Automatic Exchange of Financial Information

automatic exchange of financial information

Automatic Exchange of Financial Information is the answer of international tax authorities to global tax evasion and is intended to facilitate international cooperation and sharing of financial information between international tax authorities to ensure compliance with each country’s local tax laws.

 

Why is Automatic Exchange of Financial Information Required?

Global tax evasion is becoming an increasing problem and is costing governments billions of dollars in lost tax revenue.  Up until now, governments have been relying on Tax Information Exchange Agreements to pursue cases of tax evasion.

However there have been a number of limitations with tax information exchange agreements including:

  • they are bilateral agreements, meaning an agreement between two countries.  So each country needs to negotiate an agreement with every other country it wishes to exchange information with.  This is not only time consuming, but provides loop holes where, say, a resident of one country can move their assets to a country in which no bilateral agreement exists at the time;
  • the requesting government needs to know what specific information they are looking for (including the name of the (non)taxpayer, their account details, and provide adequate justification for why they suspect the individual or company may be involved in illegal activities; and
  • the government who is being requested to provide information needs to be able to access the requested information.  As it is usually tax haven governments that are being requested information, their laws and systems mean that it is not always possible to collect such information.

What is Automatic Exchange of Financial Information?

As the name suggests, Automatic Exchange of Financial Information (also known ‘automatic exchange’) is where countries automatically exchange information on bank accounts and financial transactions with each other on a periodic basis.

Automatic Exchange of Financial Information establishes a common international standard for financial institutions to identify the financial accounts of foreign residents, report information on those account holders and their financial accounts to their local tax authority and for the authority to exchange that information with the tax authority of the foreign resident.

In 2014, every OECD member country and some additional countries approved a standard system for the automatic and multi-lateral exchange of financial information.  It is expected that this will make law enforcement and tax authorities around the world more successful in identifying and pursuing tax evasion cases.

And in contrast to the Tax Information Exchange Agreements, governments will no longer need to request the information, need to know the specific details of the company or individual they are interested in, nor have an adequate suspicion that the individual or company is involved in criminal activity or tax evasion.  Participating governments will now obtain automatic access to all financial information of their residents living abroad.

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What countries are participating in Automatic Exchange of Financial Information?

There are 98 countries that have committed to implementing automatic exchange of financial information, with around half of these countries committing to commence exchanging information automatically from 2017.

Countries that have signed up include the usual suspects like Australia, France, Ireland, UK, Japan, and Canada, but the list also includes countries often considered tax havens like Switzerland, Liechtenstein, Isle of Man, Cayman Islands, British Virgin Islands and Bermuda.

At the time of writing the take up from Middle East and Africa is less advanced.

The current list of countries participating or planning to participate in automatic exchange of financial information is found here.

What information will be exchanged?

The scope of the information exchange is likely to include certain categories of income (including employment income, directors fees, and pensions), ownership of and income from immovable property, bank account balances, interest payments, dividends, and the proceeds from the sale of financial assets.

What is happening in Australia with respect to Automatic Exchange of Financial Information?

Legislation was introduced into Australia’s parliament in 2015 to implement the requirements of the agreed international standard and require financial institutions to disclose certain information to the Tax Commissioner.

The legislation will require certain Australian financial institutions to report information to the Tax Commissioner about financial accounts held by foreign residents. In turn, the Commissioner will provide this information to the foreign residents’ tax authorities, and in parallel, will receive information on Australian residents with financial accounts held overseas.

Australian financial institutions will be obliged to have their systems and processes in place by 1 July 2017.

 

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Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.

 

 

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Craig

Craig is an Australian Expat and the founder of The Australian Expat Investor.Craig is passionate about investing, and while Craig cannot give personal financial or tax advice, Craig enjoys sharing investing, tax, and other tips for Australian expats to help them to build their wealth while living abroad and get the most out of their time living overseas.Get his free ebook on 9 Financial Surprises That Could Cost Australian Expats Thousands of Dollars at the link above.
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