Automatic Exchange of Information Regime

Automatic Exchange of Information Regime – a new international development on measures for combating cross-border tax evasions

The recent Panama Papers scandals have exposed how the big multinationals and powerful rich are using the tax heavens to move funds around shell companies in different countries for so called “tax planning” purposes.

Interestingly, BERMUDA has become the latest country to sign up to the OECD’s tax transparency agreement; just weeks after the Panama Papers exposure.

Bob Richards, Bermuda’s minister of finance, revealed that the country signed the OECD’s Multilateral Competent Authority Agreement (MCAA) last week, enabling the sharing of country-by-country reports with 31 other nations. (Fraser Simpson, 20^th August 2016, Bermuda falls in line with OECD tax reporting agreement, http://www.accountancyage.com/2016/04/20/bermuda-falls-in-line-with-oecd-reporting-agreement)

The tax heavens being a platform that billions of dollars assets are hidden away which are involving the tax evasions and money laundering activities. They are always being the main target that Organisation for Economic Co-operation and Development (OECD) and the Group of 20 Developed Nations that they have been working jointly pushing pressures for greater transparency and information sharing.

The latest framework that have been materialized and in force are the Automatic Exchange of Information (AEoI) (United State of America has implemented Foreign Accounts Tax Compliance Act (FATCA)), other than that the Base Erosion and Profit Shifting (BEPS) project is now in the hot discussion and the relevant policies and methodologies in the formulating process which consist of 15 actions plans are taking place which are as below:-

Action 1:           Addressing the Tax Challenges of the Digital Economy

Action 2:           Neutralising the Effects of Hybrid Mismatch Arrangements

Action 3:           Designing Effective Controlled Foreign Company Rules

Action 4:          Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

Action 5:          Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

Action 6:          Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

Action 7:          Preventing the Artificial Avoidance of Permanent Establishment Status

Action 8 to 10:  Aligning Transfer Pricing Outcomes with Value Creation

Action 11:         Measuring and Monitoring BEPS

Action 12:         Mandatory Disclosure Rules

Action 13:        Guidance on Transfer Pricing Documentation and Country-by-Country Reporting

Action 14:        Making Dispute Resolution Mechanisms More Effective

Action 15:        Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

Let’s take a look at Automatic Exchange of Information (AEoI) which is a global tax transparency initiatives introduced by Organisation for Economic Co-operation and Development (OECD) with the main objectives of combating cross-border tax evasions and enhancing transparency by sharing of financial accounts information among the different jurisdictions or countries.

With the adoption of the Foreign Account Tax Compliance Act (FATCA) by the United States Congress in 2010 and against the background of the global financial crisis, a significant political momentum for putting in place a global automatic exchange standard developed.

AEoI is a new reporting obligation with a bilateral or multilateral approach of information between countries. It is reporting on a regular basis e.g. yearly and the information is exchanged between the tax authorities of the countries. The development of the AEoI is tremendously fast to reach the stage of issuing the Common Reporting Standard (CRS) and more than 80 countries around the world with the commitment of implementing the AEoI.

The following is the highlights of the development of the AEoI which are extracted from the website of OECD:-

In 2012:-                        OECD presented a report on the automatic exchange of tax information, highlighting a broad range of existing programmes and recommending future action. The report was endorsed by the G20 at their Los Cabos summit.

February 2014:-             G20 finance ministers and governors endorsed the Common Reporting Standard (CRS)

On 6^th May 2014:-         44 countries (early adopter group) committed to a specific timetable for implementation with effective date of 1^st January, 2016

On 21^st July 2014:-         OECD released the full version of the Standard for Automatic Exchange of Financial Account Information in Tax Matters

29^th Oct 2014:-              At the OECD Global Forum meeting, 51 jurisdictions signed Multilateral Competent Authority Agreement that will activate AEoI. A further 38 jurisdictions also confirmed their commitment to start AEoI by Sept 2018

2015:-                            The OECD and the Global Forum are playing an active role in ensuring a timely and uniform implementation of the CRS across the globe.

In that respect, a series of workshops for government officials are being organised throughout 2015, technical implementation assistance is provided to a broad range of jurisdictions and a number of pilot projects for implementing the CRS are underway.

The first edition of the CRS Implementation Handbook was published by OECD in August 2015, which provides a practical guide to implementing the CRS to both government officials and financial institutions and includes a comparison between the CRS and FATCA, as well as a regularly updated list of Frequently Asked Questions.

2016:-                            The Global Forum is undertaking a review of the confidentiality rules and practices in place in committed jurisdictions, as to ensure that the automatic exchange of CRS information takes place in a secure environment.

MONITORING THE CRS for AEoI

With the implementation of the CRS being underway, the Global Forum is now taking up work for putting in place a peer review process for the purpose of monitoring the effectiveness of the automatic exchange of information in jurisdictions, once the CRS has been implemented.

SIGNATORIES OF THE MULTILATERAL COMPETENT AUTHORITY AGREEMENT ON AUTOMATIC EXCHANGE OF FINANCIAL ACCOUNT INFORMATION AND INTENDED FIRST INFORMATION EXCHANGE DATE

(Status as of 16 February 2016 source : OECD website)

* Malaysia became a Signatory on 27 January 2016

Malaysia has adopted FATCA in last year supposing the first reporting have to be submitted by 30 June 2015 but it has been postponed to 30 June 2016

Besides, Malaysia is going to adopt AEoI and its framework Consists of 2 components which are

1. Model Competent Authority Agreement
   • Template for intergovernmental agreements
2. Common Reporting Standard (CRS)
   • Reporting and due diligence standard

CRS consists of 4 important components.

Financial Institutions are the reporting entities and the definition of Financial Institution is a broad definition which is including

• Depository institutions
• Custodial institutions
• Investment entities
• Specified insurance companies etc.

Reportable Accounts & Persons are including

• Depository accounts, custodial accounts, cash value insurance contracts, annuity contracts and certain equity or debt interest etc.
• Certain insurance products e.g. pensions funds etc.
• Equity interest in investment banking traded funds are included

Information Reporting including

• accounts balance, sales proceeds from financial assets
• all types of investment income e.g. interest, dividends income from certain insurance products etc.
• Individuals his name, address, date and place of birth, Tax Identification number, etc
• Entity its name, address, Tax Identification Number, etc but for passive entity particulars of the controlling persons are the reporting information

• Due Diligence
  • Pre-existing individual’s accounts
    • FATCA set reporting threshold e.g. for individuals with US$50,000 but it is not provided in CRS which means any amounts are the reportable accounts
    • Lower value and higher value accounts (US$1 million) differentiation in term of the level of detailed for due diligence procedures
  • New individual’s accounts with a standard of due diligence procedures
  • Pre-existing entity’s accounts including trusts and foundations the accounts value / balance exceeding US$250,000 are subject to review
  • New entity’s accounts with a standard of due diligence procedures
  • CRS require to determine the “reportable persons” base on tax residence not citizenship (as required by FATCA)
  • Passive non-financial entity (NFE) are required identifying residence of controlling persons

Mechanism of the AEoI

The implication of the implementation of AEoI would make the information more transparent between the jurisdictions which will expose those offshore companies which avoiding Permanent Establishment at risks.

In Malaysia, although the income is taxed on territorial basis except for banking, sea & air transporting and insurance industries, and the foreign source income are exempted. However, the taxpayers must prove to the Inland Revenue Board Malaysia that the business income is from foreign source which means that it is derived in a place outside Malaysia. If a taxpayer fails to do so, the business income can be deemed to be derived in Malaysia under the provision of Section 12 (1) (a) Income Tax Act 1967. Basically, if business income derived from outside Malaysia, one of the main factors is that the Permanent Establishment is outside Malaysia, the business income is tax exempted in Malaysia (Paragraph 28 Schedule 6 Income Tax Act 1967, except for banking, sea & air transporting and insurance industries)

It is very important to take note of the income tax implications for the cross border transactions there are many considerations ranging from the transfer pricing, properly defining permanent establishment to double tax treaties. The risks and its cost of overlook of all these are heavy.