The ability to keep assets and income hidden from taxmen throughout the world is about to become exponentially harder with confirmation that 97 countries have begun a process that will see an explosion in the amount of financial information shared between governments.
New Zealand’s commitment to the global fight against tax evasion was reinforced last week when Inland Revenue’s policy wonks began a consultation process to adopt the AEOI Standards which represent the most concerted measures seen so far in lighting up financial nooks and crannies the world over.
There are three key themes running through the rapidly changing regulatory landscape and each of them underscores just how radically the global tax system is being overhauled in the wake of the Global Financial Crisis. In short they are greater transparency, more reporting and, most critically of all, vastly increased levels of cooperation between jurisdictions through the automatic exchange of financial information.
Readers may recall that the United States began the global offensive with a unilateral strike through its tough new FATCA regime. The G20 and OECD then weighed in with their BEPS (base erosion and profit shifting) initiatives aimed at businesses which are gaming existing tax settings to artificially reduce the size of their worldwide tax liabilities.
Now the OECD has upped the ante with AEOI Standards which expose individuals to the same level of transparency and scrutiny that corporations and other entities will face under the new international tax framework.
As one would expect for a range of issues which are now treated with the same level of gravitas as standards aimed at preventing international money-laundering and terrorist financing, the AEOI Standards are hefty pieces of work which contain vast amounts of detail. However the essential features can be summarised as follows:
- AEOI Standards are focussed on developed nations and international finance centres, particularly secretive offshore jurisdictions commonly referred to as tax havens. In reality, however, as the lists below make clear, the signatories basically cover the board in terms of every safe and reliable destination for capital.
- The information that will be exchanged identifies financial assets, income and wealth which is held offshore and often goes unreported for tax purposes in the country where the owner or benefactor resides. AEOI partners will use that information to detect current tax evasion and deter future evasion.
- So far all G20 members, all OECD countries and all but three of the jurisdictions that have or operate as an international finance centre have committed to implementing the AEOI measures.
- New Zealand will begin gathering tax information to exchange with its AEOI partners from 1 July 2017. This will allow Inland Revenue to complete its first exchange of information with other tax authorities by 30 September 2018 (at the latest). One assumes Inland Revenue will also begin to receive information from the earlier of these two dates.
- The AEOI Standards are driving new domestic legislation requiring certain records to be kept and reported to Inland Revenue, negating any avoidance or circumventing of the AEOI rules, and providing enforcement measures to deter (and punish) non-compliance. This is what the current Inland Revenue consultation process will feed into.
- Reporting obligations will go well beyond banks. They will include other financial institutions and intermediaries such as brokers, custodians, collective investment vehicles, managed entities and insurers.
- Certain financial assets such as deceased estates and retirement and pension accounts will be exempt from the rules. The full range of exemptions will become clearer as AEOI implementation takes firmer shape.
- Financial accounts to be reported on include bank accounts, deposit accounts, custodial accounts, equity and debt interests, cash value insurance contracts and annuity contracts.
- Financial assets include shares, notes, bonds, debentures and other commercial paper, partnership interests, commodities, swap contracts, insurances and security options. It does not include any direct interest in real property.
- Reportable information includes personal data (eg name, address, residence and tax identification numbers) and financial data (eg amounts of interest or dividend income, account balances, contract values and proceeds realised from the sale of financial assets).
Early adopters who plan to start exchanging information next year include: Bermuda, British Virgin Islands, Cayman Islands, Cyprus, Denmark, France, Germany, Gibraltar, Greece, Guernsey, India, Ireland, Isle of Man, Italy, Jersey, Korea, Luxembourg, Malta, Mexico, Netherlands, Norway, Portugal, San Marino, South Africa, Spain, Trinidad and Tobago, Turks and Caicos, United Kingdom.
2018 (standard) adopters include: NZ, Australia, Andorra, Austria, Bahamas, Brazil, Canada, Chile, China, Cook Islands, Grenada, Hong Kong, Indonesia, Israel, Japan, Kuwait, Macao, Malaysia, Monaco, Panama, Qatar, Russia, St Kitts and Nevis, Samoa, St Lucia, Saudi Arabia, Singapore, St Maarten, Switzerland, Turkey, United Arab Emirates.
Countries yet to agree: Bahrain, Nauru, Vanuatu.
What about the United States? They don’t need to sign up to AEOI. Uncle Sam already enjoys the same rights and obligations to information exchange through FATCA as the rest of the word intends to achieve through AEOI mechanisms.
To find out more click HERE.
This post was written by Kelvin Scoble.
Opinions expressed in this article are general in nature and are not intended to be relied upon by any person as a recommendation or advice regarding any tax obligations or financial options they might have. Readers should not rely upon these opinions and should always seek professional advice that is specific to the circumstances at hand. Neither the writer nor Johnston Associates South accepts any liability to any person for any issue discussed in this forum.