Automatic Exchange of Information under AIA

The AIA standard is a set of four documents contained in the OECD document “Standards for the Automatic Exchange of Information on Financial Accounts”:

• Intergovernmental treaty: This is a model agreement for the purpose of providing a basis for bilateral agreements on the adoption of the AIA standard.
• Common Reporting Standard CRS: The so-called Common Reporting Standard (CRS) defines, which institutions are required to report which kind of information on which types of accounts.
• Commentary on implementation (for the uniform interpretation of the AIA-regulations) and
• Technical application directives These directives aim at warranting data security and the reliable and compatible transmission of information.

The AIA standard results in the systematic and periodic reporting of information on a taxpayer to his country of residence, including asset values or income in a another country. For this purpose, the banks report information on the account holder and his accounts to the national tax authorities. These will then, in a further step, exchange the information with the tax authorities of the other participating countries.

The AIA standard aims at universal application and thereby prevents circumvention, as far as possible. For this purpose, the AIA contains a three-pronged regulatory approach:

• Reportable information on accounts includes all types of capital income (interest, dividends, income from certain insurance policies and other similar income). Account balances and income from the disposal of investments are also included. Account numbers, names and addresses of the banks as well as names, addresses and dates of birth of the account holders, or, in the case of legal entities, name and address of the company and its controlling person are reported. The so-called TIN (taxpayer identification number) for persons, companies and controlling persons are also reported.
• The financial institutions which must comply with mandatory reporting are not only banks and fiduciaries, but also other financial institutions such as brokers, certain organisations for syndicated investment in securities and certain insurance companies.
• Accounts held by individuals as well as legal entities are reportable, including trusts and charitable foundations. The standard further includes the duty to audit passive legal entities (companies, which do not engage in commercial activity but manage assets, e.g. trusts) and reporting of the individuals who in fact control these entities. The beneficiary of the account must be identified. The rules for identification vary, depending on whether it is an existing account or a new account to be opened.

The AIA reporting standard also defines the duty of care, which the financial institutions must comply with in identifying reportable accounts.

The AIA standard must be implemented by the the participating countries in their national laws. Additionally, all countries must enter into a bilateral or multilateral treaties for the application of the AIA standard. Non-member countries may enter into an agreement with the European Union, rather than with each individual EU member country. The AIA standard must be implemented between 2016 and 2018.

The OECD and EU exert pressure on the participating countries to implement the standard as soon as possible. The only remaining question is when each participating country will implement the AIA standard. The year in which the standard is implemented does not have to correspond with the first year for which information is reported. This means, that information for the current year is usually reported retrospectively in the following year. Depending on national law, this may lead to a certain retrospective effect. However, this remains to be seen.

The EU took one step ahead: The EU agreed on to apply AIA standard for the taxation of interest income. In March 2014, the EU member states supported the broadening of the EU directive pertaining to the taxation of interest income. Previously, it was Austria and Luxembourg who declared their consent to a broadening of the scope of application. Austria and Luxembourg prevented this broadening for a long time, because they wanted to retain the anonymous withholding tax. Both countries made their consent subject to progress in the negotiations, which are conducted between the European Commission and the five non-member countries Switzerland, Liechtenstein, Andorra, Monaco and San Marino. The European Commission was also given the mandate to push through with the new standard, even against the will of non-member countries.

Increasing globalisation leads to taxpayers investing their money in foreign countries, thereby wittingly or unwittingly evading taxation in their country of residence. A common reporting standard is to be introduced for the automatic exchange of information on capital income, with the aim to counteract tax fraud. The OECD has, earlier than expected, tabled a complete version of a global standard for the automatic exchange of information on financial accounts (AEOI). The complete version of the AEOI standard is supposed to be presented to and subsequently adopted by the G20 this year (2014).

The aim of adopting the global AEOI standard is to facilitate effective taxation of income earned in foreign countries by the country of residence. This requires cooperation among the tax authorities, in particular in respect of the exchange of tax-relevant information. The global AEOI standard for the automatic exchange of information on financial accounts is a further big step by the countries in their battle against tax fraud. The controversial acquisition of CDs containing the details of tax-evaders will then be obsolete for countries which have adopted this treaty.

1. AEOI - automatic exchange of information on financial accounts

Under the completed version of the standard for the automatic exchange of information in taxation matters, countries are able to obtain financial information from their financial institutions (typically banks and insurance companies) and automatically exchange this information with other countries. The global standard prescribes a minimum standard for the information to be exchanged. This means, that the global standard also permits an exchange of information between countries exceeding the minimum standard. The countries may agree to exchange a much broader scope of information than provided for in the global standard. Tax fraud in connection with undisclosed accounts and untaxed income from capital will then be history.

2. What does automatic exchange of information under the AEOI standard mean?

The automatic exchange of information on financial accounts means the systematic and periodic reporting of tax-relevant data. The relevant information is usually collected in the source country, which means the country in which the income is generated or the country in which the assets are held. In most cases, information of payments originates from financial institutions or employers. In addition to tax-relevant data, the automatic exchange of information on financial accounts can be utilised to exchange information on a change of residency, the purchase and sale of real estate, sales tax refunds or similar information.

2. What does automatic exchange of information under the AEOI standard mean?

The automatic exchange of information on financial accounts means the systematic and periodic exchange of tax-relevant data. The relevant information is usually collected in the source country, which means the country in which the income is generated or the country in which the assets are held. In most cases, information of payments originates from financial institutions or employers. In addition to tax-relevant data, the automatic exchange of information on financial accounts can be utilised to exchange information on a change of residency, the purchase and sale of real estate, sales tax refunds or similar information.

3. Automatic Exchange of Information: Which countries participate?

There are currently more than 65 countries participating in the automatic exchange of information (as of July 2014): These are Argentina, Australia, Belgium, Brazil, Bulgaria, Canada, Chile, Costa Rica, Denmark, Germany, Estonia, Faeroe Islands, Finland, France, Greece, India, Indonesia, Ireland, Iceland, Israel, Italy, Japan, Colombia, Korea, Croatia, Latvia, Liechtenstein, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Netherlands, New Zealand, Norway, Austria, Poland, Portugal, Romania, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Czech Republic, Turkey, Hungary, USA, Great Britain including Isle of Man, Guernsey, Jersey, Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat and Turks and Caicos as well as Cyprus.

4. Automatic Exchange of Information: When does the automatic exchange of tax-relevant information commence?

The initial exchange of information is scheduled for September 2017. It is already set, that the automatic exchange of information will initially make a distinction between significant and insignificant assets, however no value thresholds are known at this point. There will be a further differentiation between “new” and “pre-existing” accounts. The AEOI standard shall apply to all types of accounts no later than September 2018. This means, that from then onwards, the automatic exchange of account information applies without restrictions.

5. Background information on the OECD standard AEOI

The European Council resolved the broadening of the automatic exchange of information within the EU on 22.05.2013. The G20 already voiced support for the automatic exchange of information in April 2013. Numerous countries signalled their willingness to develop and introduce the exchange of tax-relevant information on the basis of the model agreement for the purpose of improving tax honesty and implementing of the “Foreign Account Tax Compliance Act” (FATCA).

A uniform standard for the participating countries is to be introduced by the global standard for the automatic exchange of information on financial accounts. The countries are now called upon, to implement the common reporting standard in their national laws. For taxpayers in Germany, this means that the focus of attention is no longer exclusively on countries like Switzerland or Luxembourg. The exposure of tax fraud in connection with foreign accounts is now a real risk in all EU member-countries, in particular also in Austria and Liechtenstein. Exposure of tax fraud is also impending for tax heavens such as Singapore, the British Virgin Islands and Bermuda.  

6. Legal basis for the implementation of the OECD standard AEOI

Bilateral treaties on the basis of section 26 of the OECD model agreement form the initial legal basis for the exchange of information. A bilateral treaty requires two member countries to enter into a treaty on the automatic exchange of information on financial accounts:

Countries wishing to implement the standard in their national laws also have the option to enter into multilateral agreements within the scope of the existing mutual administrative assistance in taxation matters, in the version amended in the year 2001. The treaty on mutual administrative assistance in tax matters already provides numerous types of cooperation for the authorities and an automatic exchange of information (see: “International administrative and legal assistance”). As an example, the UNESCO treaty on the prevention of double taxation of copyrights in literature dated 1979 is such a treaty.

The global OECD standard for the automatic exchange of information on financial accounts consists of a proposal for a common reporting standard and a template for bilateral agreements between individual countries wishing to participate in the automatic exchange of information.

The OECD standard contains a proposal for an agreement between the authorities of the respective countries on the automatic exchange of information on financial accounts. The purpose of the model agreement is to provide a uniform legal basis for the exchange of information, thus ensuring the uniform interpretation of the individual agreements in the best possible way.

Under the global standard for the automatic exchange of information in taxation matters, two steps are proposed for the exchange of information on financial accounts.

In a first step, the reporting financial institutions (e.g. banks, credit unions, investment fund companies) determine the reportable persons and information.

Reportable persons particularly include individuals, whose residence is in another reporting country, meaning a participating country. In addition to individual persons, legal entities who are registered in a participating country are also reportable. Account information of stock-exchange listed companies and their affiliated companies, authorities, regional administrations, international organisations, central banks or financial institutions registered in the other member-country are not included in mandatory reporting.

The following details are part of the reportable account information and must be recorded and reported by the reporting financial institution:

• Name, address, country of residence, tax identification number as well as date and place of birth for individual persons;
• Account number; 
• Name and, as far as existing, identification number of the financial institution;  
• Account balance and value at the end of the respective year or, if an account has been closed, at the point of account closure (the redemption value in the case of insurance policies ); 
• Gross interest payments, dividends, income from insurance policies, gross proceeds and payments resulting from the disposal of financial assets over the year.

In order to expose and prove tax fraud, reporting financial institutions must identify if the reportable accounts belong to individual persons. A further distinction has to be made between accounts of low or high value. Accounts with a low value are generally identified on the basis of the existing residential addresses. A further examination based on circumstantial evidence is only performed for accounts of a higher value. This is particularly significant for large-scale tax frauds. The following information may be considered circumstantial evidence: Residence of an account holder in another participating country, current postal and residential address in another participating country, one or more telephone numbers in another participating country and no telephone number in the reporting country, recurrent transfers to an account in another participating country, an authority to sign or power of attorney of a person with an address in another participating country or a poste restante arrangement or use of an c/o address by the account holder. If circumstantial evidence is observed during verification, the account must be considered a reportable account in the country in which the circumstantial evidence was observed. There is also the option to request proof of tax residency from the account holder.

In a second step, the financial institutions must automatically report all relevant information, such as income or profits from the disposal of investments as well as the account balances at the end of the respective reporting period. If the reported investment and the income derived from it are undisclosed to the German Tax Authority, criminal proceedings for tax fraud have to be expected. Depending on the amount of the undisclosed investment, a search of premises must also be expected.  

8. Practical note - LHP Attorneys at Law

The global standard for the international exchange of taxation information (AEOI) facilitates a quick and effective exchange of tax-relevant data. The standard is therefore a further step towards streamlined criminal prosecution of tax fraud. The number of tax heavens protecting against access by the tax administration will significantly decrease and the pressure by the tax inspection in relation to assets in foreign countries will be further increased in the future. All assets in EU member countries are affected. This also applies to all assets located in OECD member-countries and countries who are guided by the OECD standards (See 3. - which countries participate?) The EU member countries have expressed great interest in the implementation of the standards for an international exchange of tax data. The fact that, in addition to classic European financial hubs (Switzerland, Liechtenstein and Luxembourg), tax havens such as Singapore, the British Virgin Islands, the British Channel Islands and Caribbean islands such as the Cayman Islands wish to participate in the automatic exchange of data is worthwhile mentioning. In light of the increasing pressure on potential tax evaders, which will increase significantly if the OECD standards are swiftly implemented in national law, a voluntary self-disclosure for the purpose of correcting data previously disclosed inaccurately may be advisable. This is because only a timely voluntary self-disclosure will guarantee the affected taxpayer immunity from criminal prosecution. As attorneys and tax advisers specialising in criminal tax law, we can advise during an initial consultation on sensible steps to be taken in each individual case.

The global standard for the exchange of tax data (AEOI) enables a fast and efficient exchange of information of tax-relevant data. The standard is therefore a further step to streamlined criminal prosecution of tax fraud. The number of tax heavens protecting against access by the tax administration will significantly decrease and the pressure by the tax inspection in relation to assets in foreign countries will be further increased in the future.

All assets in EU member countries are affected. This also applies to all assets located in OECD member-countries and countries who are guided by the OECD standards (See 3. - which countries participate?) The EU member-countries have expressed great interest in the implementation of the standards for an international exchange of tax data. The fact that, in addition to classic European financial hubs (Switzerland, Liechtenstein and Luxembourg), tax havens such as Singapore, the British Virgin Islands, the British Channel Islands and Caribbean islands such as the Cayman Islands wish to participate in the automatic exchange of data is worthwhile mentioning.

In light of the increasing pressure on potential tax evaders, which will increase significantly if the OECD standards are swiftly implemented in national law, a voluntary self-disclosure for the purpose of correcting data previously disclosed inaccurately may be advisable. This is because only a timely voluntary self-disclosure will guarantee the affected taxpayer immunity from criminal prosecution. As attorneys and tax advisers specialising in criminal tax law, we can advise during an initial consultation on sensible steps to be taken in each individual case.