The Common Reporting Standard (CRS) was announced in 2014 in response to decades of offshore tax evasion, during which wealthy individuals could exploit bank secrecy in tax havens to hide their wealth and income from national tax authorities, leading to significant revenue losses for governments worldwide. The CRS was meant to curtail tax evasion by providing tax administrations with information about the identity and amount of offshore wealth held by their tax residents. This policy note reviews the progress achieved under the CRS, as well as its remaining shortcomings, a decade after its introduction.
Available evidence suggests that the CRS has significantly reduced the scope for cross-border tax evasion. Pioneering work in Denmark by researchers from the EU Tax Observatory finds that the automatic exchange of bank information may have closed up to 70% of the offshore tax gap in that country.
However, avenues to circumvent reporting requirements persist for many countries, hampering their ability to reduce the offshore tax gap: estimates from the EU Tax Observatory indicate that the amount of CRS-reported wealth reported by tax havens is about 40% lower than the actual level of offshore financial wealth—suggesting the existence of loopholes in the CRS framework.
This policy brief describes four categories of loopholes allowing taxpayers to escape reporting:
Issue #1: Complex structures: Accounts held through complex structures such as shell companies are, in theory, covered by the CRS. In practice, tax authorities often receive incomplete information on the owners of complex shell company structures, weakening the chances of identifying the true owner of accounts.
Issue #2: Assets not covered by the CRS: Crypto-assets and real estate are not (yet) covered by the CRS. Research shows that, ahead of the CRS’s entry into force, some taxpayers reallocated their portfolio from financial assets to real estate to escape reporting. In addition, the blurred frontier between passive non-financial entities – whose owners are reportable under CRS – and active non-financial entities – whose owners are exempted – may also lead tax evaders to use artificial reclassification to skirt reporting rules.
Issue #3: Non-Compliance by Financial Institutions: CRS reporting requirements may fall on financial institutions with weaker incentives to comply (hedge or private equity funds, wealth management companies, trust and corporate service providers, etc.). In some instances, such institutions are closely held, effectively turning third-party reporting into a form of self-reporting, with limited incentives to truthfully report.
Issue #4: Non-participating countries: Not all countries participate in the CRS. Sometimes reciprocity rules act as a barrier to proper exchanges, particularly for low-capacity tax administrations. In other instances, jurisdictions refuse to join. Moreover, when jurisdictions offer citizenship-by-investment schemes, they allow citizenship arbitrage, obscuring the true tax residency of taxpayers.
Loopholes in reporting, as well as the quality of information of CRS data that tax authorities receive and their capacity to use it for enforcement, suggest that the levels of reduction in the offshore tax gap observed in Denmark will not necessarily be observable in every country. Improvements to the standard are therefore essential.
As the CRS marks its tenth anniversary, a number of reforms are needed to make sure it fully meets its goals: