Exchange of financial information: Will it be given the green light in 2021 and will the data on foreign companies be disclosed?

The background of tax information exchange between countries

Income taxation is one of the main issues faced by the international community, motivating to find the effective solutions for preventing tax evasion and tax base erosion. In the context of global economic integration and competitive proposals from a number of jurisdictions to minimize tax burden on individuals and legal entities, a rather tense situation is created when many countries become more sensitive to the issue of “tax fairness”.

Unilateral attempts by countries to protect their tax bases, on the one hand, resulted in unnecessary administrative burden for business, and on the other hand, stimulated other countries to create new opportunities for tax evasion. For this very reason, the states started to conclude bilateral agreements with specific terms and join their efforts, leveraging the experience of such international structures as the Organisation for Economic Co-operation and Development (OECD).

Exchange of tax information has become one of the instruments for cooperation between the states and tax authorities, which took various forms and now has transformed into the Common Reporting Standard (CRS) many countries want to implement.

Regulation of tax information exchange

To understand the effect of global tax processes and how they will affect the development of Ukraine’s national “tax solutions”, it is important to gain insight into the underlying processes and legal mechanisms for exchange of tax information.

International regulation of tax information exchange started to develop long before the implementation of CRS by the participating countries. Since such information was initially exchanged under the reciprocity principle only, it was based on multilateral and bilateral agreements, which can be classified as follows:

1. Bilateral tax treaties:

• Double Tax Treaties
• Tax Information Exchange Agreements
• Agreements on Cooperation and Mutual Assistance in Tax Compliance Matters
• Agreements on Cooperation and Exchange of Information on Countering Tax Legislation Violations

2. Multilateral Tax Information Exchange Agreements

While the provisions of double tax treaties on tax information exchange are only part of the subject of such treaties, the agreements on tax information exchange are entirely devoted to exchange of information on taxpayers and their respective transactions between the states as an instrument for cooperation between the participating jurisdictions.

As regards multilateral agreements, the first thing to pay attention to is the 1998 Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMAA). Initially, it was not popular since the states independently concluded bilateral agreements on tax information exchange and mutual administrative assistance, including with offshore jurisdictions. However, having realized that separate agreements between the states do not contribute to improving the process of identifying income that is subject to tax, the world community shifted its focus on using multilateral agreements between the countries.

Finally, Article 6 of the Convention was developed providing for automatic exchange of tax information. Based on the abovementioned document, in 2014 the OECD developed CRS – an overarching framework for individuals and the states that provides for prompt and sometimes instant automatic exchange of information on any reportable person available in a single database. As of 31 December 2020, the CRS was joined by 110 jurisdictions.

Ukraine being both a member of the Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes and the state that joined the 2004 Convention (the document was ratified by the Verkhovna Rada and entered into force in 2009) has an opportunity to cooperate on tax matters not only with key jurisdictions participating in the Convention, but also with offshore territories. For example, the United Kingdom, the Netherlands and Denmark have recently extended the Convention to a number of territories to enable exchange of information that was previously impossible. The list of such territories includes the British Virgin Islands, Cayman Islands, Gibraltar, and Isle of Man.

It can be concluded that in Ukraine there have always been sufficient grounds to obtain selective information about an individual or legal entity. And even if Ukraine has not yet started to exchange information automatically under the CRS, other jurisdictions are ready to provide us with such information on parity basis under the above bilateral agreements on tax cooperation or on the basis of the Convention.

What does the Standard for Automatic Exchange of Tax Information envisage

The CRS mandates the banks and other financial institutions (credit unions, microfinance institutions, investment vehicles, certain types of insurance companies, brokers, securities depositories) to provide tax authorities with the following information:

• accounts of individuals of the participating countries if an account holder is a tax resident of the jurisdiction from which information is exchanged automatically (the so-called Reportable Persons);
• accounts of entities, funds and trusts if an entity is controlled by one or more Reportable Persons or receives income from passive sources (royalties, dividends, interest) or is controlled by Passive Non-Financial Entity.

The following information with respect to each Reportable Account shall be collected and reported:

• in the case of an individual: information about account holder (full name, residential address, tax residence jurisdiction, individual tax number, date and place of birth), the account number and currency, receipts for the reporting period, account balance as of the end of the reporting period, detailed information about the financial institution in which the account is opened;
• in the case of a legal entity: name of the entity, tax residence jurisdiction, TIN, and financial information (the account number and currency, current balance, revenue from commercial activities, detailed information about the financial institution where the account is opened), information about the entity's Controlling Person (full name, residential address, tax residence jurisdiction, individual tax number, date and place of birth) as well as information about the Controlling Person's account, if more than 50% of the entity's income is passive income.

While the above list does not include information about the sources of funds, it can be provided at the additional request.

In addition, each jurisdiction has the right to allow the bank to apply due diligence procedures for the client's accounts with an aggregate balance of less than USD 250,000 at the end of the year.

It is important to understand that the main indicator for tax information exchange is the residence of the Reportable Person and not their citizenship (for individuals), which serves as the main factor to determine where the collected information has to be further submitted.

Furthermore, there is a special provision on treatment of trusts under the CRS. The following Controlling Persons who are tax residents of the participating countries are subject to information exchange: the trustees (trusts), protectors, beneficiaries, and any other natural person exercising effective control over the trust.

It should be noted that, under the CRS, all parties to the trust are considered as Controlling Persons, regardless of the powers and authority set forth in the trust deed. Tax residence of a trust is determined by its residence, unless otherwise provided by the national legislation. As regards discretionary trusts, only those beneficiaries in whose favor the income was actually distributed are subject to exchange of information.

It should be noted that automatic exchange between countries is contingent upon meeting all requirements listed below.

To be eligible to participate in tax information exchange, the countries should:

• be signatories of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters;
• be signatories of multilateral or bilateral agreement on automatic exchange of information;
• adopt national legislation allowing for automatic exchange of information;
• have appropriate confidentiality and data safeguards in place;
• file a special notification stating the timeline of the first information exchange, including the list of countries with which such an exchange is planned.

Spontaneous exchange of tax information: What it is and how it works

Additional agreements on spontaneous exchange represent another facet to the exchange of financial information.

For example, Ukraine and the Kingdom of the Netherlands signed an additional Working Agreement on Spontaneous Exchange of Information on 3 April 2002.
Regulatory authorities of Ukraine and the Netherlands shall provide each other, without the prior request, with information “that may be of interest to ensure correct taxation of residents of both countries” and may include information on payments in the form of dividends, interest, royalties, directors’ fees, independent service fees, commissions, and similar payments. The participating countries also inform each other about the methods used to collect tax information and share experience on possible ways to use the information obtained.

Ukraine and the Kingdom of Belgium have reached a new level of tax cooperation by signing an agreement on data exchange and simultaneous inspections, following the conclusion of the Double Tax Treaty (17 March 2003). It stipulates that the spontaneous exchange of information may relate to the change of the individual's place of residence of one of the participating jurisdictions, information on the amount of taxes paid, transfer of funds within the group of companies and other data that will help to correctly determine the size of required taxes.

The parties to the above agreement also agreed that they could simultaneously and independently, each in their own country, examine the “tax situation” of one or more taxpayers who represent joint business and complementary interest when there is a suspicion of tax avoidance schemes being used, undeclared income, and transactions with tax havens.

It is worth mentioning that the agreements on spontaneous exchange take effect from the date of their signing, which further justifies their name.

Attention should also be paid to the Standard on Spontaneous Exchange of Information with Countries in Low-Tax Jurisdictions (Substantial Activities in No or Only Nominal Tax Jurisdictions), approved by the OECD on 15 October 2019. The Standard includes details as to the circumstances giving rise to exchange, the data points included in the exchange, and the jurisdictions to be exchanged with. The spontaneous information exchange is based on the Convention, tax information exchange agreements or bilateral agreements on spontaneous information exchange.

The Standard envisages disclosure of information by zero or low-tax jurisdiction to the country of ultimate beneficiary’s residence. Such disclosure is required in cases of the entity’s non-compliance with the economic substance requirements, absence of real employees and physical premises in the jurisdiction, and non-compliance with other requirements applicable in respective jurisdictions. Information that should be disclosed and exchanged includes the entity’s name and address, type of income, beneficiary’s name and size of income. Upon receipt of the specified information, the recipient jurisdiction can request additional information.

What brings Ukraine closer to the implementation of financial information exchange

In order for Ukraine to join the international network of multilateral automatic information exchange, the legislator should launch the second round of simplifying the banking secrecy disclosure (to enable tax authorities to access financial accounts of individuals) and develop regulations on the form and procedure for filing reports, the list of reportable financial institutions, and rules for identifying reportable accounts. It will also be helpful to select partner countries, undergo checks by the OECD Global Forum, install and automate respective hardware and software tools to launch collection and exchange of information, and insure that the required confidentiality standards are in place.

According to the 2025 Ukraine Financial Sector Development Strategy, the OECD Global Forum should assess Ukraine’s compliance with data confidentiality and security requirements for the purposes of automatic exchange (the assessment results are expected in the near future). In addition, the Global Forum will assess the implementation of technical measures required for the automatic information exchange by the end of 2022.

This means that, in the event of a positive decision, information available as of 31 December 2022 on Ukrainian tax residents’ account balances in foreign banks and income received (in particular, interests on deposits) will be disclosed to Ukrainian tax authorities. As a result, the regulatory authority may request documents that confirm the sources of funds as well as their declaration and taxation in Ukraine.

Source: MinFin