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Automatic Exchange Of Information
Tax Purposes The automatic exchange of information is regarded as the best system for ensuring that national tax authorities can assess and collect the taxes they are due on income and capital that their residents have abroad.
Under this system, Member States collect data on income earned in their territory by non-resident individuals. They then automatically transmit this data to the authorities where the individual resides, so that it can be taxed in line with the Member State of residence's rules.
These exchanges take place through a secure IT network (the CCN system) which ensures that EU data protection rules are fully respected. The information is exchanged using standard computerised formats that the Commission has developed in close cooperation with the Member States.
Provisions In Place
The automatic exchange of information is provided for under 2 key pieces of EU legislation.
The EU Savings Tax Directive
Automatic Exchange Of Information On Savings Income
The automatic exchange of information was first introduced in the EU in 2005, through the Savings Tax Directive. Under this Directive, Member States spontaneously exchange information with each other on the interest that non-residents receive from savings in their territory.
Austria and Luxembourg have been allowed, for a transitional period, to apply a withholding tax instead of engaging in the automatic exchange of information on savings. Currently, the rate of this withholding tax is 35%. However, Luxembourg recently announced that it would be moving to the automatic exchange of information from 2015.
In 2008, the Commission proposed a revised Savings Tax Directive. The aim of this proposal is to close loopholes in the legislation that are being exploited by tax evaders (IP/08/1697). For example, the scope of the Savings Directive would be extended to cover investment funds, pensions and innovative financial instruments, and payments made through trusts and foundations would also be captured.
At the European Council in May 2013, EU leaders committed to the adoption of the revised Savings Tax Directive before the end of the year.
Administrative Cooperation Directive Automatic Exchange Of Information On Other Income Types
In January 2013, a new Administrative Cooperation Directive entered into force. This legislation foresees, amongst other things, the automatic exchange of available information on five categories of income from 1 January 2015. These are: income from employment, director's fees, life insurance products, pensions, and immovable property.
It is also foreseen that this Directive would be reviewed in 2017, with a view to extending it to cover more categories of income and capital. Today's proposal accelerates this process, by proposing that the scope of the Administrative Cooperation Directive be extended to ensure that dividends, capital gains, other financial income and account balances are also covered by automatic information exchange from 1 January 2015.
Today's proposal expands the scope of automatic exchange of information under the Administrative Cooperation Directive, so that it covers dividends, capital gains, any other financial income and account balances.
While the 5 categories of income1 already covered by the Administrative Cooperation Directive will only be subject to the automatic exchange if the information is "available", this exception will not apply to the new items listed in today's proposal. Automatic exchange will be mandatory for these new categories. This is because Member States will already be making that information available to the USA under their agreements with the US on the Foreign Accounts Tax Compliance Act (FATCA).
The Commission proposes that the condition of “availability” for the five existing categories of income and capital is re-assessed during a review of the Directive in 2017.
Automatic Exchange Of Information Extension
As part of the intense new drive amongst Member States to clamp down harder on tax evasion, the May 2013 European Council called for priority to be given to extending automatic exchange of information at both EU and global level. However, uncoordinated action on this matter could lead to damaging fragmentation of the Single Market, and would not be as effective as an EU-27 approach.
Therefore, in order to ensure a coherent EU approach, and responding to Member States' new appetite for more ambition in this field, the Commission feels it is timely to enlarge the scope of automatic exchange of information at an accelerated pace.
In addition, Member States either have, or are negotiating, a FATCA agreement with the USA. The scope of automatic information exchange under FATCA is broader than is currently provided for under EU law. Therefore, these FATCA agreements could trigger a series of "most favoured nation" claims between the Member States (see question on FATCA below for full information on this point). Today's proposal will ensure that the scope of automatic exchange of information between Member States is just as wide as the scope of FATCA, thereby avoiding the need for the most favoured nation clause to be invoked.
Finally, extending automatic information exchange, under EU law, to cover the full range of income and capital also ensures a fair and neutral approach to all different assets i.e. they will all be subject to the same rules.
An EU Frame Work
An EU framework of automatic exchange of information is needed both from an internal market perspective and for reasons of efficiency and effectiveness:
It will ensure a coherent, consistent and comprehensive approach to automatic exchange of information within the Single Market. As such, it will avoid loopholes and overlaps that could be created by a patchwork of national or bilateral approaches.
It will provide legal certainty for tax administrations and economic operators.
It will ensure equal treatment of all different types of assets under EU law, thereby avoiding undesirable reallocation of portfolios.It will save costs and burdens for tax administrations and economic operators, as it is designed to make use of the IT systems already in place to facilitate information exchange under the Savings Directive and Administrative Cooperation Directive.
Commission’s Proposal Vs. USA’S FATCA
EU Member States, like other countries across the world, are negotiating bilateral agreements with the US related to its Foreign Account Tax Compliance Act (FATCA). The agreements provide a framework for automatic information exchange between US and foreign tax administrations on the income of US citizens abroad. Under the model agreement negotiated by certain EU Member States and the Commission with the USA (so-called Model 1), there should be reciprocity in this information exchange.
FATCA had a particular significance for the EU in terms of the level of information that Member States should automatically exchange with each other.
The above mentioned Administrative Cooperation Directive contains a "most favoured nation" clause (Art. 19). Under this clause, Member States are bound to provide any EU partner that requests it with the same level of information as they provide third countries, if this is more than provided for under EU law.
With today's proposal, EU legislation (Savings Directive + Administrative Cooperation Directive) will provide for the same scope of automatic exchange of information between Member States as is required under the US FATCA. As such, there would be no need for the most favoured nation clause to be triggered, and the EU will remain a global leader in the area of automatic information exchange.
The Pilot Project
On 9 April 2013 five EU Member States (DE, FR, ES, IT, UK) announced their intention to cooperate on a "pilot multilateral exchange facility". Through this, they would exchange the same type of information amongst themselves as they will exchange with the USA under FATCA. The logic of this initiative was to avoid the need to trigger the Most-Favoured Nation (MFN) clause in the Administrative Cooperation Directive (see FATCA question above). Since then, 12 other Member States (BE, CZ, DK, FI, IE, NL, PL, PT, RO, SE, SI, SK) have indicated their wish to join the pilot initiative.
Today's proposal offers Member States a means of carrying out this extended automatic exchange of information within a Community framework, with a legal structure that would apply throughout the EU. There are clear benefits to an EU approach rather than a bilateral/multilateral one in this area. It will avoid a patchwork of different bilateral agreements, which could leave loopholes and create additional costs for both administrators and businesses. It will also ensure that all 27 Member States benefit from this expanded information exchange on an equal basis, and create greater legal certainty for operators. Finally, it will mean that a single, strong automatic information exchange system is applied within the EU, putting the Union in a stronger position to push for similar standards internationally.
The Role Of EU
The EU has been the long-time pioneer of automatic exchange of information internationally. Since the Savings Tax Directive entered into force in 2005, it has been the only region in the world to apply this higher standard of information exchange for tax purposes. It has used this position as global fore-runner to also push for higher standards of tax good governance internationally.
When developing the FATCA, the USA took automatic exchange of information as its basis. As a result, every country or financial institution2 in the world will have to automatically transmit specific information to the US authorities on their US account holders.
With the world's two largest economic blocks now pushing the automatic exchange of information, there has been a new shift in this direction in the global arena.
In February 2013, G20 Finance Ministers committed to working towards making the automatic exchange of information the global standard. This idea will be taken forward at the the upcoming G8 Summit (June 2013) and G20 Summit (September 2013). The Commission will work with Member States to ensure that there is a strong, unified EU position, pushing to secure higher international standards of tax good governance worldwide. This reflects the call of the May 2013 European Council to give priority to extending the automatic exchange of information at international level, as well as at EU level.
In addition to these global developments, the Commission has also recently received a mandate to negotiate stronger savings tax agreements with Switzerland, San Marino, Andorra, Monaco and Lichtenstein. (see speech/13/…). The aim of these negotiations will be to ensure these countries engage in equivalent levels of transparency and information exchange with the EU, as is carried out within the EU itself. The Commission will take into account international trends and developments in the negotiations, including the international shift towards greater automatic exchange of information.
Jurisdictions Undertaking First Exchanges By 2017
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria,* Cayman Islands, Chile, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands,* Finland, France, Germany, Gibraltar, Greece, Greenland,* Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom, Uruguay
Jurisdictions Undertaking First Exchanges By 2018
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, China, Costa Rica, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Marshall Islands, Macao (China), Malaysia, Monaco, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates
Jurisdictions That Have Not Indicated A Timeline Or That Have Not Yet Committed
Bahrain, Cook Islands, Nauru, Panama, Vanuatu
Breaking Down The Exchange Of Tax Information In Europe
Almost every week a new piece of information is published on the development in the ways tax authorities can exchange information between each other. It is not a surprise that taxpayers are unable to follow these developments.
The most common questions raised by tax payers on this topic in general are:
What information can be provided by non-UK tax authorities to UK?;
Can exchange of information apply even to events that happened before a treaty was signed?;
What is the difference between exchange upon request and automatic exchange information?;
Do information exchange provisions also apply to companies held beneficially by individuals?
Automatic Information Exchange
Exchange Upon Request
Before we move into the depth of the topic we need to understand the key difference between automatic and “upon request” information exchange.
Normally, tax authorities exchange information with other countries’authorities upon the request of the other country. This means that tax information is only passed along upon the request for specific information regarding a specially identified taxpayer. The“upon request” information exchange does not authorize tax authorities for non-specific data fishing. Therefore only those personsmay be worried about this type of information exchange against whom a tax investigation has already been started by their local tax authorities.
As the other main alternative, automatic information exchange becomes more and more frequent between tax authorities. In the framework of automatic information exchange the tax authority of one of the countries collects financial information that may be relevant for the other country’s tax authority and passes over such information without specific request. Obviously, this method of exchange of information can be the most frightening for taxpayers who want to hide their income and assets from their own tax authorities. While automatic exchange of information is not yet widespread, there is a strong pressure towards this way of cooperation from the Office for Economic Coordination (OECD) and the EU.
EU guidelines call for the international exchange of citizens’ bank account data to catch tax evaders.
Treaty-Based Information Exchange
Double Tax Treaties
Hungary, as an example, entered into about 75 double tax treaties and all contain a provision for the exchange of information. Normally, the treaties allow an “upon request” exchange of information.Although the treaties provide the legal basis for automatic exchange of information as well, in practice only a few countries adopt this method. On the basis of a survey the OECD conducted in 2012, currently 14 counties provide automatic tax information to the Hungarian tax authorities. The identity of these countries is, however,not available publicly.
It should be kept in mind that the scope of information exchanged between the tax authorities is not restricted to certain transactions or to bank account details. Any information that may be relevant for tax perspective can be exchanged with the country’s tax authority also being able to request the identity of beneficial owners of companies’ incorporated in the other country.
Information Exchange Provisions
Information exchange provisions can have retroactive effect.
This means that even if, at the present, no double treaty exist between Hungary and the other country involved,Hungarian taxpayers cannot feel fully safe with hiding tax information in the other country: if, at a later time,Hungary enters into a treaty with the respective country then even today’s tax information can be collected by the Hungarian tax authority.
These agreements contain similar provisions on exchange of information as double tax treaties do. A key difference is, however, that, as opposed to the double tax treaties,no retroactive information can be collected on the basis of these agreements.
To date, Hungary has entered into such an agreement with Guernsey only, but the Hungarian Government is authorized to negotiate TIEAs with almost all tax haven centers, like Lichtenstein, Andorra,Jersey, British Virgin Islands or Bermuda.
The OECD Multilateral Treaty
As a recent development, on Nov.12, 2013, Hungary joined the OECD Multilateral Agreement on Mutual Administrative Assistance In Tax Matters. The treaty has 61 member states, with Belize being the only member coming out of traditional tax haven countries. It is also noteworthy that about a month ago Switzerland also joined this treaty.
The objective of the treaty is to provide a platform for cooperation between tax authorities. Apart from allowing an “upon request” exchange information the agreement itself does not oblige tax authorities fora deeper cooperation but, based on the treaty, various exchange of information mechanisms can develop between the member countries.
The Swiss Rubik Agreements
The concept of Rubik Agreements became well known recently when Hungary indicated its willingness to enter into such agreements with Switzerland. Up to now only the United Kingdom and Austria entered into such agreement with Switzerland,but Switzerland has expressed its willingness to enter into a Rubik agreement with any other countries.
Rubik Agreements offer three alternatives for nationals of other countries having bank accounts in Switzerland.
First, such persons can move their savings to another country without any sanction.
Switzerland will, however, provide information to the home country of these persons on the 10 most preferred locations where such persons moved their funds to, so that the home tax authorities can follow where to locate these funds.
As a second alternative,the bank account holder can opt for the deduction of a one-off, 30-35 percent tax from the savings placed in the Swiss bank account. The majority of this tax would be transferred from Switzerland to the home country of the bank account holders.
Finally, if the account holder does not choose any of the options above, then the Swiss tax authorities will automatically exchange information regarding the identity and the bank account details of the holder with the home tax authority of that person.
Article supplied by TBA & Associates