The 2008 financial crisis and the billions lost by States to tax havens highlighted the need to combat tax fraud more effectively.
This observation gave rise to a first initiative in 2010: the Foreign Account Tax Compliance Act (FATCA). In concrete terms, this law allows the United States to enter into agreements with foreign financial institutions in order to automatically obtain a set of information about its tax residents.
FATCA thus paved the way for the OECD which, after several years of work, created a new standard: the Common Reporting Standard, CRS (Norme Commune de Déclaration). It allows signatory States to conclude bilateral or multilateral agreements on the automatic exchange of bank account information about their tax residents. Unlike FATCA, there is reciprocity in the exchange of bank account information between countries.
Today more than 120 jurisdictions participate in AEOI (list, as at the date of writing, at the end of the article).
Our tax law firm explains below the ins and outs of AEOI.
The end of banking secrecy?
The watchword of the financial and administrative institutions of the 104 signatory countries of the Common Reporting Standard is: collect – report – exchange.
Financial institutions such as banks must identify persons who hold or are beneficiaries of bank accounts while being tax resident in another State.
To this end, customers must now be as transparent as possible about their information. Thus, since 30 September 2017, if you wish to open a bank account in a country that has signed this new standard, you will in principle be required to complete and sign a self-certification bringing together all the documents needed to identify your tax residence, as well as your tax identification number. If you refuse to provide this information, you will in principle be refused the opening of an account. Likewise, should the declared tax residence change, a new self-certification must be provided by the account holders.
The financial institutions of the signatory countries are also required to report the information collected on their customers to the tax authorities annually. The information exchanged includes in particular the surname, first name, account number, opening date, account balance, interest received, etc.
Finally, the tax authorities must transmit all of this information to their counterpart in the country where the individual or legal entity behind the account is tax resident.
It should be noted that, regardless of the amount of the account balance held abroad by an individual, the exchange of information will take place automatically.
For legal entities holding or benefiting from an account whose balance does not exceed USD 250,000, these exchanges of information are in principle restricted.
However, not all countries apply this threshold. Logic would even suggest that, in a context of stepped-up efforts against tax fraud, this threshold should disappear for good.
AEOI thus establishes a system in which banking secrecy no longer exists, since there are very few, if any, limits on the exchange of bank account information. Given that more than half of the countries in the world have signed this convention, banking secrecy is increasingly disappearing. However, countries such as the United States remain more liberal and in principle refuse to exchange information from their banking institutions.
The end of tax fraud?
AEOI is the anti-fraud tool par excellence, since it will allow States to detect which of their tax residents are committing fraud. It should be remembered that the mere fact of holding or being the beneficiary of an account abroad without having declared it to the tax authorities may, in certain circumstances, constitute tax fraud.
The approval of the new Common Reporting Standard therefore placed a heavy threat over persons in an irregular situation.
Indeed, a person whose situation is irregular may be subject to litigation and faces rather severe penalties. These penalties are first and foremost tax penalties: fixed fines ranging from €1,500 to €10,000 per year and per undeclared account, tax surcharges of up to 80% and late-payment interest of 2.40% per year (4.80% for periods prior to 2018). In certain cases, generally the most serious ones, the penalties may be criminal and go up to a fine of €3 million (or twice the proceeds of the offence) and 7 years’ imprisonment.
For fear of such penalties, a large wave of voluntary regularisations took place even before the standard came into force.
Please note that the voluntary nature of the regularisation of foreign accounts does not make it possible to escape the penalties provided for in the event of litigation. In principle, it will only mitigate them.
The fixed fine will always be the same, i.e. between €1,500 and €10,000 per account and per year of concealment. On the other hand, the surcharges may, depending on the case, be reduced, and late-payment interest (2.40% per year) may, under certain conditions, be halved in the event of voluntary filing of an amended return (déclaration rectificative). Criminal prosecution is still possible, but the tax authorities are often lenient in this type of voluntary regularisation. However, the end of the “Bercy lock” (verrou de Bercy) now exposes taxpayers to a greater risk of criminal complications than before.
To defend itself against the charge of having become too repressive, the French tax administration launched a “last chance” campaign, calling by post on persons with an undeclared account abroad to regularise their situation as quickly as possible or face the maximum criminal and tax penalties.
In a report dated 7 June 2019, the OECD highlighted the positive results of the end of banking secrecy and the introduction of AEOI. Indeed, the threat it placed on taxpayers enabled France to recover nearly €10 billion through voluntary regularisations.
Between 2008 (the time of the financial crisis) and 2018, the number of offshore bank accounts fell by 25%. There were also €489 billion fewer bank deposits in so-called offshore accounts.
While for the time being the results on tax fraud are fairly conclusive, certain difficulties remain, such as identifying the beneficial owners of certain trusts or chains of companies. In addition, transparency of bank data is not yet applied everywhere in the world.
AEOI signatory country (as at the date of writing of the article)
Date exchanges apply from
South Africa
2017
Albania
2018
Germany
2017
Andorra
2018
Anguilla
2017
Antigua and Barbuda
2018
Saudi Arabia
2018
Argentina
2017
Aruba
2018
Australia
2018
Austria
2018
Bahamas
2018
Barbados
2017
Belgium
2017
Belize
2018
Bermuda
2017
Brazil
2018
Brunei
2018
Bulgaria
2017
Canada
2018
Chile
2018
China
2018
Cyprus
2017
Colombia
2017
South Korea
2017
Costa Rica
2018
Croatia
2017
Curaçao
2017
Denmark
2017
Dominica
2017
United Arab Emirates (Dubai)
2018
Spain
2017
Estonia
2017
Finland
2017
France
2017
Ghana
2018
Gibraltar
2017
Greece
2017
Grenada
2018
Greenland
2017
Guernsey
2017
Hong Kong (China)
2018
Hungary
2017
Isle of Man
2017
Mauritius
2018
Cayman Islands
2017
Cook Islands
2018
Faroe Islands
2017
Marshall Islands
2018
British Virgin Islands
2017
India
2017
Indonesia
2018
Ireland
2017
Iceland
2017
Israel
2018
Italy
2017
Japan
2018
Jersey
2017
Kuwait
2018
Latvia
2017
Liechtenstein
2017
Lithuania
2017
Luxembourg
2017
Macao (China)
2018
Malaysia
2018
Malta
2017
Mexico
2017
Monaco
2018
Montserrat
2017
Niue
2017
Norway
2017
New Zealand
2018
Netherlands
2017
Poland
2017
Portugal
2017
Qatar
2018
Czech Republic
2017
Romania
2017
United Kingdom
2017
Russia
2018
Saint Kitts and Nevis
2018
Saint Lucia
2018
San Marino
2017
Saint Martin
2018
Saint Vincent and the Grenadines
2018
Samoa
2018
Seychelles
2017
Singapore
2018
Slovakia
2017
Slovenia
2017
Sweden
2017
Switzerland
2018
Trinidad and Tobago
2017
Turks and Caicos
2017
Turkey
2018
Uruguay
2018
Our tax law firm can assist you.
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