The various instances of information leaks (Falcian`s Swissleaks, Luxembourg Leaks, Swiss Leaks, Panama Leaks), as well as the requirements on information exchange between countries imposed by international organizations (FATF, OECD), the EU legislation and domestic laws, essentially eliminate the possibility of any individual or company keeping a bank account abroad to bypass the regulations. Since the OECD has passed its Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard (“CRS”) in 2014 – the global standard for the committed countries regarding the exchange of financial account information with the primary aim to prevent tax evasion and profits shifting - dozens of theoretical articles as well as practical guidance on Automatic Exchange of Information (“AEoI”) have been circulated among the public. However, many aspects still remain unclear, including who will report and to whom, what type of information will be reportable as well as which jurisdictions will exchange information.
In this article we will consider the jurisdictions of Cyprus and Ukraine as an example to briefly illustrate current practices.
The Standard for Automatic Exchange of Financial Account Information (“Standard”) was developed in response to the G20 request and approved by the OECD Council on 15 July 2014. The Standard consists of the CRS that contains the due diligence rules for financial institutions to follow in order to collect and then report the information, the text of the Model Competent Authority Agreement (“MCAA”) which serves as a legal instrument for exchanging of the information between countries which endorsed the MCAA, the Commentaries to the MCAA and the CRS, and Guidance on technical solutions to be used for exchange of the information.
Cyprus has already endorsed the MCAA and committed to exchange financial account information by September 2017 for information relating to 2016, becoming one of 101 committed jurisdictions. Ukraine has not yet become a reportable jurisdiction. However, the Decree of the President of Ukraine “On measure against base erosion and profit shifting” dated April 28, 2016 № 180/2016 clearly sets out the intention of Ukraine to join respective international initiatives, including the AEoI. In addition, certain draft laws approved by the Ukrainian Parliament also clearly evidence the same (e.g. the Draft law №. 4678 of May 17, 2016 “On measures regarding deoffshorization” and some others).
All Cypriot taxpayers, individuals and legal entities (including trusts and foundations), should be aware of the fact that information regarding their financial accounts as of January 01, 2016 opened with foreign financial institutions in jurisdictions which have endorsed the MCAA, will be shared with the Cypriot tax authorities starting from the year 2017. Individuals - tax residents of Cyprus, who ultimately own or control 25% of legal entities which are passive (i.e. more than 50% of gross annual income of such entities is derived from passive activities) having accounts with banks registered in jurisdictions which endorsed the MCAA, should keep in mind that information about their beneficial ownership of the above mentioned entities will be disclosed to the Cypriot tax authorities as well. If a legal entity is active, information will be disclosed only to the jurisdiction where the legal entity is treated as a taxpayer, i.e. not to the jurisdiction of the tax residency of the ultimate beneficial owner.
Notably, pre-existing entity accounts opened before December 31, 2015, the aggregate balance of which does not exceed USD 250,000 as of December 31, 2015 or in any subsequent year, as well as accounts of publicly listed entities, financial institutions and any related entities, governmental entities, international organisations, and Central Bank`s accounts - will not be reportable.
The flow of information exchange will abide by the following pattern: the reporting financial institution analyses financial accounts of its clients by application of the due diligence rules, identifies reportable accounts, and then reports on an annual basis the relevant information to the tax authority of the country where the financial institution is registered. After that, the tax authority, in accordance with provisions of the MCAA, sends the received information to the tax authorities of jurisdictions of the reportable accounts.
The reporting financial institutions responsible for collecting and sending financial accounts` information to the tax authorities include banks, financial organizations, investment and insurance companies, pension funds, and investment trusts.
The following information will be reported:
- for individuals: name and surname, address, tax identification number (TIN), account number, account balance and gross amount of income as of the end of the calendar year;
- for active non-financial entities: name, address, TIN of the entity, account number, account balance as of the reporting date, gross amount of income as of the end of the calendar year;
- for passive non-financial entities with beneficial owner(s) from participating jurisdictions: the same information as for active non-financial entity, along with the relevant information on beneficial owner(s).
In practise, Cypriot banks have already started gathering the information needed for the CRS reporting and will start actual reporting to the local tax authorities in January 2017. The first exchange of information between tax authorities will take place by September 2017.
The current situation for Ukrainian taxpayers is different. As mentioned above, Ukraine has not yet endorsed the MCAA. Thus, information on Ukrainian taxpayers will not be automatically exchanged until Ukraine implements the Standard, neither Cypriot financial institutions, nor any other financial institutions from participating jurisdictions will automatically report to Ukrainian tax authorities the relevant information on financial accounts of Ukrainian entities and/or Ukrainian beneficial owners opened in those financial institutions. However, the absence of the legal basis for the AEoI cannot be interpreted as the total lack of information exchange because the information may still be exchanged either on request or spontaneously (e.g. information between Cyprus and Ukraine can be exchanged based on the double tax treaty between Cyprus and Ukraine or OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters).
The above information was presented only for informative purposes, does not contain an exclusive list of respective applicable requirements and cannot be used as a practical guidance. Our team at Eurofast would be happy to assist and advise clients on issues concerning the subject discussed herein.
 MCAA is a multilateral framework agreement that provides a standardized and efficient mechanism to facilitate the automatic exchange of information.