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January 2016

A landmark Agreement ending the Bank Secrecy era and introducing an International Automatic Exchange of Information (AEoI), namely the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) prepared by the OECD, has been signed in Berlin on October 29th, 2014 at the 7th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes.

This Global Forum is the international body safeguarding the implementation of the internationally agreed standards of transparency and exchange of information in tax matters, while the distinct importance of this agreement is that it adds automatic reporting to the already existing International Exchange of Information processes.

The genesis of the automatic exchange of information

The automatic exchange of information is not a new notion, but it wasn’t until recent years that there have been increased efforts for this to transform into a system that would be more global in scope.

The EU has also been actively addressing it, but again it wasn’t before the past few years that more focus was achieved.

Originally there was the U.S. FATCA, enacted by the United States in 2010, and which introduced a multidimensional AEoI by requiring non-U.S. Financial Institutions to furnish the U.S. tax authorities on an annual basis with information on financial accounts kept directly or indirectly by U.S. citizens.

Then there was the E.U. revised DAC (Directive 2011/16/EU on administrative cooperation in the field of taxation) given rise by the initiative of G5 (France, Germany, Italy, Spain and the U.K.) which announced their purpose of developing a multilateral AEoI based on the FATCA codes.

Further after, the G20 Finance Ministers and Central Banks Governors endorsed in 2013 the European initiative and in September 2014 they proceeded to approving the global AEoI standard, namely the ‘Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard’ (CRS) developed by the OECD, which in fact will be used as well as the standard for the DAC reporting purposes, and parallel to these, the MCAA is in fact the international agreement activating the OECD AEoI.

Which countries are involved in the OECD AEoI?

Currently over 90 jurisdictions have committed to implement this via the CRS, with some for first exchanges in 2017 and others in 2018, inclusive of countries which were traditionally well-known for their culture of bank secrecy like Switzerland, Luxembourg, the United Arab Emirates, and others. Specifically:

• 56 Jurisdictions have committed to undertake first Automatic Exchanges of Information by 2017, with these being: Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom.
• 41 Jurisdictions have committed to undertake first Automatic Exchanges of Information by 2018, and these are: Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Marshall Islands, Macao (China), Malaysia, Monaco, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Saint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay.

Additionally, the U.S. has also indicated that it undertakes automatic information exchanges pursuant to FATCA as from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions to do so. As a note, the Model 1A IGAs entered into by the U.S. address and acknowledge the need for the U.S. to achieve such equivalent levels of reciprocal automatic information exchange with partner jurisdictions. Moreover, the U.S. is also adhering to a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve these equivalent levels of reciprocal automatic exchange.

Various countries which are currently not committed to the AEoI

Further, although many countries proceeded to the commitment to start the AEoI as presented above, there are also several jurisdictions which have not and amongst these are some countries of the general European region and other near-to Europe countries, currently not committed to automatically exchanging financial accounts information, with these being: Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, FYR Macedonia, Georgia, Holy See (Vatican City State), Kazakhstan, Lebanon, Moldova, Montenegro, Serbia, Ukraine.

The OECD Common Reporting Standard (CRS)

In order to meet therefore this new single global Standard for the Automatic Exchange of financial account Information between Tax Authorities around the world, the participating countries will need to gather the relevant information from financial institutions and exchange it automatically with partner countries on an annual basis.

Further, to make sure all relevant taxpayers are covered, the CRS has been drafted with a very broad scope on four pillars, similar with FATCA’s intergovernmental nature:

• Reportable income.
• Financial institutions.
• Reportable accounts.
• Due diligence procedures.

In more detail:
• Reportable Income: All kinds of investment income ( interest, dividends, income from certain insurance contracts, annuities and such) as well as account balances, and sales proceeds from financial assets that give rise to this type of income.
• Financial Institutions: These being not only banks, but also custodians, brokers, various collective investment vehicles, and specified insurance companies.

Further, the exact terminology of a ‘Participating Jurisdiction Financial Institution’ extends to:
• Any Financial Institution that is resident in a Participating Jurisdiction, but excluding any branch of that Financial Institution that is located outside such Participating Jurisdiction, and
• Any branch of a Financial Institution that is not resident in a Participating Jurisdiction, if that branch is located in such Participating Jurisdiction.’
• Reportable Accounts: Accounts held by individuals and entities inclusive of trusts and foundations, while also there exists the necessity to examine the accounts of passive entities as well, in order to gather and provide information on reportable controlling persons if applicable.
• Due Diligence Procedures: Strong due diligence procedures will need to be in place to facilitate the recognition of reportable accounts and gather the Accountholder Identifying information that needs to be reported for such accounts.

Rationale

CRS has tax residency as its basis, and unlike FATCA it does not withstand on citizenship.
Thus, reportable accounts are financial accounts held by tax residents of CRS committed countries, and a person will be deemed to have a tax residence in a particular country if, under the laws of that country, is liable to tax due to domicile, residence, place of management, or any other similar parameter.

Also for an account holder that is a reportable person in respect to a multiple of participating countries, the entire account balances / value, and the total amount of income or gross proceeds etc, will be reportable to each CRS participating country.

Technicalities of Reportable Accounts and Reportable Persons, as per the CRS

Reportable accounts are: accounts held by individuals and entities.

For Individuals’ Accounts: an account held by an individual / individuals is a reportable account if the account holder(s) is a tax resident of a reportable jurisdiction, and the account holder in this case is called a reportable person.

Pre-existing financial accounts held by individuals (i.e. accounts that are in place before the jurisdiction joins the convention) will be reportable as well as any new financial accounts.

Further, each holder of a jointly held financial account will be attributed the entire balance or value of the jointly held account when it comes to these reporting purposes.

For Entity Accounts

Pre-existing financial accounts held by entities are not considered reportable if their aggregate account balance is not above USD 250.000 as of December 31st of a reportable year. Yet, the account(s) can become reportable if the account balance exceeds USD 250.000 as of December 31st of any subsequent calendar year.

Any new financial accounts to be held by entities, will all be considered reportable irrespective of the account balance.

An entity account will further be reportable if it is held by one or more reportable persons, or it is held by a passive non-financial entity (NFE) that has one or more controlling persons who are reportable persons. A passive NFE is defined as a non-financial entity that has more than 50% of its gross income for the previous calendar year being passive income, or if more than 50% of its assets generate, or are held towards production of, passive income.

Information to be Reported

For each of any reportable accounts the following information is to be reported:
• Account holders details: Name / Address / Jurisdiction(s) of Residence / Taxpayer Identification Number (TIN)
• If a reportable account holder is an individual, date and place of birth.
• If a reportable account holder is an entity, for each of the controlling persons the account holder details listed above are reported.
• Account details: Account Number or its equivalent if there is not one.
• Financial Institution details: Name and Identifying number.
• Financial information: Account balances, sales proceeds from financial assets, investment income (interest, dividends, income from certain insurance contracts etc) and currency in which each amount is denominated.

Automatic and Other Information Exchange in Practice

As mentioned, the information will be exchanged on a yearly basis in accordance to the reporting standard, and furthermore the information will be exchanged only between the jurisdictions which the Information Exchange convention is in force and in effect.
Apart from the automatic exchange though, information may be also exchanged in other ways as follows:
• On request: Being a situation when a competent authority of one jurisdiction asks for information from a competent authority of another jurisdiction, with the request relating to a specific tax investigation, (criminal or civil). As a side note, this is a type of exchange conducted in accordance to the Tax Information Exchange Agreements (TIEAs).
• Spontaneously: While this is a situation when there is an actual provision of information to a competent Authority of one jurisdiction that is foreseeably relevant to a competent Authority of another jurisdiction although it has not been previously requested of.
Moreover, if a jurisdiction did not sign the convention, this jurisdiction will neither automatically report nor automatically receive financial account information from the jurisdictions which signed the convention, although the absence of the automatic information exchange between a pair of jurisdictions cannot be interpreted as to that there cannot or will not be any information exchange at all, as the information may instead be exchanged either on request or spontaneously as described above.

Eurofast’s take

Conclusively, as the global map on bank secrecy is altering in such speedy manner, Eurofast is alert in assisting clients with any requests they may be presenting reference to the upcoming introduction of the AEoI.

Christiana Nicolaou
Tax Consultant
E. christiana.nicolaou@eurofast.eu