Following the FATCA compliance drive, the financial sector is now gearing up for the new international tax reporting standard – the Automatic Exchange of Information. The new regulation require financial institutions and companies in a contractual relationship with financial counterparties to report the tax residence of their clients in countries that have signed up to the regulation. Drafted by the OECD at the request of the G20 and adopted by around a hundred countries, including 58 early adopters, AEOI introduces common standards for the multilateral exchange of information regarding financial accounts. From
1 January 2016, onwards financial institutions will identify all their existing and new clients and require their tax residence for tax purposes.
AEOI aims to reduce tax leakage to ensure the source juridictions can identify taxpayers and collect the appropriate tax from holding financial assets outside their country of residence.
To make sure a consistent processing for the automatic exchange of information is introduced across the European Union, the European Commission proposed to include the draft common standard in a directive reforming the existing directive on administrative cooperation in the field of taxation (“DAC”).
This proposal gave rise to the DAC2 Directive of 9 December 2014. All Member States are required to enact it in their domestic legislation by 31 December 2015 at the latest. The first automatic exchange of information (CRS*, Common Reporting Standard) will take place in 2017 and will consist of data collected in 2016. To avoid capital flight to neighbouring countries, 35 other jurisdictions (including Switzerland, Andorra, San Marino, Liechtenstein, Bahamas) have undertaken to participate in reporting from 2018, joining Jersey, Guernsey, the Cayman Islands, the British Virgin Islands and the Isle of Man.
These regulations require financial intermediaries to be completely transparent in tax matters by applying the so-called "reasonable diligence" rules – they have to review their strategy and their organisation to make sure they are compliant.
WHO IS IMPACTED AND HOW?
CRS reporting will cover private investors and companies holding an account in a country outside their country of residence. All their banking data (account balances, interest, dividends, capital gains and any other financial income) will be gathered by financial institutions in the relevant countries and transmitted to their tax authorities once a year.