Are the days of banker-client secrecy over?

On November 17th, the Inland Revenue Authority of Singapore (IRAS) published a "Summary of Responses - Public Consultation on Draft Income Tax (Amendment) Bill 2016". In the annex, the fifth point under the "Summary of key public feedback received on the Income Tax (Amendment) Bill 2016 ", was to Amend the provisions relating to implementation of Foreign Account Tax Compliance Act (FATCA).

For those who are unfamiliar, FATCA was enacted by the United States Congress back in 2010 to encourage tax compliance by US persons using non-US financial accounts. The stated purpose of the law was "to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses."

FATCA is therefore a framework for exchange of financial information that requires all financial institutions outside the US to transmit on a regular basis information about financial accounts held by US persons to the Internal Revenue Service (IRS).

According to IRAS, public feedback was that, under subsection (2) of the draft section 105PA, the duty to provide information prevails over any duty of secrecy "whether imposed by written law, rule of law, any contract or any rule of professional conduct". The ambit of these words was considered very wide, and could potentially cover common law legal professional privilege.

A carve-out was suggested to be included in the draft section 105PA, to make clear that disclosures under FATCA are not permitted where such disclosures breach legal professional privilege.

The Ministry of Finance's (MOF) response was - Accepted. Section 105PA will be amended to include a carve-out for information subject to legal professional privilege.

This response was quite timely as FATCA was just the beginning. Following the lead of the US, the OECD has developed what can be described as FATCA on steroids. The Common Reporting Standard (CRS) is an information standard for the automatic exchange of information (AEoI). The legal basis for the exchange of data is the Convention on Mutual Administrative Assistance in Tax Matters, and the idea is based on FATCA's implementation agreements.

So far, nearly 100 countries have signed up to CRS and the first group of early adopters (mainly the Europeans and their dependencies) go live in 2017. So in 2017 they will report 2016 accounts. One can technically argue that CRS goes live in January 2016.

From Singapore's point of view, the government would need to sign bilateral agreements before any automatic data sharing begins. It has been reported that bilateral agreements would only be signed after receiving assurance that partner countries have a robust legal framework to maintain information confidentiality and confine its use to tax purposes.

Practitioners in Singapore are buzzing about CRS. Countless seminars and discussion groups are convening to discuss the implications of both CRS and the related BEPS initiative. Even though Singapore has not yet signed, having a structure with nexus to the 2017 early adopters may have implications.

Most bank account holders are already familiar with FATCA certification forms (W9 and W8 series forms) which require disclosing whether or not beneficial owners are US persons. CRS will now require those forms to be expanded to require holders to identify their jurisdiction(s) of tax residence.

For example, a French tax resident with an investment account in the United Kingdom will automatically have her investment account information sent to France. The situation will be similar for offshore / private investment structures such as the Cayman and BVIs structures that are so popular – beneficial owners may have information sent to their jurisdiction(s) of tax residency. Note my use of the plural form as many of us may be tax resident in multiple jurisdictions.

For individual account holders, it may just be another form to complete but if she already reports her global income in her countries of tax residence, then it would be in sync with the CRS automatically transmitted information.

For entities however, the situation would be more complicated. The rules for entity classification are tricky and CRS reporting may be confused by the distribution rules for partnerships and trusts.

It is therefore easy to imagine that institutions could generate and transmit misleading or inaccurate CRS reports. Reports which could vary with the amounts directly reported by taxpayers to their tax authorities. This could lead to increased audit risks in their jurisdiction(s) of tax residence.

Furthermore, for those with tax residence in countries without a robust legal framework to maintain information confidentiality, CRS is of serious concern.

Ironically, since the US already has FATCA, it is not participating in CRS. Some practitioners are wondering whether there is now an advantage in shifting to US structures. After all, FATCA intergovernmental agreements (IGAs) do not always make for full reciprocity.

This may be a viable option but as always, one should first consult with qualified US tax professionals.