The major development of automatic exchange of information of financial data in Europe was achieved with the adoption of the Directive on Administrative Cooperation 2011/16/EU (DAC 1) in 2011 with subsequent amendments: in 2014 – introduction of Common Reporting Standard (DAC 2), in May 2015 – Country by Country reporting (DAC 4), December 2015 – automatic exchange of information on Advance Tax Rulings (ATR) and Advance Pricing Arrangements (APA) (DAC 3), 2016 – implementation Anti-Money-Laundering law into DAC (DAC 5), 2018 – implementation of an obligation of professional service providers to report on cross-border arrangements (DAC 6).
The Directive on Administrative Cooperation (2011) had superseded the Mutual Assistance Directive and the Savings Directive by improving procedural measures, implementation of time limits of replies on request, reporting with common standards through Common Communication Network.1 The automatic exchange of information was provided once per year, and the information on request should not be limited and provided within 2-6 months. However, before sending a request the tax authorities of the contracting state should execute their own resources in order to comply with the principle of subsidiarity. Furthermore, the tax authorities of the requested state has a right to decline the request in case, there is a lack of mutual assistance in exchange of information from the other state, which contradicts to the principle of reciprocity.
In addition to all procedural improvements in DAC 1, the scope of transmitted information was substantially enlarged. Every Member State had to inform another Member State through the authorized body about their residents’ income of any kind including income from employment, pensions, life insurance products, income from other assets, such as real estate. Banking secrets were not in place any longer, however the commercial secrets were still protected.
At the same time, OECD had conducted further analysis of the automatic exchange of information and further needs for the improvements were identified to account financial data. As such, in 2014 the OECD introduced a “Standard for Automatic Exchange of Financial Account Information in Tax Matters” (AEFI). According to this standard the two principally important steps were implemented: 1) Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCCA -1), and 2) Common Reporting Standard (CRS).
MCCA-1 had imposed an obligation on contracting states to collect financial account information of foreign tax residents from their financial institutions and transfer it to their tax authority. The latter in turn, automatically transfers the information to the tax authority of the other state. Immediately MCAA-1 was signed by 53 states and now the Agreement is in force in 107 states.
Common Reporting Standard ensures that the financial information is transmitted in specified standard, with approved quality and in the same technical format to enable the receiving states to process it effectively. The information transmitted includes: the names of individuals or legal entities, tax identification number (TIN), their beneficial owners, account details, account balance, gross amount of interest, dividends and other income. CRS introduced “Know Your Customer” (KYC) procedure with the detailed due diligence analysis for the identification of the existing bank clients and new comers.
Furthermore, European Union had implemented the CRS into its law by amending DAC in 2014 (DAC-2) and superseded the Savings Directive. The Member states were obliged to implement DAC-2 by the end of 2015. As such, according to the Directive all financial institutions in EU had to comply with CRS by implementing due diligence and all the technical facilities.
Following DAC-2, Member States had to amend their legislation until the end of 2016 with automatic exchange of information regarding to Advance cross-border Rulings and Advance Pricing Agreements (DAC-3). This step had further extended the cross-border cooperation between Member States and had provided them with opportunity to access influence of above-mentioned rulings and agreements on their tax assessment.2
With the further amendments to DAC, by June 2017 each Member State had to implement Country by Country Reporting (CbC) (DAC-4) with regards to the multi-national enterprises (MNE) into their tax legislation. If MNE had exceeded the threshold of 750 mln Euro of consolidated revenue, parent entity had to report specific financial data to the local authorized authority, and the latter provides the report to the competent authority of the other state(s), where the subsidiaries are located. The goal of CbC is to enable the group’s tax audits and effective taxation.
Furthermore, an implementation of Anti-Money Laundering provisions (DAC-5)3 and introduction of the obligation of professional intermediaries (lawyers, tax advisors and others) to report on tax cross-border arrangements with specific tax benefit (DAC-6)4 into domestic tax legislation of EU Member states facilitated the tax authorities not only with the broad, well-defined resources and instruments to tackle tax erosion and tax avoidance, but also, provided them with possibility to apply and collect penalties. It is vital to mention, that in case the professional service provider is protected by the domestic law from disclosing the client’s information, the obligation to report transfers to the taxpayer. DAC-6 had become the final major amendment in the row of legal acts to improve the tax assistance within the EU.
Footnotes
- 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. 497
- 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. 502
- DAC-5 had to be implemented until 31.12.2017
- DAC-6 had to be implemented into Member states domestic law by 31.12.2019, applied from 1st of July 2020.
About the Author: Olena Bokan
olena.bokan@astonground.com
