The Organisation of Economic Cooperation and Development and the European Union have targeted citizenship-by-investment (CBI) and residency-by-investment (RBI) programs. Most Caribbean jurisdictions have either CBI or RBI programs. This article will discuss the EU and OECD initiatives and then highlight the Caribbean programs that may be impacted, as well as potential remedies.

EU initiative

On Feb. 8, 2018, the Conference of Presidents adopted the mandate for a new Special Committee on financial crime, tax fraud and tax avoidance. It is the 4th committee of the European Parliament after TAXE, TAX2 and the Committee of Inquiry PANA. Parliament is also responding to the publication of the Paradise Papers. The mandate was negotiated across the political groups. All relevant proposals from the group have been accepted. The new Special Committee will also review the extent to which the EU Commission and the European member states have implemented the recommendations of the previous special committees on LuxLeaks (TAXE and TAX2) and the Committee of Inquiry on the Panama Papers (PANA). Approval by the plenary session of the European Parliament on March 1 is only a formality.

Sven Giegold, the Green negotiator for the agreed mandate, says the pressure for tax justice in Europe will increase. “The former special and inquiry committees have contributed successfully to the progress for tax cooperation in Europe during the last years,” Giegold says. “Unfortunately, the Paradise Papers scandal has not had any new political consequences neither in the EU nor in the member states. The new tax haven blacklist of the EU lacks credibility and transparency. We will demand full access to all documents on the screening of third countries. We will assess whether some countries or jurisdictions received unjustified special treatment. We also have to follow closely the compilation of the strengthened EU blacklist of non-cooperative money laundering jurisdictions. The mistakes of the tax haven blacklist may not be repeated. It is totally unacceptable that the EU’s blacklists do not include the most important places in the world of shadow finance.”

Giegold also notes that the parliament will be investigating for the first time “tax privileges for new residents or foreign income such as citizenship programs or non-dom regimes. Such distorting privileges are offered by Portugal, Italy, Malta, the United Kingdom and Cyprus.” Giegold further emphasized that in “the context of Brexit, the committee will give particular attention to the British Crown Dependencies and Overseas Territories.”

The fact that the European Parliament and the EU as a whole has decided to focus on the potential abuse of CBI will add to the work of the OECD Global Forum on the abuse of CBI/RBI to avoid/evade the CRS. The investigation by the European Parliament and the EU will likely add to the scrutiny of the 10 Caribbean jurisdictions mentioned in Section III below with CBI and/or RBI programs.

OECD consultation document

On Feb. 19, 2018, the OECD released a consultation on preventing the abuse of residence by investment schemes to circumvent the CRS. The OECD is reviewing the use of “residence by investment” (RBI) or “citizenship by investment” (CBI) laws permitting individuals to obtain citizenship or temporary or permanent residence rights in exchange for local investments or against a flat fee.

Individuals are interested in these laws for many legitimate reasons, including greater mobility due to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability.

The laws also allegedly offer a backdoor to money launderers and tax evaders, as well as those seeking to circumvent reporting under the Common Reporting Standard.

The OECD’s consultation (1) evaluates the ways these schemes can be exploited in an effort to circumvent the CRS; (2) summarizes the types of laws that present a high risk of abuse; (3) reminds stakeholders of the need to correctly apply relevant CRS due diligence procedures to help prevent such abuse; and (4) sets forth future steps the OECD will take to remedy the perceived problems, once it receives public input.

The OECD invited public input to obtain more evidence on the misuse of the CBI/RBI laws and on effective ways for preventing such abuse. The OECD will then determine the next steps.

How CBI and RBI schemes can be exploited to circumvent the CRS

CBI/RBI laws provide a right of citizenship of a jurisdiction or a right to reside in a jurisdiction. They do not grant tax residence. Reporting under the CRS is based on tax residence, not on citizenship or the legal right to reside in a jurisdiction. When individuals gain tax residence through some RBI laws, these laws alone do not affect the tax residence in the original country of residence of the individual. The CRS requires taxpayers to self-certify all their jurisdictions of residence for tax purposes.

CBI/RBI laws can potentially be exploited to help undermine the CRS due diligence procedures, which may lead to inaccurate or incomplete reporting under the CRS, especially when not all jurisdictions of tax residence are disclosed to the reporting financial institution. The consultation seems to mistakenly assume that an individual cannot legitimately change his or her tax residence through participating in a CBI/RBI scheme. In such a case, it is possible that an individual does not actually reside in the relevant jurisdiction but claims to be a resident for tax purposes only in such jurisdiction and supplies his financial institution supporting documentary evidence (e.g., certificate of residence; ID card; passport; utility bill of second house).

The consultation paper gives an example of a new individual account in which the account holder falsely self-certifies tax residency and furnishes a tax residence certificate in support.

A second example features a pre-existing individual account with the use of tax residence certificates or passports as documentary evidence under the residence address test.

High risk RBI/CBI schemes

The risk of abuse of CBI/RBI laws is especially high when the law in question has one or more of the following circumstances:

a. the law imposes no or limited requirements to be physically present in the jurisdiction in question or no checks are done as to the physical presence in the jurisdiction;

b. the law is offered by either: (i) low/no tax jurisdictions; (ii) jurisdictions exempting foreign source income; (iii) jurisdictions with a special tax regime for foreign individuals that have obtained residence through such laws; and/or (iv) jurisdictions not receiving CRS information (either because they are not participating in the CRS, not exchanging information with a particular (set of) jurisdictions or not exchanging on a reciprocal basis); and

c. the absence of other mitigating facts. For example, such measures could include:

(i) the spontaneous exchange of information about individuals that have obtained residence/citizenship through such a CBI/RBI law with their original jurisdiction(s) of tax residence; or

(ii) an indication on certificates of tax residence issued that the residence was obtained through a CBI/RBI regime.

Importance of correctly applying existing CRS due diligence procedures

In many cases, a government can prevent the circumvention of the CRS through the abuse of CBI/RBI regimes by the correct application of the existing CRS due diligence procedures. In this regard, the requirement to have a real permanent physical residence address (and not just a PO Box or in-care-of address) for the application of the residence address rule and the necessity to confirm the presence of a real, permanent physical residence through appropriate documentary evidence is important.

Also significant is the requirement to instruct account holders to include all jurisdictions of tax residence in their self-certification. Another important rule is that financial institutions cannot rely on a self-certification or documentary evidence if they know, or have reason to know, that such self-certification or documentary evidence is unreliable, incorrect or incomplete.

Possible additional measures to combat the abuse of CBI/RBI laws

At present, the OECD is collecting a list of high-risk laws based on the above risk factors to raise awareness amongst stakeholders of the potential of such schemes to undermine the CRS due diligence and reporting requirements.

Already on Dec. 11, 2017, the OECD released a consultation document requesting stakeholder input on model mandatory disclosure rules requiring disclosure of CRS avoidance arrangements and offshore structures. The rules require promoters and other intermediaries to disclose arrangements for which it is reasonable to conclude that they will have the effect of circumventing CRS reporting. The adoption of such model mandatory disclosure rules will have a deterrent effect on the promotion of CBI/RBI schemes for circumventing the CRS and provide tax authorities with intelligence on the misuse of such schemes as CRS avoidance arrangements. Many commentators stated that the due date for comments – Jan. 15, 2018 – and the coincidence with the Christmas holiday season did not begin to allow sufficient time for meaningful comment, especially since the rules were retroactive.

The OECD is also considering a range of other initiatives to prevent the abuse of CBI/RBI laws. This may include tax compliance and policy-related measures and will consider the possible role of all stakeholders involved, including the jurisdictions offering these regimes, the tax administrations of jurisdictions participating in the CRS, financial institutions subject to CRS reporting, the intermediaries promoting the schemes and taxpayers.

The OECD purportedly is soliciting public input both to obtain further evidence on the misuse of CBI/RBI laws and on effective ways for preventing such.

Analysis and impact on the Caribbean and potential remedies

While the consultation states that a CBI or RBI program cannot change tax residence, the issue of an individual’s tax residence can indeed change if the individual genuinely acts so that they change their tax residence. Whether the change is legally effective requires a review of the laws of the countries involved and any international standards. The OECD consultation is an effort to establish international standards.

At least five countries in the Caribbean obtain substantial revenue through the operation of CBI programs. They include Antigua & Barbuda, Dominica, Grenada, St. Kitts and Nevis, and St. Lucia.

In addition, the Bahamas, Barbados, and the Cayman Islands have RBI programs, while Belize and Bermuda have incentives for retired persons.

Other non-Commonwealth Caribbean countries such as Costa Rica and Panama have retirement programs whereas the Dominican Republic has a CBI.

Politically, an important element is that the G20 under China’s leadership have prioritized transparency, anti-corruption, and developing better ways to both extradite fugitives and deprive them of entry into jurisdictions where they can seek refuge.

It is beyond the scope of this article to analyze whether the concerns of the OECD with respect to countries hosting CBI or RBI exempt foreign source income are warranted, whether they receive and supply CRS information, and whether the jurisdictions have a special tax regime for foreign individuals obtaining citizenship or residence through such schemes.

Failure to exchange and/or receive information through the CRS would violate tax transparency principles. The existence of a special tax regime for foreign individuals obtaining citizenship or residence through such laws ostensibly would violate the “ring-fencing” prohibition, if they genuinely discriminate between non-resident aliens and residents for tax purposes. However, the ring-fencing prohibition is not hard law. Exempting foreign source income does not seem to violate any tax or legal principle.

The biggest problem for Caribbean jurisdictions are that EU members, namely Austria, Cyprus, and Malta have CBI programs, while Austria, Belgium, Portugal and the United Kingdom have RBI programs. In addition, among the G20 countries with RBI programs are Australia, United Kingdom, and the United States. Many of these programs, including those of the United States, have been susceptible to abuse.

Even though the European Parliament states it intends to examine and act against EU members with the so-called offending schemes, the EU, when issuing its list of jurisdictions violating the EU Code of Conduct in Taxation, did not name any EU members. The ability of the EU and OECD to deal fairly with their own or G20 members remains in doubt.

The potential remedies for the Caribbean include educating the EU and OECD that the CBI and/or RBI programs are not harmful to their harmful tax and tax transparency initiatives. Such education and persuasion efforts are not easy to execute, however because the Caribbean are not members of these organizations.

Although these organizations purport to support democratic ideas, their own governance has large gaps. Other remedies include retaliation, which can work only in concert with other targeted jurisdictions, such as Panama. Another remedy is resort to the World Trade Organization. Still another remedy is educating the broader and professional sectors of the public about the potential adverse impact of the initiatives. Of course, insofar as the Caribbean CBI and RBI policies have abuses, they must be quickly addressed.

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Bruce Zagaris

Bruce concentrates his practice in tax controversy and international criminal law. His tax controversy work has included representing individuals on voluntary disclosures, audits, and litigation as well as consulting and serving as an expert witness in criminal trials for defendants and the U.S. Government. Since 1981, he has also represented foreign governments in international tax and financial services, including advising and helping negotiate income tax and tax information exchange agreements. He has also written a number of books and articles, and is an adjunct professor. Bruce is founder and editor of the International Enforcement Law Reporter.

Bruce Zagaris
Berliner Corcoran & Rowe LLP
Washington, D.C.
United States

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