«WHAT IT IS, HOW IT WORKS, BENEFITS, WHAT REMAINS TO BE DONE Automatic Exchange of Information WHAT IT IS, HOW IT WORKS, BENEFITS, WHAT REMAINS TO BE ...»
Automatic Exchange of Information
WHAT IT IS, HOW IT WORKS, BENEFITS,
WHAT REMAINS TO BE DONE
Automatic Exchange of Information
WHAT IT IS, HOW IT WORKS, BENEFITS,
WHAT REMAINS TO BE DONE
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENTThe OECD is a unique forum where governments work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Union takes part in the work of the OECD.
Photo credits: cover photo © Julien Eichinger – Fotolia.com TABLE OF CONTENTS – 3
TABLE OF CONTENTSI. Introduction
II. What is automatic exchange of information?
III. How does automatic exchange of information work?
IV. What is the legal basis for automatic exchange?
V. Current state of play
VI. Does automatic exchange work?
VII. What is the OECD doing in this area and what still needs to be done?............ 21
AUTOMATIC EXCHANGE OF INFORMATION © OECD 2012INTRODUCTION – 5
I. INTRODUCTIONAs the world becomes increasingly globalised and cross-border activities become the norm, tax administrations need to work together to ensure that taxpayers pay the right amount of tax to the right jurisdiction.
An open international architecture where taxpayers operate cross-border but tax administrations remain confined to their national borders, can only be sustained where tax administrations co-operate. One key aspect of international tax co-operation is exchange of information.
Exchange of information comes in different forms and includes exchange upon request, spontaneous information exchange and automatic exchange of information. The OECD has a long history of working on all forms of information exchange and Article 26 of the OECD Model Convention provides a basis for all three forms of information exchange.
The OECD’s work on exchange upon request and the more recent peer review work of the Global Forum on Transparency and Exchange of Information 1 are well known. The OECD also works on other forms of exchange of information, including automatic exchange of information, where it has been active in facilitating such exchanges for many years.
The OECD’s work in this area is focused on helping make automatic information exchange into an effective compliance tool for countries wishing to use it and does not suggest a change in the current international standard, which is information exchange upon request.
The work has ranged from creating the legal framework for such information exchanges to developing technical standards and seeking to improve automatic exchange at a practical level. In addition, the OECD has produced guidance on automatic exchange and provided training to countries interested in developing the necessary framework and operating automatic exchange on a practical level.
1 See www.oecd.org/tax/transparency.
AUTOMATIC EXCHANGE OF INFORMATION © OECD 20126 – INTRODUCTION Another key component in connection with automatic exchange of information is the need to ensure that information exchanged is kept confidential. This aspect has long been a key focus for the OECD in respect of all forms of exchange of information, not just automatic exchange, but it is particularly pronounced in the automatic exchange area. To engage in exchange of information, and in particular automatic exchange of information, countries need a high degree of comfort that the information is kept confidential both in law and in practice and is only used for the purposes allowed under the applicable exchange instrument.
This report informs the wider public on key aspects of automatic exchange of information and the work of the OECD in this area. In
particular it answers the following basic questions:
II. WHAT IS AUTOMATIC EXCHANGE OF INFORMATION?
The automatic exchange of information2 is understood to involve the systematic and periodic transmission of “bulk” taxpayer information by the source country to the residence country concerning various categories of income (e.g. dividends, interest, royalties, salaries, pensions, etc.).
The information which is exchanged automatically is normally collected in the source country on a routine basis, generally through reporting of the payments by the payer (financial institution, employer, etc). Automatic exchange can also be used to transmit other types of useful information such as changes of residence, the purchase or disposition of immovable property, value added tax refunds, etc. As a result, the tax authority of a taxpayer’s country of residence can check its tax records to verify that taxpayers have accurately reported their foreign source income. In addition, information concerning the acquisition of significant assets may be used to evaluate the net worth of an individual, to see if the reported income reasonably supports the transaction.
2 Also called routine exchange by some countries.
III. HOW DOES AUTOMATIC EXCHANGE OF INFORMATION WORK?
The basic process of automatic exchange of information can be
divided into seven steps:
2. Payer or paying agent reports information to the tax authorities.
3. Tax authorities consolidate information by country of residence.
The process starts with the provision, by a taxpayer, of information regarding his or her identity to a payer or paying agent and/or with the generation of information by the payer or paying agent (first step).
According to domestic rules in the source country, payers and paying agents are required to report to the tax authorities information regarding the identity of the non-resident taxpayer as well as payments made to them (second step). Once the information has been received by the source country tax authorities the information will be consolidated and bundled according to the country of residence (third step). Next, information is transmitted from the source country to the residence 3 While most tax systems operate in this way, some require the taxpayer to file a refund claim directly to the tax administration. It is from this refund claim that the tax administration obtains the information to exchange.
AUTOMATIC EXCHANGE OF INFORMATION © OECD 2012
10 – HOW DOES AUTOMATIC EXCHANGE OF INFORMATION WORK?
country. The source country must ensure that the transmission is done securely, with a sufficient level of encryption. Information may be transmitted electronically or by CD ROMs. If the CD ROMs are sent by mail, it must be done via an international registration system where a mail tracking function is in place (fourth step).
The fifth step in the process is the receipt and decryption of the information by the residence country tax authorities. Next, relevant information will be fed into an automatic or manual matching process.
The processing and use of the information varies from country to country depending on the risk assessment parameters, processing and technology systems used. The key aspect is to be able to identify the taxpayer and “match” the information with the domestic records. In this respect many countries have developed sophisticated automatic matching systems, allowing them to run all of the information received through a database to identify matches. This is often followed up by manual matching of the previously unmatched data. Other countries use only a manual matching system (sixth step). Based on the results of the matching process, the tax authorities may commence compliance action against a taxpayer that may not have complied with reporting obligations, or make a specific request for information from the source country to obtain additional information. In addition to using the specific information received, some countries use the information for more general risk assessment (seventh step).
Throughout the entire process feedback can be given from the receiving to the sending country, but also from the country collecting the information to the reporting payers or paying agents.
IV. WHAT IS THE LEGAL BASIS FOR AUTOMATIC EXCHANGE?
The legal basis for the automatic exchange of information is generally (1) the exchange of information provision of a double taxation convention based on Article 26 of the OECD or UN Model Convention, (2) Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters, or (3) for EU member countries, domestic laws implementing EU directives which provide for automatic exchange.
While the treaty law contains the legal basis for automatic exchange including rules on reciprocity some countries require, and others have a policy to require, a special working agreement or memorandum of understanding (MOU) setting forth the terms and conditions of the proposed automatic exchange. Such an MOU typically sets forth the types of information to be exchanged automatically, details about the procedures of sending and receiving information and the appropriate format to use. The OECD has designed a Model Memorandum of Understanding on Automatic Exchange 4 that can be used as a basis for an operational working agreement between tax administrations. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters specifically requires an agreement between the Parties willing to provide each other information automatically.
4 See C(2001)28/FINAL (available under www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=C(2001)28/FINAL& docLanguage=En)
Results of a recent survey on automatic exchange conducted by the OECD 5,6 show widespread use of automatic exchange of information regarding country coverage and income types, transaction values and records exchanged. Certain facts and figures in each of these areas are summarised below.
Country coverage and income types Automatic exchange is widely used both within and outside the European Union (EU) with many non-EU members having extensive automatic exchange relationships. Among the most frequently exchanged income types are: interest, dividends, royalties, income from dependent services and pensions. All 38 countries (100%) receive information automatically from treaty partners and 33 (85%) of them send information automatically to treaty partners. Denmark, as the country with the largest number of automatic exchange relationships sends information automatically to 70 countries. The charts below give further details on country coverage.
5 Responses were received from the following countries that participate in the work of the OECD’s Committee on Fiscal Affairs: Argentina, Australia, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Russia, the Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turkey, the United Kingdom and the United States.
6 The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.
AUTOMATIC EXCHANGE OF INFORMATION © OECD 201216 – CURRENT STATE OF PLAY
Transaction value relates to the amounts of income and capital reported on records exchanged automatically. The survey shows that the amounts represented by records received can range from as little as several million of Euros to well over EUR 200 billion for a particular year. 7 Five countries, including Italy, reported receiving records relating to more than EUR 15 billion each in a particular year. Further, most countries reported exchanging information in the billions of Euros.
While these amounts do not represent tax but income and assets, applying average tax rates to such amounts and even assuming a low non-compliance rate can add up to significant numbers.
7 Depending on the last year of available statistics in a country, the year for which the information was provided may vary.
8 Australia, Belgium, Canada, France, Spain, Sweden, United Kingdom, United States.
9 Depending on the last year of available statistics in a country, the year for which the information was provided may vary.
10 The following 31 countries provided numbers of records sent: Argentina, Australia, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Iceland, India, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovenia, Spain, Sweden, the United Kingdom and the United States.