Automatic exchange of financial information Part 1. History

For decades tax authorities, bounded by the territorial borders, could not get access to the information on their taxpayers’ transactions or assets abroad. Lack of the information for the tax purposes was creating inequality and favourable conditions for those, capable to execute the advantages of the tax heavens, such as Panama, Belize, Seychelles and other offshore countries. Early attempts by the tax administrations of the different countries to ensure tax assistance in matters to counter the tax avoidance could be found as early as in 1927, when this issue was addressed by the League of Nations¹.  Nevertheless, to ensure cooperative mutual assistance between different states was quite a difficult effort at those times and the situation remained unchanged for years. 

The first approach to outline the cross-border exchange of information for the tax purposes was provided in 1963 by Article 26 of Double Tax Treaties (DTT) based on OECD Model Convention (OECD MC). This was, and remaining until now, the most common² instrument of information exchange among international tax authorities, considering the number of 2600 signed DTTs around the world.³ At that time, the transmitted information was limited only to the taxes mentioned in the DTT. With the gradual evolution of the Article 26 of DTTs, the scope of cross-border information exchange was covering all types of taxes, so called unlimited major clause (2000), the bank secrets obstacle was removed in 2005, and the information received can be used now not only for tax purposes, but also for non-tax purposes (2012). Nonetheless, such DTT provision is considered by states as ‘soft law’,⁴ having no legal influence on requested state to provide the information needed for the tax assessment by the requesting state. As such, contracting state is depending only on the good will of the other state in order to receive the needed information. 

Although, latest version of Article 26 contains the provision for the automatic exchange of information, only few states included such provision in their DTTs and mostly the information is provided on request. Such request can be denied by the other state if it may disclosure any commercial secrets (trade, business, industrial or professional), which may harm public interests. ⁵ Nevertheless, in case the bank holds the needed information, it should be still obtained by the requested state and provided to the requesting state, making bank secrets no longer valid to the tax purposes. The Article 26 does not provide instructions for the contracting states on specific data for transmission, instruments, measures and procedures. It states that the information should be ‘foreseeably relevant’ ⁶ to execute the tax assessment of the requesting state. Furthermore, the possibility to request the information on a group of taxpayers, not individually identified may cause so called ‘fishing expedition’, when the requesting state will get the access to the information beyond the need to make the tax assessment of the specific taxpayer. To prevent such, the requesting state has to provide factual analysis of the group, its description and any other relevant legal justification for such request.

In 1980s United States had identified the need to involve the low tax countries into the trend of exchange of information on their tax residents by providing different incentives and signing tax information exchange agreements (TIEA). Later on, in 2002, OECD had issued its own TIEA aiming at cooperation with offshore countries and removing bank secrecy obstacle in order to get access to the information. TIEA developed by OECD was based on the same tax information exchange approach as in the Article 26 of the OECD MC, namely, the contracting state should provide all information on request, on all taxes and not considering whether there is a domestic interest for such information and bank secrecy protection.⁷ Such model agreement was named as OECD standard on Exchange of Information (OECD Standard). Although more than 500 TIEAs were signed within 10 years after implementation, the Agreement did not enable states for automatic and spontaneous information exchange.

An automatic exchange of information (AEOI) enables the states to receive highly structured and organized data from the other states on a regular basis, ones per year. Such approach is highly effective to prevent tax avoidance and tax collection due to the automatic processing of data, then matching it with the filed data by the tax residents, and, public awareness that the financial data is transmitted to the tax authorities regularly.

Therefore, OECD, United States (US) and European Union had always aiming to implement effective and regular AEOI. In 1988 OECD had developed Convention on Mutual Administrative Assistance (CMAA), which was containing all 3 types of information exchange: on request, spontaneous and automatic. The Convention had covered simultaneous examination and tax examination abroad and assistance in collection of taxes.⁸ But, CMAA was not effective due to the low effort of contracting states to implement it and provide mutual assistance.

The US, on contrary, after the crisis in 2007, unanimously developed and implemented Foreign Account Tax Compliance Act (FATCA), the major goal of which was to force foreign financial institutions, such as banks, to provide the information on US residents holding bank accounts in foreign banks. In case, the foreign bank was to decline to reveal the needed information to Internal Revenue Service (IRS), it would face 30% withholding tax on all interest gains or any other income derived from the territory of US. This provision forced many foreign banks to comply with intergovernmental agreements (IGA) and report to authorized local body (Model 1) or to register directly with the IRS (Model 2) and report directly. Many countries such as Germany, France, Great Britain and others adopted Model 1 IGA. Switzerland and Japan adopted Model 2 IGA. At this moment more than 100 IGAs signed globally.

The data transmitted under FATCA provisions includes the names of US residents (individuals and entities), account numbers, account balance, total income (dividends, interest, other), total expenditures, tax identification numbers, all the bank accounts available. As such, FATCA had completely fulfilled the aim of US tax authorities to receive all the financial information about their residents abroad. At the same time, many IGAs with US contain provision regarding reciprocal exchange of information between states, such as German-US FATCA IGA.

European Union, on its own, had experienced the need to implement mutual multilateral agreement on tax assistance years before implementation of FATCA by the US and adopted the Mutual Assistance Directive 77/799/EEC in 1977, and in 2003 – The Savings Directive 2003/48/EC. The Mutual Assistance Directive had incorporated provisions on automatic, spontaneous and exchange of information on request on direct taxes, VAT and insurance premiums. However, due to the rapid development of economies and tax avoidance arrangements, this Directive was not as effective as it needed to be, and was later served as a basis to the Directive on Administrative Cooperation (DAC). The Savings Directive had implemented the automatic exchange of information between Member states, but its scope was limited only to the interest income paid by Member state to the tax residents of the other Member state. The goal of the Directive was to enable effective taxation of the interest income through the involvement of paying agents, such as financial institutions. The financial data included the residence of the individual or an entity, the name and address, name of the security, which generates the interest, all the financial information related to interest income. Although, the Savings Directive had proved effectiveness in collection interest income, especially from Switzerland and Luxemburg, the Council found it was not as wide and effective as it expected to be at the moment of its adoption.

1. Roman Seer/Sascha Kargitta, ‘Exchange of information and cooperation in direct taxation’ in: HJI Panayi Christiana, Werner Haslehner, Edoardo Traversa (eds), Research Handbook on European Union Taxation Law, (Edward Elgar Publishing, 2020) p. 489
2. Roman Seer/Sascha Kargitta, in: HJI Panayi Christiana, Werner Haslehner, Edoardo Traversa (eds), Research Handbook on European Union Taxation Law, (Edward Elgar Publishing, 2020) p. 489
3. Julia Braun, Martin Zagler, ‘An Economic perspective on Double Tax Treaties with(in) developing countries’, World Tax Journal (2014) p.242
4. Roman Seer/Sascha Kargitta, in: HJI Panayi Christiana, Werner Haslehner, Edoardo Traversa (eds), Research Handbook on European Union Taxation Law, (Edward Elgar Publishing, 2020) p. 489
5. OECD, Model Tax Convention (Full Version), (OECD:2012)
6. OECD, Model Tax Convention (Full Version), (OECD:2012)
7. Roman Seer/Sascha Kargitta, in: HJI Panayi Christiana, Werner Haslehner, Edoardo Traversa (eds), Research Handbook on European Union Taxation Law, (Edward Elgar Publishing, 2020) p. 495
8. Roman Seer/Sascha Kargitta, in: HJI Panayi Christiana, Werner Haslehner, Edoardo Traversa (eds), Research Handbook on European Union Taxation Law, (Edward Elgar Publishing, 2020) p. 495