these tax wrappers were treated in a ‘look through’ manner and holders were liable for tax on actual gains made or at a deemed rate set by the authorities...
Read more

British Expat? Here are the Huge UK Tax Benefits of an Offshore Investment Plan...

Image
Would you like to maximise the tax planning benefits of being a British expat abroad? Read on for a summary of some key reliefs and allowances available from the HMRC tax man… (Note: this article is relevant to British expatriates working in Singapore and other overseas locations, as well as other nationalities who may be moving to UK in the future.) Click to download this information in PDF format. Summary of Tax Benefits of an Offshore Investment Plan Under HMRC tax rules for ‘ foreign ’ investment bonds and investment-linked life policies have additional tax planning benefits compared with their domestic equivalents. The purpose of this article is to briefly highlight the most important. The content is not intended to be specific tax advice of any kind, and rules can change at any time. Everyone’s tax situation is unique and you should consult a qualified tax accountant regarding your own circumstances. 5% withdrawal allowance Time apportionment reduction Top slicing relief ...
Read more

Key Interest Rate Definitions

Image
Definitions of the various types of interest rate Central bank rate - is the one most generally referred to in the financial press when they talk about the ‘bank rate’ or ‘interest rate’ without further specification (except for the USA, see below). Set by policymakers and usually the key rate upon which others are based. Also called the ‘base rate’ in the UK, ‘cash rate’ in Australia and New Zealand, and ‘discount rate’ in the USA. It’s the rate at which the central bank lends money overnight to commercial banks. Federal funds rate - specifically in the USA, policymakers at the Federal Reserve use a slightly different mechanism for influencing the nation’s interest rates. The federal funds rate is the overnight rate at which banks lend reserve balances to each other. The Federal Reserve Open Market Committee (FOMC) sets a target for this rate and implements monetary policy through ‘open market operations’ - buying or selling government securities (Treasury bills and bonds) in the op...
Read more

Should UK Expats Pay National Insurance Contributions?

Image
I live outside the UK - should I make voluntary National Insurance contributions? The decision on whether to make voluntary NI contributions depends on your own specific circumstances. National Insurance contributions for British expats? First a quick reminder. National Insurance (NI) contributions go principally to fund the National Health Service (NHS), the state pension, unemployment benefits, and sickness and disability allowances. Anyone employed in the UK will have an NI number, and make NI contributions via PAYE (pay-as-you-earn) deduction from salary. These are known Class 1 NI contributions (NICs). If you’re self-employed in the UK, you pay Class 2 NICs at a flat weekly rate, and annually Class 4 NICs based on taxable profits. If you are working abroad for up to two years and for a UK-based employer, you will likely be required to continue paying Class 1 NICs.  Alternatively, you can choose to pay voluntary contributions, Class 2 or Class 3. Depending on your circumstances...
Read more

Mobile Phone Screens Are Getting SMALLER!

Image
If you bought a “6-inch” screen phone this year, it will have a SMALLER screen than the “6-inch” screen phone you bought two years ago.  Here’s why. Call me old-fashioned (or just old), but I spend a lot of time reading stuff – articles, charts, and data – on my phone.  And I mean actually reading it – not ‘skimming’ through an article while my thumb is continually scrolling the page upwards. A ‘Full HD’ screen is 1920 x 1080 pixels – which is nice for movies, and gives an eye-friendly ‘book page’ ratio of 16:9.   This has been the standard screen ratio of mobile phones for several years, up to the last year or so, when suddenly manufacturers have switched to a 18:9 ratio  (which is 2:1 by the way… no idea why they call it 18:9, duh).   For me, 16:9 is perfect for reading text.  2:1 isn’t – it’s too thin and narrow.   Supposedly, manufacturers have switched to this format because phones with skinnier screens fit into our pockets better,...
Read more

I Don’t Need A Financial Adviser!

Image
“I don’t need a financial adviser - I can do everything myself.” If you hear yourself thinking this - great! Because it’s almost certainly true. Every single one of my clients has the intelligence and common sense to do what I do.  Though in general, they don’t have the time to commit to this important subject. Often I hear this phrase from people who’ve never worked with a professional adviser before, and never sat down with one to find out what’s on offer. I think maybe it could be down to a misunderstanding of the role. As A Manager, Do You Have Problems Delegating? Pretty much every senior manager I know has earned his or her position by being good, often excellent, in previous roles. That means that the Sales Director was probably a great salesman before. The CFO was probably a great management accountant. The Technical Director was a great systems analyst. The Marketing Director could probably still turn out great advertising copy. In fact, each could excel doing the job of e...
Read more

Health Insurance – Key Points To Consider

Image
Professionals working abroad, and their families, have particular needs for health insurance. When you are away from your home country, access to quality healthcare is essential - both for emergencies and also general medical treatments that may be required from time to time. It is important to plan for the uncertainty of illness or injury, to make sure you can afford private medical care at the times you need it. If you took out health insurance back home, and haven’t checked if you’re covered when living abroad - check now ! National health insurance schemes have restrictions on cover when travelling abroad - they are not designed for those planning to permanently move abroad and cover often lapses after 90 days. That’s why you’ll need to look at options available from the specialist firms that provide international cover for expatriates. There are a wide range of policies available and numerous international medical insurance institutions. Using a broker will save you time and also ...
Read more