In recent times, exchange of information for tax purposes between governments has largely relied on the text of Article 26 of the OECD Model Tax Convention, which standardises the means by which information is exchanged between relevant national authorities. Crucially, Article 26 is based on information on request and contains safeguards designed to protect the confidentiality of taxpayers. However, the days of information on request look to be numbered after the OECD released its new global Standard for Automatic Exchange of Financial Account Information in Tax Matters last month, described by the Organisation itself as a “step change” in international transparency.
Since the G20 Summit in London in April 2009, Article 26 of the Model Tax Convention has been the basis of the internationally-agreed global standard on tax transparency. Following this Summit, all countries were encouraged to sign agreements based on the wording found in Article 26, either as part of new or renegotiated bilateral double tax agreements, or in stand-alone tax information exchange agreements. Those that failed to meet the standard – which at the time was a minimum of 12 tax agreements with the standard information exchange provisions – were either “grey listed” or “black listed” by the OECD, depending on whether they had committed to implementing the standard or not. As of November 2013, when the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes issued an update on its work to promote tax transparency globally, Lebanon was the only jurisdiction to have refused to commit to the standard.
In terms of Article 26, exchange of information on request refers to the situation where one tax authority is carrying out an audit or investigation and seeks information located in another country that is “foreseeably relevant” to that investigation.
Exchange of information on request occurs where one jurisdiction’s competent authority asks for particular information from the competent authority of another jurisdiction. Typically, the information requested relates to an examination, inquiry or investigation of a taxpayer’s tax liability for specified tax years. Importantly, the standard prohibits so-called “fishing expeditions”.
Before sending a request, the requesting jurisdiction should use all means available in its own territory to obtain the information except where those would give rise to disproportionate difficulties. The request should be made in writing, but in urgent cases an oral request may be accepted, where permitted under the applicable laws and procedures. Requests should be as detailed as possible and contain all the relevant facts, so that the competent authority that receives the request is well aware of the needs of the applicant contracting party and can deal with the request in an efficient manner. The OECD has developed templates and guidance on what could be included in a request.
The standards impose an obligation to exchange all types of information foreseeably relevant to the administration and enforcement of the requesting country’s domestic tax laws. This could include information on companies and trusts and their owners and beneficiaries. Moreover, a jurisdiction cannot decline to provide information in response to a request for exchange of information solely because it is held by a person acting in an agency or fiduciary capacity, such as a trustee.
The protection of taxpayers’ confidentiality is enshrined in Article 26, which states that any information received by the requesting country should be treated as secret in the same manner as information obtained under the domestic laws of the requesting state. Information obtained under Article 26 can only be disclosed to persons or authorities concerned with the assessment, enforcement or prosecution of taxes referred to in Article 1 of the Model Convention.
The Global Forum has published terms of reference that break down the internationally agreed standard on information exchange into 10 essential elements. Two of these elements relate to the confidentiality and protection of rights and safeguards of taxpayers and third parties.
According to the Global Forum, the international standard for information exchange upon request is a “balanced standard – one that includes a high level of protection of taxpayers’ rights, including the right to confidentiality.”
However, although the OECD claimed until relatively recently that it had no intention of advocating a switch to automatic exchange of information for tax purposes, this is precisely what it is now doing.
Following the commitment to establish automatic exchange as the new global standard made by G8 Leaders in June 2013, the G20 Leaders at their Summit in September 2013 fully endorsed the OECD proposal for a truly global model of automatic exchange and invited the OECD working with G20 countries to present such a new single standard for automatic exchange of information in time for the G20 February 2014 meeting. In February 2014, the G20 Finance Ministers and Central Bank Governors endorsed the global standard for automatic exchange of tax information.
On 9 April 2013, the Finance Ministers of France, Germany, Italy, Spain and the UK (the countries that developed the FATCA intergovernmental agreements with the United States) announced their intention to exchange FATCA-type information amongst themselves in addition to exchanging information with the United States. By April 2014, over 40 jurisdictions had joined this group and committed to the early adoption of the standard developed by OECD, including a specific and ambitious timetable for doing so.
The following are part of the Early Adopters Group: Argentina, Belgium, Bulgaria, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Malta, Mexico, Netherlands, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, South Africa, Spain, Sweden, the United Kingdom, and the Faroe Islands; the UK's Crown Dependencies of Guernsey, Isle of Man and Jersey; and the UK's Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands.
Further political support for the new global standard on automatic exchange was evidenced at the OECD Ministerial Council Meeting held in Paris 6-7 May 2014 with the adoption of the Declaration on Automatic Exchange of Information in Tax Matters. The adherents declared their determination to implement the new global standard swiftly and on a reciprocal basis, called on all financial centres to do so without delay, and highlighted the need to provide technical assistance to developing countries to help them benefit from the new standard.
The following adhered to the Declaration: all OECD countries (Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States), and Argentina, Brazil, the People’s Republic of China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore, South Africa, the European Union, and Andorra.
Including all G20 countries, over 65 jurisdictions have now publicly committed to implement the Standard. More are expected to follow in the run up to the late-October meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes, which brings together more than 120 countries and jurisdictions, to be held in Berlin and hosted by the German Ministry of Finance. At this occasion a signing ceremony is expected to be held for a new multilateral agreement that activates automatic exchange once legislation and other conditions are in place.
The OECD released its new global Standard for Automatic Exchange of Financial Account Information in Tax Matters on July 21, 2014. The new standard calls on governments to obtain detailed account information from their financial institutions and exchange that information annually with other jurisdictions. The standard has a wide ambit to prevent situations where it can be easily avoided.
The new consolidated version includes commentary and guidance for implementation by governments and financial institutions, detailed model agreements, as well as standards for harmonized technical and information technology solutions, notably a standard format and requirements for secure transmission of data.
Assistance will be available to support less developed countries to put the systems in place to facilitate automatic information exchange, and international organizations have pledged to support these countries.
The OECD is also updating a report from 2010 that sets out its policy guidance on voluntary disclosure of income by taxpayers. It has invited public comments until September 12, 2014, on how the framework for voluntary disclosure could be further improved and what particular features might encourage more taxpayers to come forward and take advantage of such programs.
The single global standard is based to a large degree on the United States FATCA intergovernmental agreements in that jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
Where the global standard differs from FATCA is that aspects specific to the United States have been removed. For instance, it is based on residence and unlike FATCA does not refer to citizenship. Terms, concepts and approaches have been standardised allowing countries to use the system without having to negotiate individual annexes.
Additionally, unlike FATCA, the Standard does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. It also has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in automatic exchange under the standard.
The Standard consists of two components: the common reporting standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions; and the Model competent authority agreement (CAA), which contains the detailed rules on the exchange of information.
To prevent taxpayers from circumventing the CRS it is specifically designed with a broad scope across three dimensions:
Before entering into a reciprocal agreement to exchange information automatically with another country, it is essential that the receiving country has the legal framework and administrative capacity and processes in place to ensure the confidentiality of the information received and that such information is only used for the purposes specified in the instrument. Where this is not the case, automatic exchange is not “appropriate”.
Different legal bases for automatic exchange of information already exist, and whilst bilateral treaties such as those based on Article 26 of the OECD Model Tax Convention permit such exchanges, the OECD says that it may be more efficient to establish automatic exchange relationships through a multilateral information exchange instrument.
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended in 2011, is such an instrument. It provides for all possible forms of administrative co-operation between States, contains strict rules on confidentiality and proper use, and permits automatic exchange of information.
Automatic exchange under the Multilateral Convention requires a separate agreement between the competent authorities of the parties, which can be entered into by two or more parties, thus allowing for a single agreement with several parties (with actual automatic exchange taking place on a bilateral basis). Such an agreement would activate and “operationalise” automatic exchange between the participating countries. It would specify the information to be exchanged and would also deal with practical issues such as the time and format of the exchange. The Model CAA serves that function and can be used within the context of the Multilateral Convention but also under bilateral treaties. As permitted by the Multilateral Convention, it has been also adapted to a Multilateral Model CAA.
Following the recent signatures by Gabon and Cameroon, there are now 66 signatories to the Convention, including all G20 countries, and 15 jurisdictions are covered by way of territorial extension. Additional countries have expressed interest in signing, including Azerbaijan, Kenya and Mauritius.
The OECD will formally present the new standard to G20 finance ministers at their next meeting in Cairns, Australia, on September 20-21, 2014. However, approval is likely to be a formality given how most of the world has united in the fight against tax evasion.
Bringing the new global standard into force will still require a lot of work, however. Participating countries will need to select the appropriate legal basis for the exchange of information; translate the reporting and due diligence requirements into domestic law; put in place the necessary administrative and information technology infrastructure to collect and exchange information under the standard; and ensure that safeguards are in place to protect data and confidentiality.
It is unclear when all of the pieces of the jigsaw will be in place, but the G20 at least expect to be exchanging information with each other automatically by the end of 2015.
One key question that the OECD and the G20 have failed to satisfactorily address is the potential use of automatically-exchanged information for nefarious uses by some of the world’s more undesirable regimes. In spite of this, the authorities driving forward automatic exchange of information seem intent on making it apply globally. So it is probably just a question of time before the new standard straddles most of the world.
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