The global progress of Automatic Exchange of Tax Information on financial accounts

The global progress of Automatic Exchange of Tax Information on financial accounts. The United Arab Emirates (UAE)[1] situation.

1. Introduction

Transparency in tax matters of the States is a necessary condition to achieve a fairer international scenario ("a level playing field"), due to the unfair competition that occurs with the opacity offered by certain jurisdictions. Some known cases of data leak (for example, the banks UBS and HSBC) highlighted the importance of accessing, with a well-founded purpose and in a legitimate way, the information of financial accounts, protected by strict rules of financial secrecy. However, in recent years the financial secrecy of some jurisdictions has begun to become more flexible, given the possibility of certain crimes, including tax crimes.  

In the current context of high globalization and vertiginous progress in the digitization of the economy, the exchange of tax information (EOI) between countries becomes a key tool for the Tax Administrations (TAs), considering the asymmetry of information that exists between these TAs and taxpayers, before which the EOI allows such organizations to be put on an equal footing with taxpayers, who can operate internationally, without geographical limits, to set up their businesses and investments.

This information asymmetry also affects taxpayers, given that the TAs, in the absence of information on international operations and to protect their tax bases, tend to use general anti-avoidance measures (GAAR) that allow them to re-characterize or ignore transactions, based on the abusive use of certain forms and structures and even specific anti-abuse measures (SAAR), which often end up generating controversies and unnecessary costs for both parties to the tax relationship. This greater transparency will surely lead to more determinations on a certain basis and less on a presumed basis in the future.

It is important to remember that the use of the EOI responds to certain principles and has limits, in such a way as to promote an adequate balance between the powers of the TAs and the rights of taxpayers[2].

Automatic information exchange (AEOI) is one of the EOI modalities, which enables the sharing of information in bulk or in large volumes (due to the number of taxpayers involved in relation to the exchange on request, for example), referring to a structure of previously defined data, in accordance with the international legal frameworks agreed between the countries.

Under this modality, the AEOI of financial accounts was established as the second international standard, in accordance with the agreed international rule of the “Common Reporting Standard” (CRS), which as anticipated by the OECD in the short term will incorporate the information related to each ever more present “crypto assets”. This represented a significant advance, in relation to financial secrecy in relation to tax control purposes.

On this occasion, I will refer to the world situation and in particular to the United Arab Emirates (UAE) in relation to this standard, based on the first international review carried out.

2. Automatic exchange of tax information on financial accounts.

The Global Forum was quick to launch a process to promote the global implementation of the second standard, through collective commitments by countries to set deadlines. Subsequently, all members of the Global Forum were asked to commit to:

• Implementation of the new standard.
• Exchanging information with all “appropriate interested partners” (all jurisdictions interested in receiving information from a jurisdiction and complying with confidentiality and data protection standards).
• Initiate exchanges in 2017 or 2018. This resulted in a group of 49 “early adoption” jurisdictions that pledged to exchange information in 2017 and a further 51 jurisdictions pledged to begin exchanges in 2018, including UAE.

Subsequently, other jurisdictions undertook to implement this standard for different timelines, including some jurisdictions that had been identified as "relevant jurisdiction", which were not part of the Global Forum, to maintain equal conditions with those committed as well as some developing countries that were not asked to commit to a specific timeline.

Once a jurisdiction commits to implement the AEOI standard, the Global Forum monitors the timeliness of compliance with each milestone necessary to fulfill the commitment made regarding:

• A national legislative framework that requires financial institutions to collect and report data for subsequent exchange, which must be in effect to require the collection of information in the year prior to its reporting and exchange.
• An international legal framework that allows the exchange of information with the appropriate jurisdictions interested in the year of the exchange, comprising an international legal basis for automatically exchanging information and an agreement between competent authorities containing the details of the exchanges (the vast majority of exchanges take place using the multilateral Convention on Mutual Administrative Assistance in Tax Matters and the Multilateral Agreement of the competent authority CRS (CRS MCAA).
• An adequate technical infrastructure to receive the information from the obliged Financial Institutions and process it as necessary and subsequently transmit it to the partner jurisdictions (all jurisdictions use the “Common Transmission System” (CTS), developed and acquired by the OECD and managed by the Global Forum).

The fact that almost 100 jurisdictions exchanged information in 2019 regarding 84 million financial accounts with an approximate value of Euros 10 trillion, demonstrates the importance of the standard. In 2020, 105 jurisdictions owed information and the network of exchange relations has increased by 15%, to around 7,000. As for 2020 exchanges, the Global Forum agreed that jurisdictions would complete them by the end of December, in instead of at the end of September, as has been done since its inception, due to the operational impact of the COVID-19 pandemic on fiscal authorities and financial institutions.

From the OECD, it is recognized that despite the enormous progress achieved, there is still work to be done to ensure that the standard is fully effective.

3. Monitoring the implementation of automatic exchange.

Understanding that not all the requirements of the second standard could be reviewed once the exchanges are finalized, the Global Forum implemented a “Staged Approach” to ensure effective implementation from the beginning. Problems in key areas of AEOI implementation could be identified, even before the exchanges took place, comment from the OECD.

This approach includes modules and timelines for committed jurisdictions to begin exchanges from 2017 or 2018:

• Commitments and monitoring of implementation.
• Expert evaluations on confidentiality and data safeguarding.
• Legislative evaluations, including low-risk lists.
• Ensure networks include appropriate interested partners.
• Compliance with technical exchange requirements.

The Global Forum provides technical assistance throughout the engagement and implementation process.

Finally, it must be ensured that the implementation of the standard is effective in practice, including that jurisdictions are ensuring that Reporting Financial Institutions are effectively implementing the requirements. Peer reviews initiated regarding the effectiveness of implementation in practice should be completed in 2022.

Peer reviews consist of:

• A review of the national and international legal frameworks of each jurisdiction to ensure that they are in accordance with the detailed requirements.
• A review of the effectiveness of the implementation of each jurisdiction in practice, including the operational frameworks established to ensure compliance with the requirements by the Financial Institutions.

With regard to legal frameworks, the AEOI Terms of Reference (ToR) group the requirements, according to two basic requirements (CR):

• CR1: Jurisdictions must have a national legislative framework that requires all Reporting Financial Institutions to carry out due diligence procedures and submit the reports provided for in the CRS for effective implementation as established therein.
• CR2: Jurisdictions should have existing exchange relationships with all appropriate interested partners as committed and provided for by the AEOI.

4. First results of global monitoring. 

The OECD (2020)[3] has published a first report with the conclusions of the first peer reviews of the legal frameworks in force in each jurisdiction to implement the standard. The results refer to the 100 jurisdictions committed to exchanging information in 2017 or 2018.

The first results show that the vast majority of jurisdictions reviewed in their legal framework implemented the necessary legal and technical requirements and successfully began exchanges, in accordance with their commitments. In 2019, 94% of jurisdictions met their exchange commitment.

They recognize from the OECD that, when considering the results of the peer review, it must be taken into account how extraordinary the progress has been in the implementation of this standard. Following commitments from 100 jurisdictions to implement it in time to begin exchanges in 2017 or 2018, they moved in record time to implement the necessary legal frameworks. On a perhaps unprecedented scale, around 100 jurisdictions simultaneously enacted detailed due diligence and reporting requirements for financial institutions. In addition, up to the date of this report, around 7,000 bilateral relationships had been established for AEOI, the vast majority of which through the signing and activation of a new international legal instrument (the CRS MCAA).

Regarding the review of regulatory frameworks, there is a very high level of compliance to implement the AEOI:

• Of the 100 jurisdictions committed to starting in 2017 or 2018, some 98 have an international legal framework that is fully in accordance with such ToR. Therefore, the Global Forum has issued an "in place" determination for CR2.
• Most jurisdictions (54) have national legislative frameworks that are also fully compliant with the ToR. Therefore, the Global Forum has issued to these jurisdictions an "in place" determination for CR1. Consequently, 54 jurisdictions received an overall rating of "in place" (CR1 plus CR2) included the UAE, as will be explained below.
• A large group of jurisdictions (34) are those for which the Global Forum issued a determination of "in place" for CR2 and "in place, but needs improvement" for CR1. Recommendations were made to amend your national legislative framework in order to be fully consistent with the ToR. As a result, 34 jurisdictions received a blanket determination of "in place, but needs improvement."

These results allow us to conclude that 88% of the jurisdictions have been determined to have national and international framework laws that are totally or substantially in accordance with the TR. Of the remaining jurisdictions (12), 10 have implemented a national legislative framework that contains many of the requirements, but includes shortcomings that could undermine the operation of the standard (Aruba, Azerbaijan, Belize, Costa Rica, Czech Republic, Grenada, Israel, Macau and Romania). The remaining 2 jurisdictions have not yet enforced the necessary primary and secondary legislation containing the obligation for due diligence and reporting procedures, which are also necessary (Sint Maarten and Trinidad and Tobago). Therefore, twelve jurisdictions have received a blanket "not in place" determination.

Although the results of the peer reviews show a generally high level of compliance with the requirements, it is also possible to identify some common points in which recommendations are made, based on certain problems:

• The standard allows jurisdictions to identify specific Non-Reporting Financial Institutions and Excluded Accounts that have characteristics substantially similar to the provisions of the standard that present a low risk of being used for tax evasion. In some cases, after peer review, it has been found that they are not sufficiently similar to the categories in the standard. This aspect is the one that generated the most recommendations.
• The standard requires jurisdictions to have various legislative provisions to enforce the requirements. These provisions were found to be sometimes incomplete regarding the requirement to have powers that can be used to address non-compliance with due diligence and reporting requirements, the ability to impose sanctions on account holders and controllers. for submitting false self-certifications and having record keeping obligations covering the full scope of the records must be kept.
• Several more specific recommendations have also been made in cases where jurisdictions have sought to summarize the definitions detailed in the standard or have omitted some elements of the definitions necessary to ensure their full and correct functioning, as stated in the OECD report.

5. The United Arab Emirates position. Review of the legal framework.

The UAE has 69 tax information exchange treaties that enable automatic financial account exchange and comply with the standard (OECD, 2020). In 2018 it sent information regarding financial accounts in 2017 to 43 countries and in 2019 it did so regarding financial accounts in 2018 to 53 jurisdictions.

Overall determination on the legal framework: In Place

The UAE legal framework implementing the AEOI Standard is in place and is consistent with the requirements of the AEOI ToR. This includes the domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) and its international legal framework to exchange the information with all Interested Appropriate Partners (CR2).

The UAE commenced exchanges under the AEOI Standard in 2018.

The UAE has a decentralized regulatory system to provide for Reporting Financial Institutions to collect and report the information to be exchanged. There are now six Regulatory Authorities specified by Cabinet Resolution No. (5/11) of 2020, with each Regulatory Authority of the United Arab Emirates having enacted rules to cover the entities they regulate. These are:

• The Central Bank (CB)- Notice No. 404/2016, amended on 20 August 2020;
• The Securities and Commodities Authority (SCA) - Decision of the Chairman of the SCA Board of Directors No. (25 / R.M) of 2017 Concerning the Issuance of Regulation for Common Standards to Prepare the Tax Reports, amended on 3 August 2020;
• The Insurance Authority (IA) - Insurance Authority Circular No. 34 issued on 9 September 2020;
• The Dubai International Finance Centre (DIFC) - Common Reporting Standard Law No. (2) of 2018 and the CRS Regulations of the Board of Directors of the DIFCA, amended on 30 July 2020;
• The Abu Dhabi Global Market (ADGM) - Common Reporting Standard Regulations 2017, amended on 24 June 2020; and
• Ministry of Finance (MoF) – CRS Guidance Notes issued in 2016, revised and reissued on 3 August 2020.

Also made reference to Federal Decree-law No. 20 of 2018 relating to antimony laundering for the purposes of the identification of Controlling Persons under the AEOI Standard.

Centralized guidance was also issued by the Ministry of Finance. The Guidance and the aforementioned rules enacted by Regulatory Authorities are legally binding.

Under this framework Reporting Financial Institutions were required to commence the due diligence

procedures in relation to New Accounts from 1 January 2017. With respect to Preexisting Accounts,

Reporting Financial Institutions were required to complete the due diligence procedures on High Value Individual Accounts by 31 December 2017 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2018.

Following the initial Global Forum peer review, the UAE amended its legislative framework to address issues identified, the last of which was effective from 20 August 2020.

With respect to the exchange of information under the AEOI Standard, the UAE is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated the CRS MCAA in time for exchanges in 2018.

The detailed findings are below:

• CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.

Determination: In Place

The domestic legislative framework is in place and contains all of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures. It also provides for a framework to enforce the requirements.

• The UAE has defined the scope of Reporting Financial Institutions in its domestic legislative framework in a manner that is consistent with the CRS and its Commentary.

• The UAE has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in accordance with the CRS and its Commentary.

• The UAE has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.

• The UAE has a legislative framework in place to enforce the requirements in accordance with the CRS and its Commentary.

• CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.

Determination: In Place

The UAE international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all Interested Appropriate Partners (i.e., all jurisdictions that are interested in receiving information from the United Arab Emirates and that meet the required standard in relation to confidentiality and data safeguards).

• The UAE has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
• The United Arab Emirates put in place its exchange agreements without undue delay.
• The UAE exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.

6. Final words.

In closing, it is worth highlighting the progress in tax transparency in the UAE, observing others aspects related to the tax transparency and the BEPS plan, according to the OECD:

Exchange of information on request (EOIR):

• Global Forum membership: yes.
• EOIR rating round 1: prov. largely compliant.
• EOIR rating round 2: largely compliant.
• Mutual Administrative Assistance Convention: in force.

BEPS plan:

• Inclusive Framework on BEPS membership: yes.
• Existence of harmful tax regimes (BEPS Action 5): not harmful (no or only nominal tax jurisdiction).
• Exchange of information on tax rulings (Action 5): no review (no tax jurisdiction).
• Preventing treaty abuse (Action 6): 2021 review ongoing.
• CbC – Domestic law (Action 13): legal framework in place.
• CbC – Information exchange network (Action 13): activated.
• Effective dispute resolution (Action 14): stage 1 reviewed & recommendations made.
• Multilateral Instrument (Action 15): in force.

[1] A few years ago I visited Dubai with my family and we were all pleasantly surprised and fell in love with its buildings, its beautiful beaches, its sounds, its flavors and mainly with its culture and history, in particular my son Tiziano, who longs to return. I dedicate this present to Tiziano Porporatto.

[2] See my previous posts on this page: “Taxpayer's rights and guarantees in relation to the exchange of tax information and its new paradigms. Parts I and II”. April, 21st and 28th, 2020.

[3] The information in this report is current as of December 2nd, 2020. More information and updates are available on the AEOI Portal (www.oecd.org/tax/automatic-exchange).

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