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Automatic Exchange of Information

December 18, 2014 - by Nida U.

Automatic Exchange of Information

Facts

On 28, 29 October 2014, more than 300 delegates form 101 jurisdiction and 14 international organizations and regional groups came together in Berlin for the 7th "Global Forum", 1 during which on 29 October 2014 , 51 jurisdictions signed the first ever multilateral competent authority agreement (MCAA) to automatically exchange information, committing to implement the new standard on Automatic Exchange of Information (AEOI) 2 by 2017 or 2018.

How will it work

Signatory countries of the AEOI will automatically exchange information between each other on accounts held by individuals as well as certain entities.3 The process is set out to work as follows: banks and other financial institutions will collect information, forward it to their respective tax authorities, further, the collected information will be forwarded to tax authorities in respective countries.4 Nevertheless, I must emphasize that the process has not, to date, been tired in practice, so, how exactly it will work in practice is still a little mystery, further, the mechanism and structure of the reporting process needs to be fully understood and properly implemented, before it can start functioning properly.

Who will be the reporting bodies

Financial institutions that will be required to report under the CRS mainly will be banks, custodians, brokers, certain collective investment vehicles, trusts and certain insurance companies.5

Flaws

The AEOI Standard and the OECD Convention are two different documents and serve different purposes. The AEOI Standard, as explained further below, can rely on either a bilateral legal instrument such as a treaty or a multilateral legal instrument such as the OECD Convention as its legal basis. Therefore many jurisdictions may end up picking and choosing the jurisdictions they would exchange information, i.e., Switzerland, Bahamas.

Further there are several loopholes in this framework, which requires further clarifications, but for time being these loopholes creates certain escape routes.

Significant loopholes are:

  1. Thresholds:

    Existing entity accounts, established before December 2015, with a balance of USD 250 000, are not required to be reviewed, identified or reported.

  2. "Controlling persons" term:

    International best practice always refers to "beneficial owner", not "controlling persons". Not always there are controlling persons, i.e., when shareholding is atomised or is a minority stake.6

  3. Lack of provisions for Foundations and anstalts

    These type pf vehicles are not covered by specific reporting obligations.7

  4. Trusts managed by individual Trustee is not considered Financial Institutions

    Trustee for such Trust is not required to report on Settlors and beneficiaries.8

About the new standard AEOI

The new AEOI standard is developed in order to achieve automatic exchange of information between the signatory countries, it does not replace already existing exchange practices, it will supplement them.9

There are two main components for the new OECD system for AEOI:

Competent Authority Agreement (Model CAA):

Model CAA agreement will have to be signed by jurisdictions willing to implement the new global AEOI standard among each other. It contains detailed rules on the exchange of information.

The Model CAA links the CRS and the legal basis for the exchange (such as the Convention or a bilateral tax treaty) allowing the financial account information to be exchanged.

The legal basis for AEOI will be either the Multilateral Convention on Mutual Administrative Assistance in tax matters10 or a bilateral treaty (i.e., double tax conventions, tax information exchange agreements, the Joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters) or domestic law implementing EU directives, which provides for automatic exchange of information.

Common Reporting Standard (CRS):
Guidelines providing rules for:

  1. Reporting:
    1. Explains specific financial account information to be exchanged: name, address, Taxpayer Identification Number, date of birth, account balance, interest, dividends.
    2. Description of financial institutions required to report under the CRS (banks, custodians, brokers, collective investment vehicles, insurance companies).
    3. Description of reportable accounts - individual and corporate, (including Trusts and Foundations, passive entities).
  2. Due Diligence

    This part explains what must be conducted in order to identify the residency of the reportable persons.

What next?

It is clear that many loopholes have been identified and risk that many lawyers and other professionals will identify even further loopholes exists. This is something that will probably be used and can at the moment be used, unless it is further clarified and amended. Like I said the reporting process needs to be fully understood and properly implemented, before it can start functioning properly.

Our team is carefully working on developing certain solutions, as we speak.
For more information feel free to contact us.

To see the list of committed countries please go here

Thank you for reading my post! And you are welcome to leave comments, feedback, suggestions for other posts or contact me for more information.


  1. 7th Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes, Berlin, Germany,28-29 October 2014
  2. OECD, "Standard for Automatic Exchange of Financial Account Information in Tax Matters ", Full Text
  3. From 2017, Member State tax authorities, signatories of the multilateral framework agreement, will automatically exchange information with each other on most categories of income and capital held by private individuals and certain entities. MCAA is multilateral agreement and was signed by more than 50 states, important to note that the actual AEOI will be bilateral and will come into effect between the participating countries that notify their readiness.
  4. OECD, "Automatic Exchange of Information: WHAT IT IS, HOW IT WORKS, BENEFITS, WHAT REMAINS TO BE DONE ", Full text
  5. The term “Financial Institution” means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company. Full Text
  6. Currently threshold for company ownership according to financial action task force (FATF) is more than 25%.
  7. With a discretionary foundation assets can be given away, but have no immediately identifiable beneficiaries, until distribution of the assets is made, but this again can be any time, in few years or few decades.
  8. According to the CRS, Trusts can in some instances be considered financial institutions as well, and if so they would need to report about settlors and potential beneficiaries. Extent of reporting requirement for trusts managed by individual trustees is unclear.
  9. The AEOI standard does not replace already existing Exchange of Information upon request (EOIR) standard, it complements it, addressing its limitations, it supplements other bilateral or regional already existing treaties of Automatic Information Exchange (AIE), i.e., U.S. Foreign Account Tax Compliance Act FATCA, EU Savings Tax Directive (EUSTD).
  10. Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters

Commentaries

  • Ravi April 8, 2016 at 11:45 AM
    Hi, I read your article about the new AEOI. You said \"Our team is carefully working on developing certain solutions, as we speak. For more information feel free to contact us.\" As an investor am interested in knowing what are the solutions to avoid the new AEOI.Is there any foolproof setup you have identified/worked on? Please let me know so that i may order from you. Pls reply to: sunsong@protonmail.com Looking forward.
  • Nida U. April 19, 2016 at 12:27 PM
    Hi, you can e-mail to: info@offshoreworldwide.com
  • business expansion November 22, 2016 at 02:17 AM
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