Welcome to the New World of Tax Information Exchange Agreements

July 14, 2014

Article by Dave Wolf, Adv. and Mirit Reif, Adv.

I. INTRODUCTION

As the world becomes increasingly globalized it is becoming easier for all taxpayers to make, hold, and manage investments through financial institutions outside of their country of residence. Offshore tax evasion is a serious problem for countries all over the world and they therefore have a shared interest in cooperating with each other against tax evasion whilst protecting the integrity of their tax systems. One way to fight against tax evasion is through exchange of information between countries.

II. FATCA

The catalyst for the recent developments was the Foreign Account Tax Compliance Act (FATCA), which was enacted in the United States 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act and was an important development in U.S. efforts to combat tax evasion by Americans holding investments in accounts outside the United States.

Under FATCA, non US foreign financial institutions (banks, hedge funds, pension funds, insurance companies etc.) are required to report to the U.S. tax Authorities (the IRS) information regarding accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Failure to do so will impose a withholding tax of 30% on most U.S. sourced income payments to the foreign financial institution.

Since FATCA is imposed on foreign financial institutions, the institutions themselves are required to report the fact that their U.S. clients have a bank account thus handing over to the IRS the knowledge of the individual's compliance or non-compliance with his U.S. tax obligations. The first deadline for foreign financial institutions to file FATCA information reports with the IRS is March 31, 2015 and will cover tax year 2014. Over 30 countries have signed agreements implementing FATCA, and an additional approximately 50 countries have reached agreements in substance with the U.S. government.

In response to FATCA many banks have chosen to change their relationship with U.S. clients, for example, banks refuse to do business with Americans. In the Netherlands, private wealth management firms are asking that American account holders leave. In Switzerland, major banks are closing their U.S. departments. In general, Americans have become personae non gratae in the world of banking and company management.

III. EXCHANGE OF INFORMATION AGREEMENTS

Since FATCA there have been various initiatives by a growing number of countries and organizations of their intention to strengthen and further develop tax information exchange agreements in order to improve international tax compliance. A few examples:

  1. Son-of-FATCA, the UK’s version of FATCA, whereby the UK tax authority, otherwise known as the HMCR, has decided to attack offshore tax issues. The Crown Dependencies (Isle of Man, Guernsey and Jersey) and the British Overseas Territories (the Cayman Islands, the British Virgin Islands, Bermuda, Anguilla, Turks and Caicos Islands, Montserrat and Gibraltar) have all agreed to enter into automatic tax information exchange agreements with the UK for all UK citizens or UK corporations that have accounts in these jurisdictions.

2. The Nordic countries: Denmark, Faroe Islands, Finland, Iceland, Sweden and Norway have already an agreement on automatic exchange on income and ownership of real estate.

3. Tax authorities of the United States, UK and Australia have announced a plan to share information involving companies and trusts holding offshore assets of taxpayers under their respective jurisdictions.

In addition, there have been efforts to introduce multilateral agreements for exchange of tax related information, for example the European Union’s (EU) Saving's Directive which aims to counter cross-border tax evasion by collecting and exchanging information about foreign resident individuals receiving savings income outside their resident state, within the EU.

The OECD Convention on Mutual Administrative Assistance in Tax Matters as amended in 2011, provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. Currently over 60 countries have signed the Convention.

IV. THE COMMON REPORTING STANDARD

The OECD working with G20 countries and in close cooperation with the EU is trying to shift all jurisdictions to an international standard for automatic exchange of financial account information, otherwise known as the Common Reporting Standard (CRS). Its aim is to avoid a proliferation of different standards which would increase costs for both government and financial institutions.

Automatic exchange of information involves the transmission of taxpayer information by the source country to the resident country concerning various categories of income. This can provide timely information concerning tax evasion, even where tax administrators have had no previous indications of non-compliance. The information which is exchanged automatically is normally collected in the source country on a routine basis, generally through reporting of the payments by the payer (financial institution, employer, etc).

Automatic exchange can also be used to transmit other types of useful information such as changes of residence, the purchase or disposition of immovable property, value added tax refunds, etc.

Information may be transmitted electronically or by CD ROMs. If the CD ROMs are sent by mail, it must be done via an international registration system where a mail tracking function is in place.

44 jurisdictions recently issued a joint statement on implementing a global standard for the automatic exchange of information between tax authorities. Among the 44 early adopters belong even typical offshore jurisdictions such as: Liechtenstein, Malta, Isle of Man, Guernsey, Jersey, Anguilla, Bermuda, the BVI, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands.

The information on new accounts and pre-existing individual high-value accounts will be exchanged by the end of September 2017. All other account information will be exchanged by the end of September 2018.

V. CONCLUSION

The world of tax havens and stashing money away in secretive bank accounts is rapidly diminishing. Jurisdictions all over the world are implementing ways to grasp unpaid tax by making it difficult to hide it. It is advisable for taxpayers to voluntarily pay the tax due otherwise they might have to “pay up” in court dealing with criminal and civil implications.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article is dedicated to those injured in Operation Protective Edge and to the memory of:

Naftali Frankel  hyd
Gilad Shaar  hyd
Eyal Yifrach hyd