International Tax Transparency regimes
International Tax Transparency regimes require the identification and reporting of reportable offshore financial accounts (AEOI/CRS) as well as potentially aggressive cross-border tax-planning arrangements (DAC6/MDR). Once financial institutions or intermediaries report relevant accounts or arrangements to their local tax authorities, the local tax authorities will automatically exchange the data with the tax authorities in the taxpayers’ jurisdiction of tax residence with the goal to increase tax transparency and compliance globally.
Automatic Exchange of Information (AEOI) / Common Reporting Standard (CRS)
AEOI is a global initiative to combat tax evasion led by the OECD. Since the OECD published the CRS framework in 2015, over 100 jurisdictions including Switzerland have implemented the standard into local law. The relevant rules came into force in Switzerland on 1 January 2017 and Switzerland has first exchanged information with its partner jurisdictions in 2018.
Similar to FATCA, the impact of AEOI/CRS differs depending on whether a Swiss financial institution (FI) is a reporting or non-reporting Swiss FI.
A reporting Swiss FI must register with the Swiss Federal Tax Administration and comply with the following main obligations of a reporting Swiss FI:
- Performing due diligence on its entire account population with the primary goal to identify the tax residences of account holders and controlling persons
- Informing account holders of reportable status and
- Reporting annually to the Swiss Federal Tax Administration information on account holders and controlling persons that are resident in a reportable jurisdiction.
Again similar to FATCA, AEOI/CRS does not only affect banks but also fiduciaries, trust companies, life insurance companies and asset managers. Even though theses may be less impacted by AEOI/CRS as they may qualify for a non-reporting FI status, they are nevertheless required to ensure that they, as well as the trusts, underlying companies or funds they administer, comply with their respective AEOI/CRS obligations.
Moreover, even a Non-Financial Entity (NFE) must be prepared to respond to AEOI/CRS queries from clients and counterparties, including requests to confirm its AEOI/CRS status when opening bank accounts or requesting financing.
6th amendment to the EU Directive on Administrative Cooperation (DAC6) / OECD Mandatory Disclosure Rules
DAC6 is closely linked to certain transparency initiatives from the OECD, such as Base Erosion and Profit Shifting (BEPS) Action 12 and the Mandatory Disclosure Rules (MDR). However, the scope for DAC6 is much broader. Each of these regimes aims to provide tax authorities with additional information in order to quickly close loopholes in tax legislation and react against harmful tax practices.
Under DAC6, such information will be gathered by imposing new disclosure obligations on EU intermediaries and taxpayers in relation to reportable cross-border arrangements (RCBAs).
The definition of an intermediary is very broad and likely captures not only lawyers and advisers, but also banks, trustees, insurance companies, asset managers and other service providers. Where no EU intermediary is involved or the EU intermediary is exempt from reporting based on legal professional privilege, the reporting obligation falls back to the EU taxpayer.
An RCBA is a cross-border arrangement that involves at least one EU Member State and meets at least one ‘hallmark’. The hallmarks can be grouped into the following categories:
- Hallmarks linked to the main benefit test
- Hallmarks related to cross-border transactions
- Hallmarks concerning automatic exchange of information and beneficial ownership (the sole category of hallmarks that is also relevant in the OECD MDR framework)
- Hallmarks concerning transfer pricing
All RCBAs implemented on or after 1 July 2020 must be reported within 30 days. In addition, DAC6 encompasses a retrospective element and requires reporting for RCBAs implemented between 25 June 2018 and 30 June 2020.
The reportable information includes, amongst others:
- Identification of the intermediary and relevant taxpayer
- Details of the relevant hallmarks
- A summary of the arrangement
- Details of the provisions forming the basis for reporting the arrangement
- The value of the arrangement
It is important to keep in mind that every EU member state must implement the DAC6 standard into local law and regulations. As a result, the actual obligations for EU intermediaries and taxpayers may vary from the DAC6 standard depending on the country.
EU MDR Reporter
When it comes to tackling tax avoidance, efforts to improve transparency are high on the agenda for governments around the world. A new EU Directive, "DAC6" (also known as EU MDR) is one of the measures the European Commission has put in place towards achieving this. Although introduced in June 2018, the full reporting requirements do not take effect until 1 July 2020; however at this point an entirely new reporting regime will apply for tax payers (and their advisors).