AEOI – the world delivers on the new global standard

AEOI exchanges in 2018 100 jurisdictions committed to implement the AEOI standard 96% of jurisdictions have passed the required domestic laws 90% have concluded the necessary international exchange instruments 91% have put in place the IT systems Around 4,500 exchanges have taken place so far in 2018

After much fanfare in 2014, with the development of the standard for the automatic exchange of financial account information (the AEOI standard) and the widespread commitments to implement it, the international community has delivered with action.

Vast numbers of jurisdictions across the world have changed their laws, concluded new international information exchange agreements and put in place the necessary systems and processes to collect and transmit the information. Following the commencement of automatic exchanges of financial information last year, September 2018 represents the start of the global shift in tax transparency with 86 jurisdictions across the world conducting around 4,500 exchanges of financial information.

The occasion was marked at this year's plenary meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) held between November 20 and 22 2018 at Punta del Este in Uruguay. With its 154 member jurisdictions, the Global Forum has been at the heart of encouraging, facilitating and supporting the move to automatic exchange, from calling for the commitments to implement the AEOI standard through to the delivery of the actual exchanges.

Few could have predicted this milestone year for the global community just a few years ago. At a point, the standard on the exchange of information on request (the EOIR standard) was just becoming embedded, there emerged an intense resolve in the international community to go even further and exchange certain financial information automatically. This was prompted by the financial crisis, where public revenues came under pressure and the financial sector needed significant support. Tax evasion and avoidance scandals appearing in the public domain and advancements in IT made automated exchange easier to achieve. Tax authorities needed to catch up with financial markets in their ability to see across borders. Consequently, just a few years later, many jurisdictions that had never previously countenanced the automatic exchange of information have exchanged a very wide scope of financial information automatically, including on a wide range of financial accounts and assets, held by individuals and entities, including in banks, insurers, funds and trusts. This landmark commencement of automatic exchange both reaffirms the end of banking secrecy and is a sign of the international community's determination to ensure taxpayers comply with their tax obligations, even in a globalised world. It also represents a remarkable success for the tax transparency movement.

An effective AEOI standard requires its widespread adoption. Otherwise, financial assets can simply be moved to a non-participating jurisdiction, compromising the effectiveness of the AEOI standard, damaging compliant financial institutions and undermining the global level playing field. Therefore, soon after it adopted the AEOI standard, the Global Forum launched a commitment process in 2014 to ensure its widespread implementation. The commitment requested was for jurisdictions to implement the AEOI standard, to exchange information with all interested appropriate partners (being all those jurisdictions interested in receiving information and that meet the necessary standards in confidentiality and data safeguards) and to commence exchanges in 2017 or 2018.

In response, as shown in Table 1, a total of 10 jurisdictions committed to commence exchanges by 2018 (with many committed to commencing a year earlier in 2017). Developing countries that do not host a financial centre were not asked to make such a commitment, recognising the constraints they face and the reduced risk they present to the level playing field. Nevertheless, there are a number of developing countries among those that committed to implement the AEOI standard to specific timelines, with two even commencing exchanges in 2018 (Azerbaijan and Pakistan). The Global Forum's strategy towards gradually increased involvement of the developing countries is set out in the Global Forum's Plan of Action for Developing Countries Participation in AEOI. Extensive technical assistance is being provided to its members to enable all jurisdictions to fully participate in the benefits this new tax cooperation brings.

Table 1. AEOI committed jurisdictions Jurisdictions undertaking first exchanges in 2017 (49) Anguilla, Argentina, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands and United Kingdom. Jurisdictions undertaking first exchanges by 2018 (51) Andorra, Antigua and Barbuda, Aruba, Australia, Austria, Azerbaijan, The Bahamas, Bahrain, Barbados, Belize, Brazil, Brunei Darussalam, Canada, Chile, China (People's Republic of), Cook Islands, Costa Rica, Curaçao, Dominica, Greenland, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Lebanon, Macau (China), Malaysia, Marshall Islands, Mauritius, Monaco, Nauru, New Zealand, Niue, Pakistan, Panama, Qatar, Russia, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Trinidad and Tobago, Turkey, United Arab Emirates, Uruguay and Vanuatu. Jurisdictions undertaking first exchanges after 2018 (8) Albania (2020), Ghana (2019), Kazakhstan (2020), Kuwait (2019), Maldives (2020), Nigeria (2019), Oman (2020) and Peru (2020). Notes 1. The US has undertaken automatic information exchanges pursuant to FATCA from 2015 and entered into intergovernmental agreements (IGAs) with other jurisdictions to do so. The Model 1A IGAs entered into by the US acknowledge the need for the US to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions. They also include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve such equivalent levels of reciprocal automatic exchange. 2. Turkey notes that the information in the documents with reference to Cyprus relates to the southern part of the Island. There is no single authority representing both Turkish and Greek Cypriot people on the Island. Turkey recognises the Turkish Republic of Northern Cyprus (TRNC). Until a lasting and equitable solution is found within the context of the United Nations, Turkey shall preserve its position concerning the Cyprus issue. Note by all the European Union member states of the OECD and the European Union: The Republic of Cyprus is recognised by all members of the United Nations with the exception of Turkey. The information in the documents relates to the area under the effective control of the Government of the Republic of Cyprus.

An analysis would not be complete without mentioning the US, which has not so far committed to implement the AEOI standard. It should, however, be noted that the US has exchanged information automatically since 2015 pursuant to its Foreign Account Tax Compliance Act (FATCA) intergovernmental agreements, which it has concluded with a large number of partner jurisdictions. These agreements also include a commitment to pursue reciprocal automatic exchange, which, if delivered, would result in similar exchanges to those taking place under the AEOI standard.

Even after the widespread commitments have been made, delivering the benefits of the AEOI standard relies on there being a level playing field in relation to the timeliness and effectiveness of its implementation. The resulting level playing field:

• Maximises the effectiveness of the AEOI standard by ensuring all jurisdictions properly implement the rules; and

• Minimises costs to businesses by avoiding the need to comply with a multitude of different and potentially conflicting international standards.

Given its already established expertise in tax transparency matters and its global reach, the G20 turned to the Global Forum to request it to monitor and review the implementation of the new AEOI standard. The Global Forum is the principal international body that ensures implementation of the internationally agreed standards of transparency and exchange of information in the tax area through its peer review processes. Since 2009, it has been reviewing the implementation of the EOIR standard. The membership of the Global Forum is illustrated in the map below.

With respect to the AEOI standard, in recognition that full reviews of the effectiveness of the implementation of the AEOI standard could only take place once exchanges are fully underway, the Global Forum put in place a 'staged approach' to monitor, assess and assist in the implementation of the AEOI standard. Its various work streams are set out in Figure 2.

A more detailed account of the staged approach is set out in the Global Forum's 2018 AEOI Implementation Report. In short, there are two core components of the Global Forum's implementation of the this approach:

• Monitoring of the timely delivery of all the key milestones in the implementation of the standard; and

• Overseeing the quality of this implementation through a peer review mechanism.

The monitoring mechanism (see element 1 in Figure 2) aims to ensure that the political commitments made come to fruition in time for the 2018 exchanges. This entails close engagement with all the committed jurisdictions that report on a regular basis on the progress made with respect to:

• Passing of the domestic legislation, providing for due diligence and reporting obligations on the local financial institutions;

• Putting in place an international exchange agreement framework, allowing for the widespread exchange with all the respective partner jurisdictions; and

• Adopting technical solutions to support the automatic transmission of data with the partner jurisdictions.

As far as legal frameworks are concerned, out of 100 jurisdictions committed to commence exchanges in 2017 or 2018, only four – Dominica, Israel, Sint Maarten and Trinidad and Tobago – have not so far managed to introduce a complete domestic legal basis. Some jurisdictions also do not have the international legal framework in place yet. However, the vast majority have delivered what is needed. As presented in Figure 3, the domestic and international legal frameworks are in place in 90% of the committed jurisdictions. All those exchanging information are also using the the common transmission system (CTS) put in place by the OECD's Forum on Tax Administration and managed by the Global Forum in order to securely exchange information between tax authorities. In total, 91% of the committed jurisdictions have finalised the technical implementation of the CTS with at least a few other expected to do so shortly.

The various staged approach peer review assessments of the implementation of the standard conducted by the Global Forum are outlined below (corresponding to elements 2 through 5 in Figure 2). Where gaps are identified, recommendations are made to address the issues as soon as possible and the jurisdiction must report back every 12 months on the progress made. Further detail is set out below:

Each jurisdiction is assessed by a panel of experts from member jurisdictions in relation to the confidentiality and data safeguard standards to ensure they meet the requirements before the jurisdiction receiving information. The review of these standards for all of the jurisdictions exchanging information have been already completed.

The vast majority of the jurisdictions' domestic legislative frameworks implementing the AEOI standard have been reviewed. This includes around 350 jurisdiction-specific exclusions of certain financial institutions or financial accounts to ensure the exclusions meet the requirements in the AEOI standard (the low-risk lists). Many jurisdictions have already amended their domestic laws to address the recommendations made. This process should be completed by the end of 2018.

The exchange networks being put in place are monitored to ensure each jurisdiction is able to exchange information with all their interested appropriate partners. These are the jurisdictions that are interested in receiving information from a particular jurisdiction and that meet the standards in relation to confidentiality and the proper use of data. In this respect, the Global Forum also has in place a process to identify and address any delays in putting in place agreements for exchange between interested appropriate partners, as committed to.

The putting in place of the necessary IT and operational procedures is being overseen to ensure the data can be exchanged on time.

Plenary meeting of the Global Forum in November, Punta del Este, Uruguay

Ultimately, what will determine the success of the AEOI standard is how effectively it operates in practice, including whether financial institutions are properly carrying out their obligations.

Work is already underway in this regard. The OECD identifies possible risks to the effective operation of the AEOI standard and takes action as necessary. It has put in place a disclosure facility to identify potential schemes to circumvent reporting under the AEOI standard and when disclosures are made action is taken, including contacting the jurisdiction(s) in question and working with them to address the issue. The OECD has also recently identitified a number of residence by investment and citizenship by investment programmes that could potentially be misused by account holders to conceal their true tax residence and has provided guidance to financial institutions to help address the risk. The guidance does not question the legitimacy of the identified programmes, but rather intends to equip financial institutions with the right tools to conduct their AEOI due diligence obligations in relation to such programmes.

Now that exchanges are fully underway, the assessment activity of the Global Forum (as set out above in relation to the staged approach) is evolving to focus also on effectiveness in practice. To this end, at its recent 2018 plenary meeting, the Global Forum adopted the terms of reference for the future full peer reviews of the implementation of the AEOI standard, including its effectiveness in practice. The next steps to put in place a framework to review the effectiveness of each jurisdiction's implementation of the AEOI standard in practice were also agreed. The tools and processes in this regard (i.e. the various information sources that can be used and how) will be tested in 2019 and the reviews in relation to effectiveness in practice will then commence from 2020.

The key message is therefore that the commencement of the exchanges is not the end of ensuring the success of this significant step forward in tax transparency. The focus among the Global Forum members is now moving to ensuring its effective operation. This includes ensuring compliance by financial institutions with their requirements, including by jurisdictions effectively supervising and enforcing the rules and through using all information sources available to identify and address risks to the AEOI standard.

The views expressed in this article are the views of the authors and may not represent the views of the Global Forum or its members.