Individuals relying on secret accounts, trusts, and other entities to reduce their reported taxable income and assets are probably already aware that the number of nations where the reach of FATCA and other disclosure laws is limited is quickly dwindling. Few nations are left unaffected by FATCA, but in certain countries the scope or powers of the law have been limited by an inability to reach a corresponding intergovernmental agreement. To date, Russia has been one of those nations where the impact of FATCA has been limited. However, despite the continued lack of a corresponding IGA, the confidentiality of accounts held in Russia was likely recently dealt a significant blow. These actions show that the mechanisms to promote transparency in the global financial system are only strengthening in their ability to detect accounts and entities meant to conceal assets and income.
Like most aspects of the relationship between the United States and Russia, the current state of FATCA enforcement in the country is complicated and perhaps both more and less than what it seems. From the outset in 2010, the Russian government was a harsh critic of FATCA. At the time, the Russian Ministry of Finance and Rosfin monitoring criticized the law for its belief that the law would compromise the independence of Russia’s domestic financial sector. In 2012, the law was criticized on the grounds that it was a violation of Russia’s banking laws and sovereignty. However, despite these pronouncements, the Russian and American governments quietly negotiated implementation of FATCA.
However, a proposed agreement fell apart amid the fallout from Russia’s 2014 annexation of Crimea. But then, one day prior to the Russian financial system’s falling out of compliance with U.S. Treasury standards, President Vladimir Putin signed a law permitting Russian financial institutions to send information regarding U.S. linked accounts. Then in January 2016, despite Russian criticisms of FATCA, “Russian FATCA” was passed into law in December 2015. Thus, Russia seems to have come around towards understanding how offshore tax enforcement could benefit the nation’s coffers, but it was still unclear just how much assistance it would be willing to lend the United States in tracking down its tax evaders.
Russia recently agreed to participate in the Organization for Economic Cooperation and Development’s (OCED) Common Reporting System (CRS).Consequently, recent uncertainty regarding the exact level of thoroughness regarding Russian financial institution FATCA compliance may have been rendered largely moot. OCED’s CRS is modeled on FATCA. It provides for the automatic exchange of financial information among more than 95 nations and 82 nations that are signatories of the CRS Multilateral Competent Authority Agreement (MAA). Russia is expected to begin collecting information regarding reporting foreign individuals and entities beginning in 2017. Actual reporting will not begin until 2018 so there is still time to correct past mistakes regarding Russian accounts, but that window is quickly closing.
Under the law, Russia’s Federal Tax Service will collect information reported by Russian banks and financial institutions. Reported information is likely to include clients’ investment revenues, sales of shares, account balance and percentages on deposits and obligations. Foreign companies operating in Russia will be affected by the law unless the company operates through a subsidiary or branch that pays taxes in Russia. Anonymous trusts and holding companies are likely to draw special scrutiny under the law.
While the United States is an OCED member nation, it is not currently a signatory for CRS. However, the United States has indicated a willingness to share information of this type and already exchanges information with the vast majority of nations that have signed on to CRS. While the United States government has been rather tight-lipped about its efforts to mesh together FATCA, CRS and other disclosure systems, the potential for such action already exists. Furthermore, under existing IGAs, the United States has already agreed to an automatic, reciprocal exchange of information with over 100 nations. Therefore, information may flow freely between the systems despite a lack of formal U.S. entrance into CRS.
If you have undisclosed foreign accounts, the time to take action and come into compliance with U.S. law is now. Today, it is not only the United States government that is developing a global system of financial disclosure but also a significant majority of the developed and developing world. These disclosure systems increase the likelihood of discovery of your foreign accounts or trusts and are likely to become increasingly comprehensive and interlocking. Failure to disclose under OVDP or Streamlined Disclosure may mean that you will face the full extent of penalties when your undisclosed foreign accounts are discovered. Furthermore, if you fail to take action before your come under suspicion or investigation, these mitigating options are likely to be foreclosed.