New EU Law On Automatic Exchange Of Information

31.10.14

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EU member states have agreed to apply the widest possible scope of mandatory automatic exchange.

EU member states have agreed to apply the widest possible scope of mandatory automatic exchange.

Automatic exchange of information will enable tax authorities to compare data received on taxpayers’ financial assets with tax returns and identify those who have not declared all their income and capital as per local tax law. This will be a key tool in helping them combat tax evasion and improve tax collection. The EU estimates that tax evasion and fraud costs member states around €1 trillion a year.

The agreement was reached at an EU Council meeting on 14th October 2014. It amends the existing Administrative Cooperation Directive, which provides a framework for mutual assistance between EU states, enabling them to better assess tax due, and prevent requests being refused on the grounds of banking secrecy.

The current directive provides for information sharing on income from employment, directors’ fees, life insurance, pensions and property. It will now be extended to include interest, dividends and other income, as well as account balances and sales proceeds from financial assets.

The new law “promises full and lasting tax transparency in Europe,” said EU Tax Commissioner Algirdas Semeta. “Bank secrecy is dead.

It will be adopted at a forthcoming Council meeting without further discussion, once finalised in all official EU languages.

From 2017, member states will collect data on income earned by non-residents, to transmit to the authorities of the individual’s country of residence. Austria has an extra year to develop the infrastructure needed.

The EU was the first region to introduce automatic exchange of information as a key tool to fight tax evasion, with its Savings Tax Directive in 2005. Compared to the type of data exchange being sought today, the Directive has limited scope since it only applies to savings income.

There have been significant international developments since, particularly the US Foreign Account Tax Compliance Act (FATCA) and the Organisation for Economic Cooperation and Development’s (OECD) global standard of automatic exchange of information. The latest EU legislation will ensure it has a solid framework to apply the OECD standard.

It therefore looks like the Savings Tax Directive may have run its course. The revised Administrative Cooperation Directive covers a wide scope of income and capital, including most of what the 2005 Directive covers. The EU Commission will now consider repealing the Savings Tax Directive, so there is just one standard of information exchange.

The Commission has also been negotiating with Switzerland, San Marino, Monaco, Andorra and Liechtenstein to create stronger tax agreements. The original aim was to ensure they applied a level of transparency equivalent to that applied by member states under the Savings Tax Directive. However the international developments mean the EU is now expecting a more ambitious outcome.

The OECD published its Standard for Automatic Exchange of Financial Account Information in Tax Matters 21st July 2014. It was endorsed by G20 finance ministers at their meeting in Cairns on 21st September, who said it will provide a step-change in their ability to tackle and deter cross-border tax evasion. Almost 70 countries had signed up, but with 120 jurisdictions participating in FATCA, the global standard numbers are expected to grow.

The “Early Adopters” group have indicated their first exchange will take place in 2017. This includes the UK, Spain, France, Portugal, Cyprus and Malta, as well as the Isle of Man, Guernsey and the UK’s offshore territories.

Other committed parties include Switzerland and Singapore.

The information to be shared includes interest, dividends, account balances or value, income from certain insurance products and sales proceeds from financial assets. Reportable accounts include those held by individuals and entities such as trusts.

According to the OECD, more than 500,000 taxpayers have come forward with previously undeclared income and assets since the global standard and FATCA were announced, helping governments raise £21 billion in extra tax revenue.

On 8th October the Swiss government said it will soon begin negotiations with the EU and some other countries on automatically sharing data on bank accounts. It will aim to start collecting data in 2017, so the first exchange could take place in 2018, once the international standard is in place and pending parliamentary and voter approval.

The cross-border tax landscape has changed considerably. It is important to be informed on developments and take specialist advice to ensure your tax planning conforms to local tax law and does not result in unexpected consequences. With expert advice, it is possible to take advantage of tax compliant opportunities to protect your assets from the various taxes in your country of residence.

24 October 2014

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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