|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.|
Essential information about about AEOI (Automatic Exchange of Information) and the CRS (Common Reporting Standard)
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 effects 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 Effect YOU?
CRS effects 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 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, and are likely to be moving on from Singapore sooner or later, these tax-wrapper investment platforms 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.