Cross-border tax information exchange is a game-changer

The G20 declared that bank secrecy was over for tax purposes in 2009 and committed to taking action against non-cooperative jurisdictions, including tax havens.

After nearly 11 years, the OECD followed this up with a press release on June 30 2020, stating that nearly 100 countries have carried out automatic exchanges of information in 2019, enabling their tax authorities to obtain data on 84 million financial accounts held offshore by their residents, covering total assets worth €10 trillion ($11.8 trillion).

The press release said that the automatic exchange of information (AEOI) is providing countries, including many developing countries, with a wealth of new information, empowering their tax administrations to ensure that offshore accounts are correctly declared. Countries are going to raise much-needed revenues while moving to a world where there is nowhere left to hide the undisclosed wealth.

In this article, the author traces, in brief, the commendable work undertaken by the OECD, the Global Forum, the governments of jurisdictions, the financial institutions and other stakeholders during these past 11 years. The cross-border exchange of information under two international standards have proved to be a game-changer, but the author concludes with a suggestion to ensure there are tangible benefits for all participating jurisdictions.

Provisions concerning the exchange of information have existed in tax treaties before 2009. Article 26 of the OECD Model Tax Convention and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters supported all forms of exchange of information, including on request, spontaneous, and automatic. However, a large number of financial centres (the so-called tax havens) neither had any obligations on entities to keep information nor could they exchange the information.

A positive outcome of the 2008 financial crisis was the political consensus for ending bank secrecy and listing non-co-operative jurisdictions. The OECD started publishing the black, grey, and white lists of jurisdictions based on an assessment by the Global Forum against the international standard for the exchange of tax information. During 2009 and 2010, real work on tax transparency and exchange of information started taking shape.

The exchange of information on request (EOIR) became the first international standard in 2009. The standard allows tax authorities to make specific requests of foreseeably relevant information to other tax authorities for carrying out the provisions of a tax convention or for the administration or enforcement of the domestic laws of a requesting country.

The EOIR standard has three key aspects that must be met by a jurisdiction:

1. It should ensure the availability of ownership, accounting, and banking information;

2. Its authorities should have powers to access the information; and

3. The jurisdiction should also have a legal basis to exchange information in a timely manner with other interested jurisdictions.

The Global Forum’s robust peer review process has enabled the rapid implementation of the EOIR standard. The 10^th Anniversary Report of the Global Forum said that Global Forum members have received more than 250,000 requests for information in 10 years and annual figures are almost universally on the rise. The EOIR alone has enabled the recovery of nearly €7.5 billion in additional tax revenue.

While the Global Forum was conducting peer reviews at a rapid pace during 2012 and 2013 to ensure the EOIR standard was being implemented, there was an increased demand to raise the bar and make the automatic exchange of information the new global standard.

At the beginning of February 2014, the OECD Committee on Fiscal Affairs published the first two documents supporting the automatic exchange of information that was endorsed by the G20 finance ministers and central bank governors: The model competent authority agreement (CAA) and the common reporting standard (CRS).

The CRS for the automatic exchange of financial information in tax matters was developed by the OECD with G20 countries and represented the international consensus on the automatic exchange on a reciprocal basis.

The AEOI standard is built on three key components:

1. A domestic legal framework that mandates financial institutions to collect and report the information to the tax administration;

2. A legal basis (exchange agreements) allowing the AEOI between all appropriate interested partners (who are interested in receiving information and meet the required standards about confidentiality and data safeguards); and

3. The systems and processes for the reportable information and exchanged effectively in practice, including ensuring compliance by financial institutions.

The standard consists of the following four core parts:

1. A model CAA, providing the international legal framework for the automatic exchange of CRS information;

2. The CRS;

3. The commentaries on the CAA and the CRS; and

4. The CRS XML Schema User Guide.

The CRS and due diligence for financial account information set out the data to be exchanged, the financial institutions required to report, the different types of taxpayers and accounts covered, as well as common due diligence procedures to be followed by financial institutions in identifying the accounts.

Financial institutions covered	Financial information to be reported concerning reportable accounts	Reportable accounts
Depository institutions	Dividends and interest	Accounts held by an individual
Custodial institutions	Account balance or value	Accounts held by entities (which include trusts and foundations)
Investment entities	Income from certain insurance products	The standard includes a requirement to look through passive entities (including in a multi-layered structure) to report on the relevant controlling persons.
Specified insurance companies, unless they represent a low risk of being used for evading tax and are expressly excluded from reporting	Sales proceeds from financial assets
	Other income generated from the assets held in the account or payments made concerning the account

To ensure that financial institutions maintain and report complete and accurate information, the standard specifies information gathering procedures (due diligence) to be followed by financial institutions, and these procedures draw on the existing anti-money laundering standards. Making due diligence a part of the standard ensures that the reporting financial institutions, wherever they are located, will follow the same procedure to ensure consistency and reliability of information collected and not to miss out any reportable account and information on those accounts.

The CRS draws extensively on the intergovernmental approach to implementing the US Foreign Account Tax Compliance Act (FATCA), a US legislation seeking information on US citizens and entities holding accounts with financial institutions in foreign countries.

The CRS ensures that no account of interest for a residence jurisdiction maintained by its residents in another jurisdiction is left out from the scope of the AEOI. At the same time, exclusions within the law avoid reporting of accounts having no or low potential for tax evasion, which reduces the cost of compliance.

Global implementation of the AEOI standard is essential to tackle tax evasion effectively, as well as to ensure jurisdictions are on an even footing and do not create specific benefits to taxpayers due to their non-participation. The job of building international consensus and creating solutions for tax transparency and exchange of information cannot be considered complete until the same are implemented and used for their benefit by the global community.

More than 100 jurisdictions have committed to the implementation of the AEOI. The Global Forum has carried out a pre-exchange review of each jurisdiction’s domestic and international legal frameworks to ensure complete consistency with the standard. The review indicated that 98% of the jurisdictions committed to implementing the AEOI have a domestic legal framework for collection and reporting of information, and an equal number of jurisdictions have the international legal framework for the exchange of information in place. The Global Forum has also conducted reviews about confidentiality and data safeguard. Post-exchange reviews are scheduled to start in 2020.

The Global Forum has  released The 2019 AEOI Implementation Report to provide comprehensive and updated information on the implementation status of the AEOI standard. 

As of May 2020, there are more than 4,000 active bilateral exchange relationships concerning more than 100 jurisdictions committed to the CRS. Three annual automatic exchanges (2017, 2018, and 2019) have already taken place, and the next exchanges between these jurisdictions are likely to  happen at the end of September 2020.

Global institutions, governments and other stakeholders, including financial institutions, have invested a considerable amount of resources in making the AEOI operational. The success of the AEOI initiative, however, relies on the recipient jurisdictions effectively processing and utilising the data in risk assessments, detecting undisclosed accounts and collecting the taxes due.

Jurisdictions participating in the AEOI have received information on 84 million accounts in 2019. However, how many pieces of information have been analysed and effectively used by the recipient jurisdictions in identifying the undisclosed accounts? Also, is the use of information consistent among developed and developing countries?

The data received by a jurisdiction requires matching with the information already available within the tax administration. Whether the jurisdiction has a database of information and whether the IT system and processes are capable of identifying the mismatches, and therefore the undisclosed accounts, is an important factor. This issue is undoubtedly a domestic capacity matter because manual data matching is impossible. The AEOI aims to benefit the developing counties too, which may not be having robust IT systems and may require technical assistance from a partner country that is successfully analysing and using the information.

The Global Forum will soon start reviewing the effectiveness of the AEOI implementation in practice based on the AEOI terms of reference. It will undoubtedly assess the quality of the information exchanged. Still, it is uncertain whether the review’s scope will cover how the received information is used and the tangible benefits achieved by each jurisdiction. In such a scenario, it will be a waste of taxpayer money and all the efforts that were invested in collecting and sending information to other countries without reaping the benefits of the received information.

There are also practical problems associated with the automatic matching of data received with the available taxpayer data in a jurisdiction using IT tools. For example, issues arise when tax identification numbers (TINs) are unavailable, names and addresses cannot be matched, or jurisdiction uses different TINs such as the permanent account number by India. The FATCA and CRS obligations require the financial institutions to get self-certifications from account holders, but practical implementation and getting the correct data can also be a challenge.  

The Global Forum should look into these practical aspects in its peer reviews of jurisdictions. By discovering how countries are maximising the use of data received, it would allow best practices and practical guidance to be established.

Furthermore, the FACTA and CRS models need to be better aligned. The US has not yet committed to the AEOI standard, choosing instead to base its data exchange relationships on FATCA. The requirements of the CRS and FATCA differ in some aspects, and this puts an additional compliance burden on governments and financial institutions. Further, as the US may not be sharing information on accounts held by residents of all jurisdictions, such accounts may remain undisclosed for tax purpose in the residence country. Convergence and reciprocity in both models are required.

The exchange of information as a tool in the hands of tax administrations will be successful when all relevant jurisdictions deliver the information to ensure a level playing field and leave no place to hide undisclosed assets.

It is expected that changes in taxpayers’ behaviour due to the deterrence effect of the EOI will lead to enhanced voluntary compliance, less costs to tax administrations and much-needed tax revenue. A day will undoubtedly come when taxpayers will be obliged to pay tax whenever and wherever it is due, and no income or asset will remain untaxed.

The exchange of information could only be considered a success when all the participating jurisdictions have the necessary technical and administrative capabilities to use the received information in identifying the undisclosed assets and collect the taxes due.

Countries, particularly developing jurisdictions, need resources to finance their development agendas and global sustainable development goals. Domestic resource mobilisation and the fight against illicit financial flows would be a vital component of the strategy to economic recovery post-COVID-19. 

It is expected that the collective efforts of the OECD, the Global Forum and tax administrations around the globe in implementing the EOI standards will bring the desired change in taxpayers’ behaviour and the governments will be collecting the legitimate taxes due to them. The results would justify the words of OECD Secretary-General Angel Gurria, who said: “Automatic exchange of information is a game-changer”. 

Sanjeev Sharma wrote this article for ITR. The views expressed are personal and not attributable to any organisation.