International Automatic Info Exchange to commence in 2017

International automatic exchange of financial account information (AEoI) – an issue of global importance[1] closely discussed and analyzed by professionals and market players during the last year – is constantly evolving, and, thus, requires further analysis and attention. We have already provided the basics of AEoI and its global standard in previous articles while in this article we would like to present a brief update hereof and implications for businesses, in light of the actual commencement of AEoI by countries in 2017.

As a reminder, a landmark Agreement introducing international AEoI, namely the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) prepared by the OECD, was signed on October 29th, 2014 at the 7th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Prior to the MCAA execution, in 2013, the G20 Finance Ministers and Central Banks’ Governors endorsed the European initiative of information exchange based on US FATCA codes (which gave rise to such international phenomena as the AEoI), and in September 2014 they proceeded to approve the global AEoI standard. This standard – called the ‘Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard’ (CRS) – will be used as the standard for reporting purposes, while the MCAA is the international agreement activating the OECD AEoI.

By the end of 2016 more than 101 jurisdictions had either signed MCAA or committed to implement AEoI via the CRS. Some of these jurisdictions (early adopters) have undertaken to commit first information exchanges in 2017 and the others (late adopters) will do so during 2018. The list of such jurisdictions is constantly growing. According to the latest news, Pakistan, Switzerland and Liechtenstein has ratified OECD Convention on Mutual Administrative Assistance in Tax Matters, thus soon we can expect those countries to join the Global Standard on AEOI. At the same time, a number of jurisdictions have neither signed MCAA nor officially committed to implement CRS, including in particular Armenia, Azerbaijan, Belarus, Georgia and some other countries.

In the official press release of the OECD dated 22 December 2016, it was stated that there are now more than 1,300 bilateral relationships in place across the globe, most of them based on the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the CRS MCAA). Thus, bilateral agreements based on the CRS MCAA are the most popular way of implementing the AEoI between a pair of jurisdictions. Besides, CRS can be also implemented by countries based on double tax treaties and bilateral tax information exchange agreements. The largest amount of bilateral information exchange relationships established, as well as CRS implementations, was made by and between EU countries.

In 2016, countries have only begun to collect the reportable financial account information to be automatically exchanged while the first such exchanges will take place during 2017.

In regards to Cyprus, on October 29, 2014, the Republic of Cyprus – following a Council of Ministers decision dated October 22, 2014 – signed the CRS MCAA, and determined September 2017 to be the first date of exchange (i.e. with respect to exchange of data pertaining to the year 2016). Cyprus banks have already started gathering the information for the CRS reporting. In January 2017, Cyprus banks commenced reporting to the local tax authorities. It is expected that by September 2017 the first exchange of information between tax authorities will take place. Information will be exchanged on automatic basis only with jurisdictions with which Cyprus has mutually agreed to exchange information based the relevant bilateral agreements.

We would like to separately note several specific issues which are worth taking into account by actual businesses in view of the commencement of the global AEoI, and, if necessary, to take relevant timely measures in order to avoid respective negative consequences with this regard. In particular:

  1. reporting under CRS shall be made by the reportable financial institutions which should report to relevant competent authorities of their respective jurisdictions about reportable persons accordingly. Once a financial institution is classified and determined as the “financial institution”, further its necessary to determine whether its reportable or not reportable. . Reportable institution shall be subject to relevant due diligence and reporting requirements. Accordingly, strong due diligence procedures and relevant technical infrastructure 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, and to also ensure the protection of personal information within the AEoI;
  2. reportable persons under CRS will include any individual or entity that is resident in a reportable jurisdiction under the tax laws of such jurisdiction, other than a corporation, the stock of which is regularly traded on one or more established securities market; any corporation that is a related entity of a corporation described above; a governmental entity; an international organization; a central bank, a financial institution; and pre-existing entity accounts (those that are open on 31 December 2015, starting from 1 January 2016 – new accounts) the aggregate account balance of which does not exceed USD 250,000 as of December 31, 2015 or in any subsequent year. The accounts of financial institutions themselves are not reportable based on CRS. The above exemptions from reporting can be considered for purposes of businesses structuring or restructuring in the new global reality.
  3. only passive Non-Financial entities (NFEs) will be obliged to disclose their controlling persons – which, in most cases, are the ultimate beneficiary owners (UBOs) of such entities. The criterion for determining whether the NFE is active or passive is the following: active NFE is an entity whose gross income for the preceding calendar year or other relevant reporting period consists of no more than 50% passive income (i.e. dividends, interests and royalties), and less than 50% of the assets held by the NFE during the preceding calendar year or other relevant reporting period are assets that produce or are held for the production of passive income. All the other NFEs which do not qualify as active ones are considered to be passive NFEs.
  4. The controlling person (natural persons), to be reported automatically by passive NFEs, are the following persons:
  5. for companies and cooperative societies: UBO(s), who ultimately owns or controls a legal entity through direct or indirect ownership of 10% and more shares in the company`s capital (for Cyprus – 25% and more). In case no natural person(s) can be identified as exercising control of the entity, the controlling person(s) of the entity will be the natural person(s) who holds the position of senior managing official, except for entities that are (or are majority owned subsidiaries) an entity listed on a stock exchange;

–       for unions, administrative committees, foundations, clubs, association and funds raising committees: members of the Board of Directors/Committee and administrators of accounts;

–       for trusts (if trust qualifies as passive NFI): the settlor(s), trustee(s), the protector(s) (if any), the beneficiary(ies) and any other natural persons exercising ultimate effective control over the trust. If trust qualifies as a financial institution, then different reporting requirements apply.

Despite the above mentioned strict requirements and rules, there is a number of legitimate, doable and practicable options of escaping reporting under CRS for the reason of being exempt therefrom, or not covered by the relevant requirements. In any case, regardless of whether you will be subject to AEoI under the CRS or will be excluded, the fact is that all businesses will be either directly or indirectly affected by new rules in the international tax sphere. As such, businesses will need to quickly adapt to the new reality.

We at Eurofast are ready to meet all your needs and assist you with any requests which you may have with respect to the introduction of AEoI and provide you with practical solutions which would meet your financial and business needs.

Anna Pushkaryova
Tax & Legal Associate
T. +38 067 504 67 39

[1] AEoI is a global instrument for the prevention and fighting against tax avoidance and the hiding of taxable assets abroad. It has been first initiated by OECD in order to put dividends, interest, royalties, proceeds of the sale of financial assets, other income and account balances within the scope of AEoI.