What is Exchange of Information?
Exchange of Information is an essential tool for tax authorities worldwide to ensure that all taxpayers pay the correct amount of tax. The information received can be used to detect compliance risks or it can be used to improve service quality to taxpayers by prefilling declarations with relevant information.
While the cross-border movement of goods, services, and persons was intensifying, tax authorities were facing obstacles in obtaining information about their residents’ international transactions, offshore assets, and financial affairs.
This scenario has now changed: tax administrations have worked together and engaged in worldwide cooperation through the Exchange of Information in tax matters.
By implementing international exchange standards and other instruments, bank secrecy has ended and cross-border tax evasion has diminished considerably.
In general, Exchange of Information refers to the process through which countries officially send or receive relevant information through the official channels, and under any current applicable standards.
When used effectively, EOI combats tax evasion, enhances tax compliance, improves tax transparency, increases tax revenues, and promotes a level playing field for taxpayers worldwide.
Exchange of Information on request (EOIR)
EOIR is used when additional information for tax purposes is needed from another jurisdiction.
EOIR is the Exchange of Information based on a specific request made by one jurisdiction to another.
The international standard provides that the information requested must be foreseeably relevant to the administration and enforcement of domestic tax laws of the requesting jurisdiction.
Automatic Exchange of Information (AEOI)
Tax administrations automatically exchange tax information received from financial institutions or Multi-national Enterprises to the residence jurisdiction of the taxpayer, in electronic form and periodically.
FATCA: The Foreign Account Tax Compliance Act
This is an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore.
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS.
There are serious penalties for not reporting these financial assets.
FATCA will also require certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
The reporting institutions will include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies.
Some non-financial foreign entities will also have to report certain of their U.S. owners.
CRS: The Common Reporting Standard.
CRS is the standard model for AEOI designed and governed by the OECD. The information to be shared corresponds to bank account information, including balance, movements, and relevant information to identify the owner of the account.
The CRS contains the reporting and due diligence standard that underpins the automatic exchange of financial account information.
A jurisdiction implementing the CRS must have domestic legislation in place that requires financial institutions to report information consistent with the scope of reporting set out and to follow due diligence procedures consistent with the procedures contained in the OECD guide.
CBC: Country by Country report.
Pursuant to OECD’s Base Erosion and Profit Shifting (BEPS) Action 13, Multinational Enterprise Groups (MNE Groups) exceeding a consolidated group revenue threshold of EUR 750 million (or its local currency equivalent) are mandated to file Country-by-Country (CbC) Reports.
These reports, prepared on an annual basis, provide a granular breakdown of the MNE Group’s global operations for each tax jurisdiction in which it operates.
By providing this comprehensive, jurisdiction-specific data, CbC Reports empower tax authorities to perform high-level transfer pricing risk assessments and identify potential BEPS risks.
This information is crucial for ensuring transparency and fostering a level playing field in the international tax landscape.
CBC Reports should be filed in the Tax Jurisdiction of the Reporting Entity and shared between jurisdictions through the Automatic Exchange of Information, under government-to-government mechanisms such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, Double Tax Conventions, or Tax Information Exchange Agreements (TIEAs).
CARF: Crypto-Asset Reporting Framework.
48 jurisdictions have committed to implement the Crypto-Asset Reporting Framework (CARF) by 2027. Many jurisdictions are expected to follow after 2027. The CARF mandates the standardized reporting of tax information on crypto-asset transactions. This information is then automatically exchanged with the jurisdictions of residence of taxpayers on an annual basis.
The CARF consists of rules and commentary which set out:
- The scope of Crypto-Assets to be covered
- The Entities and individuals subject to data collection and reporting requirements
- The transactions subject to reporting, as well as the information to be reported in respect of such transactions
- The due diligence procedures to identify Crypto-Asset Users and Controlling Persons, and to determine the relevant tax jurisdictions for reporting and exchange purposes
Spontaneous Exchange of Information SEOI:
Spontaneous Exchange of Information takes place when a jurisdiction discovers information that is of interest for tax purposes to another jurisdiction, which is either the jurisdiction of the income source or the jurisdiction of tax residence.
SEOI may occur where:
- There are grounds for suspecting that there may be a significant tax loss by the treaty partner.
- A person liable to tax obtains a reduction in, or an exemption from, tax in one jurisdiction which would give rise to an increase in tax or to liability to tax in the other jurisdiction.
- Business dealings between a person liable to tax in one jurisdiction and a person liable to tax in the other jurisdictions are conducted through one or more jurisdictions in such a way that a loss of tax may result in one of the jurisdictions, or in both.
- There are grounds for supposing that a loss of tax may result from artificial transfers of profits within groups of enterprise.
NTJ: Substantial Activities in No or Only Nominal Tax Jurisdictions
The NTJ Standard requires no or only nominal tax jurisdictions to exchange information on entities, their owners, operational presence, and business activities in specified situations.
Entities operating in jurisdictions with no or only nominal taxation must demonstrate substantial economic activities.
This ensures that businesses in these jurisdictions are not merely established there for tax avoidance purposes but are genuinely engaged in significant operational activities.
The NTJ standard allows jurisdictions to exchange information related to economic substance with partner jurisdictions.
It is designed to ensure that entities operating in low-tax jurisdictions genuinely conduct substantial economic activities, thereby promoting tax fairness and preventing abusive tax practices.
ETR: Exchange of Tax Rulings
ETR is a framework for the compulsory spontaneous Exchange of Information in respect of rulings.
This includes six categories of taxpayer-specific rulings which in the absence of compulsory spontaneous Exchange of Information could give rise to base erosion and profit-shifting concerns.
These six categories of taxpayers are:
- Rulings relating to preferential regimes
- Unilateral APAs or other cross-border unilateral rulings in respect of transfer pricing
- Cross-border rulings providing for a downward adjustment of taxable profits
- Permanent establishment rulings
- Related party conduit rulings
- Any other type of ruling agreed by the Forum on Harmful Tax Practices that in the absence of spontaneous information exchange gives rise to BEPS concerns.
The availability of timely and targeted information on tax rulings, as contemplated in Action 5, is essential to enable tax administrations to quickly identify risk areas.
Who are the governing bodies that rule EoI?
OECD: The Organization for Economic Co-operation and Development (OECD)
The OECD is an international organization dedicated to building better policies for improved lives. Its mission is to develop policies that foster prosperity, equality, opportunity, and well-being for everyone.
In collaboration with governments, policymakers, and citizens, the OECD works to establish evidence-based international standards and to address a variety of social, economic, and environmental challenges.
Whether it’s enhancing economic performance, creating jobs, promoting strong education, or combating international tax evasion, the OECD serves as a unique forum and knowledge hub.
It facilitates data analysis, the exchange of experiences, the sharing of best practices, and provides advice on public policies and international standard-setting.
The OECD provides guidance over the standards, and reviews and facilitates the adoption of these new standards: AEOI, CRS, EOIR, SEOI, NTJ, CARF, and CBC.
IRS: The Internal Revenue Service (IRS)
The IRS is the revenue service of the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory tax law.
It is an agency of the Department of the Treasury and led by the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States.
The duties of the IRS include providing tax assistance to taxpayers; pursuing and resolving instances of erroneous or fraudulent tax filings; and overseeing various benefits programs, including the Affordable Care Act.
