Automatic Exchange of Tax Information (AEOI) - Legal Counsel Guides 16

Automatic Exchange of Information (AEOI) refers to the routine exchange of tax-related financial information between tax authorities of different jurisdictions. The primary goal is to reduce tax evasion by ensuring transparency for assets held abroad. AEOI is a global initiative led by organizations like the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU), aimed at ensuring that taxpayers report income and assets in all jurisdictions where they have tax obligations.

Legal Basis for AEOI:

• OECD Model Convention on Income and Capital (Article 26): Establishes the legal foundation for exchange of information between tax authorities.
• OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters: This treaty provides a legal framework for AEOI and is one of the most comprehensive instruments for tax cooperation, involving over 140 jurisdictions.
• European Union Directive 2011/16/EU (DAC): The EU has implemented AEOI through its Directive on Administrative Cooperation (DAC), which has seen several amendments (DAC2, DAC3, DAC6, etc.) to include wider financial information, including cross-border tax arrangements.

Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is an international standard for AEOI developed by the OECD in 2014. It obliges financial institutions to identify and report financial accounts held by residents of other participating countries.

Legal Obligations of CRS:

Financial Institutions: Under CRS, financial institutions (banks, brokers, insurers) are required by law to: Identify the tax residency of account holders. Report financial account details to their local tax authorities.Ensure proper due diligence procedures for identifying non-resident accounts.

Local Legislation: Countries participating in CRS must transpose the framework into their national laws. For example: United States (not part of CRS but uses FATCA): The U.S. implements a similar but separate regime, the Foreign Account Tax Compliance Act (FATCA), which also facilitates information sharing but focuses on U.S. taxpayers.

Legal Framework:

• OECD Multilateral Competent Authority Agreement (MCAA): Provides the legal framework through which participating countries agree to exchange information.
• Domestic Implementation: National laws establish obligations for financial institutions to comply with CRS requirements.

Country-by-Country Reporting (CbC Reporting)

Country-by-Country (CbC) Reporting is part of the OECD’s Base Erosion and Profit Shifting (BEPS) Action 13and requires large multinational enterprises (MNEs) to report financial and tax-related information on a country-by-country basis. The goal is to combat tax avoidance by providing tax authorities with data on the global distribution of profits, taxes paid, and economic activities of MNEs.

Legal Requirements of CbC Reporting:

Threshold: CbC Reporting applies to MNEs with consolidated annual revenues of €750 million or more.

Filing Obligation: The CbC report is filed with the tax authority in the jurisdiction where the ultimate parent company is tax resident.

Exchange of Information: Tax authorities automatically share the CbC report with jurisdictions where the MNE operates, under

• international treaties such as: OECD Multilateral Convention.
• Bilateral Tax Treaties incorporating Article 26 of the OECD Model Tax Convention.

Legal Instruments:

OECD BEPS Action Plan (Action 13): Provides the international legal foundation for CbC Reporting.

Domestic Legislation: Countries implement CbC Reporting through national tax laws. For example:

United States: Requires MNEs to file Form 8975 (CbC Report) as part of their tax return.

European Union (EU): Implements CbC Reporting through its Directive 2016/881 (DAC4).

Other International Standards

In addition to CRS and CbC Reporting, several other key standards contribute to the global framework for tax transparency and automatic information exchange:

1. Foreign Account Tax Compliance Act (FATCA):

What It Is: A U.S. law enacted in 2010 that requires foreign financial institutions (FFIs) to report to the U.S.

Internal Revenue Service (IRS) information about financial accounts held by U.S. taxpayers.

Global Impact: FATCA inspired the OECD to develop CRS, though FATCA applies solely to U.S. taxpayers.

Legal Framework: FFIs must sign agreements with the IRS or face a 30% withholding tax on U.S.-sourced payments.

2. Directive on Administrative Cooperation (DAC) in the European Union:

What It Is: DAC is the EU’s legislative framework for the automatic exchange of tax information. It covers a wide range of areas, including financial accounts, tax rulings, and cross-border arrangements.

Key DAC Amendments:

• DAC1 (2011/16/EU): Establishes the legal framework for tax cooperation in the EU.
• DAC2: Implements CRS in the EU.
• DAC6: Mandates reporting of cross-border tax arrangements (mandatory disclosure rules, MDR).

Legal Obligations: EU member states are legally required to exchange tax information under DAC, including data on financial accounts and tax rulings.

3. Joint OECD and G20 BEPS Project:

• BEPS Action 5: Addresses harmful tax practices, specifically focusing on exchange of information on tax rulings.
• BEPS Action 13 (CbC Reporting): Enhances transparency by requiring MNEs to report financial data by jurisdiction.
• Legal Framework: BEPS recommendations are legally implemented through domestic law and bilateral/multilateral agreements.

Legal Consequences of Non-Compliance

Penalties for Non-Compliance:

• Financial Institutions: Failure to comply with CRS or FATCA obligations may result in significant financial penalties, such as withholding taxes (e.g., 30% for FATCA) or fines imposed by local authorities.
• Multinational Corporations: Non-compliance with CbC Reporting requirements can result in penalties, audits, or other sanctions under national laws.
• Taxpayers: Individuals who fail to report offshore assets face penalties that vary by jurisdiction. For instance, in the U.S., FATCA violations can result in hefty fines and even criminal charges for willful non-disclosure.

Confidentiality of Data:

• Countries participating in CRS or CbC are bound by international treaties to maintain the confidentiality of exchanged data and use it only for tax purposes.
• The OECD’s Common Transmission System (CTS) provides a secure platform for the exchange of data under CRS and CbC Reporting.

Summary of Key Legal Instruments

• OECD Model Tax Convention (Article 26): Legal foundation for exchange of tax information.
• OECD Multilateral Competent Authority Agreement (MCAA): Legal framework for CRS and CbC Reporting.
• FATCA (U.S. Law): Legal requirement for non-U.S. financial institutions to report on U.S. taxpayers.
• EU Directives on Administrative Cooperation (DAC): Legal framework for the exchange of tax information within the EU.

Conclusion

The Automatic Exchange of Tax Information (AEOI), through mechanisms like CRS, CbC Reporting, and FATCA, represents a fundamental shift toward global tax transparency and cooperation. These frameworks are backed by comprehensive legal instruments such as OECD conventions, domestic laws, and multilateral agreements. They significantly reduce the scope for tax evasion and profit shifting, making it harder for individuals and corporations to hide income or assets across borders. However, they also impose legal obligations and significant compliance burdens on financial institutions, multinational corporations, and taxpayers.

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