For about 5 years, the OECD and the EU are working on increasing tax transparency and closing any loopholes. Below, we summarize some of the most important tax transparency initiatives and their impact on financial services firms, trust companies, fiduciaries but also individuals.
The AEoI became a global standard and about 100 countries are annually exchanging information.
Under the AEoI, not only individuals holding reportable accounts are affected but also entities, including trusts and foundations. Furthermore, depending on the status of the entity, the bank managing the accounts is also required to report the controlling persons (in case of Passive Non-Financial Entities, NFE) or the entity itself is required to report under the AEoI (e.g. as investment entity).
Irrespective of the AEoI, foreign tax authorities may obtain data of (former) clients of banks, insurance companies or, for example, fiduciary firms by submitting a so-called (group) request for administrative assistance.
This means that tax authorities are able to ask for information on a group of taxpayers, without naming them individually, as long as the request is not a "fishing expedition". A group request must in particular include a detailed description of the group of the affected taxpayers with a clear and fact-based justification on the grounds that the taxpayers falling into the group are generally not tax-compliant (e.g. clients who closed an account before the entry into force of the AEoI and had not provided the bank with a tax compliance confirmation).
We expect that a number of countries will approach Swiss banks with group requests, such as the Netherlands and recently Italy. However, it still remains to be seen which countries will place similar requests.
On 25 June 2018, the EU Directive 2018/822 (DAC6), which introduced mandatory disclosure rules, entered into force. These rules target all kinds of cross-border arrangements that fall under a hallmark of the Directive, irrespective of whether an advisor or intermediary is involved or not.
EU Member States have until 31 December 2019 to implement the new rules, which will be applicable from 1 July 2020. As of 1 July 2020, qualifying intermediaries (or, in certain cases, the respective taxpayer) will be required to disclose information on reportable cross-border tax arrangements to their authorities within 30 days of the earlier of when the arrangement is made available for implementation, ready for implementation or actually implemented.
However, intermediaries and respective taxpayers will also be required to disclose information retroactively by 31 August 2020 on reportable cross-border arrangements that have been implemented since 25 June 2018.
In order for a transaction to be reportable under DAC6, it is required that:
Please find further information on the hallmarks and the information to be reported here. The hallmarks that trigger a reporting obligation are drafted very broadly, so they even catch standard transactions. Furthermore, it is important to note that whenever there is no EU intermediary, the reporting obligations are with the EU taxpayer (individual or company).
Globally there has been an increasing focus on the need for transparency in business, especially in relation to ownership. A key example of this is the introduction of the 4th EU Anti-Money Laundering Directive (4th AML Directive). Among other measures designed to combat money laundering and terrorist financing, the 4th AML Directive required EU member states to set up registers of the ultimate beneficial owners (UBOs) of entities.
Under the 4th AML Directive, member states were not required to make the beneficial ownership register publicly available. Based on the latest amendment of this directive (5th EU AML Directive), however, register for EU companies will be made accessible to the general public in early 2020 and the register for trusts and similar arrangements will be made public to persons with a legitimate interest later in the year 2020.
Furthermore, non EU-countries, such as the BVI, Cayman Islands or Liechtenstein have established beneficial owner registers too, which are, however, not publicly accessible.
In a number of offshore jurisdictions, including the BVI, Cayman Islands, Bermuda, Guernsey, Jersey and the Isle of Man, legislation entered into force on 1 January 2019 that requires entities carrying on specified activities to have adequate economic substance. These rule are a response to EU and OECD initiatives in the context of establishing a standard on substantial activities requirements for zero or almost-zero tax jurisdictions.
It is still unclear how much local substance is required, i.e. what the term "adequate" means. However, if a company that is falling under the local substance regulations is solely administered by directors not resident in the entity’s jurisdiction of domicile, the economic substance test should in most cases not be met. Non-compliance is not an option, as depending on the jurisdiction, substantial penalties could be levied and a deletion from the commercial register is possible.
Please read our brochure "Tax Transparency" for more information about these transparency initiatives and additional transparency developments (OECD Mandatory Disclosure Rules, OECD initiative against fictitious tax residences).
Taking into account these far-reaching transparency regulations, not only financial services or fiduciary firms but also ordinary companies and even individuals must deal with these topics to be able to comply with these regulations. Tax compliance is not anymore sufficient. If, for example, a reporting is missed under DAC6, a penalty may be levied, even if the involved persons are fully tax compliant.