How will you be impacted by the implementation of the Automatic Exchange Of Information (AEOI)?

The Automatic Exchange of Information between financial institutions and tax offices will be implemented as of next year. How does it work? Who is concerned?

• What is the Automatic Exchange of Information (AEOI)?

It means that countries having signed the AEOI agreement can request Financial Institutions (FI) of a participating jurisdiction to send to their tax offices information about the holder of non-resident’s bank accounts including their name, address, passport number, birth date, tax identification number, account number, the account balance as well as the amount of earnings generated within the relevant period.

Then tax offices will send these data to the counterpart country of residence. It means that they will be able to compare the amounts declared by tax payers to the information provided by the tax offices that have compiled information from overseas banks in accordance with the Common Reporting Standard (CRS).

• Which countries are concerned by the AEOI?

The AEOI agreement has been signed by 101 countries around the world. Unsurprisingly, every country in the European Union has signed up, but in the list you will also find other countries such as Switzerland, Seychelles, Panama, British Virgin Islands or Cayman Islands. You will find the entire list herewith (AEOI – Juridictions committed).

You will note that countries have already started to collect data but exchanges will only take place as of 2017 and 2018 as shown in the attached list. Regarding Orbis countries, AEOI will be implemented in Hong Kong, China and Singapore from 2018 while Thailand and Philippines have not signed up yet.

The USA are not part of the AEOI agreement but they have their own version, called FATCA (Foreign Account Tax Compliance Act), for which the reporting format and threshold are different but the goal is the same: to prevent tax evasion.

However, even if all signatories proceed to exchange information according to the Common Reporting Standard, the accounts reported will vary from one country to another depending on each jurisdiction’s negotiation with other signatories.

Also, the US has negotiated in the FATCA to have every account of US citizens as well as US residents reported.

• Who will be impacted by the AEOI?

This agreement is targeting individual tax evasion, however legal entities (including trusts and foundations) are also included.

Also, it is stated in the agreement that reportable accounts are defined with the following criteria:

1. Accounts held by reportable persons (non-residents)
2. Any accounts held by a non-documented individual. If the only available address of an individual is a “hold mail” or a “in-care-of”, the bank must request a self-certification from the customer in order to validate his correct address. In case Financial Institutions do not obtain such certification, they need to report the account as undocumented.
3. A passive NFE (Non-Financial Entity) with one or more controlling persons (a person who ultimately controls or owns the entity) who are reportable persons

Point 1. is quite explicit while point 2. simply requires persons with unclear situations to be reported pending the update of their country of residence. Meanwhile point 3. is a bit trickier as we will explore below.

A non-financial entity means any entity except financial institutions. A passive NFE is a NFE which does not match any of the following criteria:

• Less than 50% of its gross income derives from passive income: interests, royalties, dividends, rents or annuities
• Being a NFE holding with non-financial subsidiaries
• Being a NFE listed on a security market
• Being a startup NFE, without any operating activities but only developing its non-financial assets
• Being a nonprofit NFE

You should note that the assessment of an active or passive NFE is made by the reporter: banks, investment entities and certain insurance companies. This categorization is important because otherwise the account will be reported to the controlling persons’ (shareholder, beneficiary) country of residence. This is the subjective part of the process. Indeed, some banks under a probation period in regards to other affairs may be overzealous in their approach to avoid further penalty or punishment. This is what we can fear but it is too early to confirm.

Synthesis

To summarize the situation, some agreements are already existing between countries but the standard annual reporting will start from 2017 and will spread out in 2018. It means that many tax offices currently have access to information regarding non-resident but this is based on an on-request process.

According to our understanding of the agreement, accounts will be reported in the following cases:

• Non-resident individuals
• Non-documented individuals
• Passive NFE with non-resident controlling individual(s)

Accounts of companies owned by individuals, non-financial entities and holdings with non-financial subsidiary are not supposed to be reported under the agreement. However, unfortunately, the procedures are designed in a way that subjective judgements from the financial institutions are needed and somehow anyone can be reported.

Indeed, the concept of passive NFE need to be clarified. So far, they remain subjective criteria at the financial institutions discretion, thus the actual impact of this agreement will be assessable in a few months after its implementation in 2017.

The main target of such agreement is to avoid individual tax evasion, but this is probably the first act of an era of worldwide tax cooperation.

Countries involved in the agreement are many and include many so-called tax havens that have been put under pressure by the international community.

At Orbis, we think that the agreement will strengthen in the coming years and will, step-by-step, involve emerging countries which have not signed up yet because of low financial system structures.