Growing Global Treaties for Automatic Exchange of Information (AEoI) to crack down Tax Evasion

Growing Global Treaties for Automatic Exchange of Information (AEoI) to crack down Tax Evasion

In 2010, the first United States federal legislation called Foreign Account Tax Compliance Act (FATCA), was enacted to track the non-US bank accounts and investments (that belong to US persons or companies) outside the United States of America in order to ensure that they settle their tax liabilities.

To enforce such Act, the US government had to enter into intergovernmental agreements with world countries’ governments to put FATCA into force.

Pursuant to the Inter-Governmental Agreement (IGA) dated April 29, 2015 between the Government of the State of Kuwait and the Government of the United States of America, to improve international tax compliance and implement the Foreign Account Tax Compliance Act (FATCA), Kuwait Ministry of Finance issued the Ministerial Resolution No. 48 of 2015 dated September 3, 2015 regarding the preliminary guidelines for the implementation of FATCA requirements in the State of Kuwait.

Under such resolution, all financial institutions operating in the State of Kuwait are required to pay due attention in reviewing and identifying the financial accounts belonging to US persons. They should then communicate such information relating to such accounts to the State of Kuwait Ministry of Finance, who, in turn, shall transmit such information to the USA Internal Revenue Service (IRS).

Organization for Economic Co-operation and Development (OECD) adopts the Standard for Automatic Exchange of Information in Tax Matters
On the other hand, the Standard for Automatic Exchange of Financial Account Information, developed by the OECD under mandate from G20, was released in 2014. It represents the international consensus on automatic exchange of financial account information for tax purposes and enables the countries committed to implement the Standard to identify their citizens and companies operating overseas and thus, enable them to collect the due taxes. On May 9, 2016, OECD announced that 101 jurisdictions are now committed to the Standard for Automatic Exchange of Financial Account Information to fight tax evasion. OECD, headquartered in Paris, expects that exchange of such information would commence in September 2010.

It is worth mentioning that 55 countries announced early adoption of the Standard, i.e. by the end of 2017 while 46 countries announced their commitment to implement the Standard in 2018 including Kingdom of Saudi Arabia, State of Kuwait, United Arab Emirate, Qatar, Kingdom of Bahrain and Lebanon.

Global Financial Crisis Pressures
Under the pressures of the 2009 global financial crisis, endeavors for fighting tax evasion and finding common rules gained momentum. Public and central banks needed more funds as a result of significant increase in their liabilities due to high costs of bank bailout programs intended to support banks that were facing bankruptcy or collapse. However, with European Union issuing a blacklist of non-cooperative jurisdictions, European jurisdictions such as Andorra, Liechtenstein and Monaco, which were considered as tax havens, had to ease their strict bank secrecy.

End of banking secrecy?
On October 29, 2014, 51 countries gave up banking secrecy by signing pact in this regard called Multilateral Competent Authority Agreement as per OECD standards. Although about 100 countries did not sign such Agreement, they announced their endorsement and support to the measures set forth in the Agreement. It noteworthy that Switzerland, Liechtenstein, Singapore, Caribbean countries signed the Agreement although they are deemed as important financial hubs viewed as tax havens and homes to shell companies.

Panama, like USA, did not completely accept OECD standards since Panama is the home to many shell companies just like certain states in USA including Nevada. Pursuant to the aforesaid Agreement, the signatory states are committed to exchange information and data about natural persons holding and operating bank accounts in jurisdictions other than their home countries. Through automatic exchange of information and data, it will be easier to monitor outbound financial flows and minimize frauds and tax evasions.

According to such Agreement, banks and financial institutions are required to provide competent authorities in their countries with information they have about interests, profits, balances and proceeds generated from sale of financial assets when the beneficiary is resident outside their home country. Furthermore, the Agreement regulates the practices and rules for exchange of information and each party’s rights and obligations. However, such new rules contained in the Agreement shall apply to bank accounts opened starting from 2016. Effective from September 2017, the countries can exchange information among each other.

Bridging Tax Gaps
In the meantime, major industrialized countries developed a plan to bridge tax gaps, which are utilized by giant multinational or transcontinental companies such Google, Amazon and other major worldwide businesses.

In the G20 summit held last year in Antalya, Turkey with participation by major industrialized and emerging countries, an action plan was adopted to fight tax evasions and bridge gaps exploited by multinational companies. It requires a company to prepare a tax report on annual basis based on the reports of its branches operating in various countries by senior management of the company in the country where its head office is located. Such report can be automatically accessed by tax administrations in the respective countries but with no permission to release it. Companies required to prepare such report are those having branches in other jurisdictions and their annual business turnover exceeds Euro 750 million.

Consequences of Growing Global Agreements for Exchange of Financial Information
In light of the increasingly growing requirements for tax related financial information to be provided by financial institutions, the financial institutions would have to create tax officer position within their organizational structure to ensure that their tax requirements are managed effectively and efficiently. This will require developing internal systems to enable timely response and create secure automatic databases.

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