In September 2017, a significant event for financial institutions around the world took place – the first automatic exchange of information for tax purposes in accordance with the CRS (Common Reporting Standard). The source of information exchange were banks, as well as other financial institutions (pension funds, investment and insurance companies, etc.). The second large group of countries is also joining the process of automatic information exchange in 2018.
CRS provides for an annual automatic exchange of tax information between Member States of the Multilateral Cooperation Convention between the competent authorities on automatic information exchange under the CRS (MCAA Convention).
The exchange of information on accounts of legal entities and natural persons will be made automatically, annually and on the principle of residency (in contrast to the FATCA law, which uses the principle of citizenship).
The essence of the exchange is that banks collect information on financial activities on corporate accounts of the companies, individual accounts of natural persons, private funds and trusts, and then transfer it to the tax authorities of their country, which send this information to the country of tax residence of the owner of such an account.
In order to apply the above mechanism, a natural person or company must be a tax resident (the country of citizenship/registration may be different) of the country-participant of the MCAA Convention.
Information for automatic exchange contains:
- personal identifiers:
- for legal entities:
- name, address in the country of residence, taxpayer identification number – with respect to each legal entity – the account holder;
- name and surname, address in the country of residence, taxpayer identification number, date of birth – with respect to natural persons identified under Due Diligence procedures as “Controlling Persons” of this legal entity;
- for natural persons:
- name and surname, address in the country of residence, taxpayer identification number, date of birth – in respect of each account holder;
- for legal entities:
- account number (or a similar in function identifier);
- name, as well as the identification number of the reporting financial institution (bank);
- the balance of funds in the account at the end of the corresponding calendar year (and if the account was closed this year – at the time of closing the account);
- for Custodial Accounts:
- total amount of interest, dividends or other income received in respect of assets placed on such an account for a calendar year or other reporting period;
- total revenue received on the account from the sale or repurchase of assets in respect of which the reporting financial institution acted as a depository, broker, nominee holder or agent of the account holder;
- Depository Account – the total amount of interest received on an account for a calendar year or other reporting period;
- for any other accounts not mentioned above – the total amount received by the account holder for a calendar year or other reporting period.
In the above described exchange, the information on the movement of funds in the accounts is not exchanged and is not disclosed. Thus, we can not talk about the complete abolition of bank secrecy.
The general scheme for automatic exchange of tax information looks as follows:
Automatic exchange of banking information must be completed by the end of September each year. The first exchange between Member States for 2016 took place in September 2017.
Since the tax authorities, as a result of the exchange, receive information about the financial assets of residents abroad, quite logical questions may arise: what will happen to the payable taxes? will the amount of taxes increase after such an exchange?
If a person practiced tax evasion – yes, of course.
The main purpose of the organization of work is to confirm the fact of paying tax liabilities by tax residents in full. If the person reports on the availability of foreign assets, pays the relevant taxes – there is no reason for the claims.
But, if a person had a secret account in an overseas offshore, which interacts now on automatic exchange of information with the country of tax residence of a person – he will not avoid taxes and penalties. Some countries have also envisaged both criminal prosecution and imprisonment in their legislation for tax evasion on a large scale.
It should be noted that according to the CRS, the accounts of natural person will appear in the zone of maximum risk (the balance sheet threshold does not matter) and the accounts of those companies that have the status of passive non-financial organizations (more than 50% of the income of such a company is income from interest, dividends, royalties). This is due to the fact that namely on the accounts of passive companies, the information will be sent:
- in the country-participant, in which the company is a resident,
and at the same time
- in the country-participant, the resident of which is the beneficiary(s) of such a passive company.
Regarding active companies, the information will not be sent to the country in which the beneficiary of such company is its resident. In addition, banks will not send the information about companies that have a “pre-existing account” (previously opened accounts, opened as of December 31, 2015) to tax agencies for further automatic exchange provided that every year the balance of funds on such an account will not exceed $250,000 (or the equivalent of this amount).
How can the beneficiaries of the companies minimize their risks from automatic information exchange in this case? In this context, this decision may be useful when the beneficial owner changes the country of his residence to a country which is more “efficient” in terms of personal tax burden. It may be Malta, Israel, Great Britain, Monaco, Cyprus, the United Arab Emirates, Andorra, Portugal.
In September 2017, a serious statement was made by the Minister of Finance of Ukraine that Ukraine plans to join the automatic exchange under the CRS in 2020. Accordingly, according to the results of the reporting year 2019 – to send and receive the first data set.
But in order to make it possible, Ukraine must:
- sign the MCAA Convention;
- ratify it;
- implement a number of changes in the national legislation.
Legislation of the country-full participant of the CRS should contain:
- the procedure for providing the information on account holders to tax agencies by the financial institutions;
- the procedure for ensuring an appropriate level of protection of such information.
Thus, the exchange of information with Ukraine within the framework of the CRS will be impossible without the necessary IT infrastructure and ensuring the proper level of confidentiality of information that is transmitted.
Therefore, the issue when Ukraine will start the automatic exchange of tax information is open. At the same time, we should not forget that law enforcement and taxation agencies of Ukraine are authorized now on an individual request to send appeals to the authorities of other countries for information on specific individuals.