Roche & Cie

Automatic exchange of fiscal information: end of the banking secrecy?

08 Oct 2015

While information succeeds one another in this subject, it seems useful to focus on the issue of the automatic exchange of tax information between tax authorities at European and global level.

At global level

OECD (Organization for Economic Co-operation and Development) published in 2014 a new model of tax convention the purpose of which is to implement a Common Reporting Standard. This Standard is strongly inspired by the American legislation FATCA (Foreign Account Tax Compliance Act) which allows the American tax authorities to force financial institutions worldwide to provide all information which are likely to affect an American taxpayer.

In 2014, 51 countries (“early adopters”) had signed a Multilateral Agreement which will set up the automatic exchange of information. The first automatic exchanges are expected on September 2017.

Other countries had signed recently the Multilateral Agreement (around 90 countries are now signatories).

Application of the automatic exchange of information

  • In red / Engaged for 2017
  • In grey / Engaged for 2018
  • In black / Countries staying away

The automatic exchange of information forces the financial institutions in which bank accounts was opened by non residents (including through intermediary structures), to provide to tax authorities, information concerning all kind of investment income (interests, dividends, income of life insurance agreements and other similar income) but also the balances and the income of financial asset’s sales. Tax authorities are in charge to transfer this information to the account holder’s tax authority.

In this way, every year, the French tax authority will be able to get information about the assets owned by French residents in a financial institution located in a country having signed an automatic exchange convention.

The automatic exchange of information will be also focused on the beneficiary of structures like trusts or foundations.

At European level

The European Directive 2011/16/EU concerning tax administrative cooperation came into force on January 1st, 2013. One of the main lines of this directive is to limit the bank secrecy. A Member State can’t refuse to give information concerning the accounts of non residents to other States for the only reason that the accounts are held by a financial institution.

This directive sets up the whole of proceedings allowing a better cooperation between tax authorities of the European Union (EU), like the exchanges of information on request, the spontaneous exchanges, the automatic exchanges, the participation to administrative enquiries, the simultaneous controls and the notifications of tax decisions.

This directive had been recently modified by the Directive 2014/107/EU which had extended the cooperation between tax authorities to the automatic exchange of information on financial accounts. In fact, in order to set up a common procedure of automatic exchange within the EU, the Commission had chosen to take up the Common Standard of OECD  in the 2014 Directive (amending the directive on Administrative co-operation dated 2011, “DAC”).

This proposition had led to the directive 2014/107/EU dated 9 December 2014 (“DAC 2”). The first automatic exchange of information should occur in 2017 with data collected in 2016.

The Directive 2014/107/EU forces the Member States to exchange automatically in 2017, information on interests, on dividends (and similar incomes), on the balance of financial accounts and on the sale’s income of financial assets.

In fact, the initial directive was limited especially to the life insurance income, but the Common Standard covers all the types of income (including share capital gains, income on financial derivatives, life insurance agreement, etc.) but also the capital or money deposited abroad, no matter the amount.

Besides, there is no exemption planned depending on the investment threshold, the date of acquisition or equity emission.

Precisions on application dates

Outside the EU area, the automatic exchange of information will be applicable in more than 90 countries in 2017 and 2018 (depending on countries), some of themknown for their bank secrecy or their opacity such as Liechtenstein, Jersey, Bahamas, Bermuda, Cayman Islands or British Virgin Islands.

On 15 October 2013, Switzerland signed with the OECD the Multilateral Agreement on the automatic exchange of information. On 19 March 2015, Switzerland signed also an agreement with the EU aiming to introduce the Common Standard. In accordance with this agreement and further to the positive vote of the National Council of Switzerland, the bank data collection will be set up in 2017, with an information exchange in 2018, between Switzerland and the 28 EU Member States.

Except for those who want to transfer their income in countries which are not committed to set up the automatic exchange of information (like Panama), the owners of accounts in Switzerland have to accept the regularization before that Administrations have at their disposal the means allowing them to discover their accounts. Trying to postpone the regularization by hoping to gain one year of prescription is a mistake, as the extension to 10 years of the prescription relative to non-declared abroad accounts means that the prescription will be gained only in 2017 for the tax income of 2006, and from 2018 for the ISF (wealth tax) and the inheritance tax.

In the EU, the automatic exchange of information is applicable since January 1st, 2015.

In fact, since January 1st, 2015, the automatic exchange of information concerns mainly the interests collected and life insurance income. The exchange concerns also Luxembourg which had accepted on the 10th of April 2013 a transition to the automatic exchange of information.

Further to the amendment made by the directive of 2014, from January 1st, 2017, the automatic exchange of information will be focused on the whole of information planned by the Common Standard relative to the information collected in 2016.

Concerning the practical implementation, the Multilateral Agreement defines the schedule and the terms of the exchange of information. The competent authorities will exchange information according to IT, secured and pre-made plan, on an annual basis, within the nine months following the end of the civil year in which information are related.

For now, it’s difficult to draw up an overview of the practical implementation of these new rules, especially concerning the amount of transferred information and the efficiency of this legislation. However, many Governments are satisfied with the scheduled end of the bank secrecy on a large scale.