We are living in an increasingly globalised world, where conducting business across borders has become the norm. It is therefore imperative that tax administrators in different countries cooperate to ensure that taxpayers are paying the right amount of tax to the right jurisdiction. This can simply and effectively be achieved by exchanging information. The OECD, a forum where international governments work together to address the challenges of globalisation, has established a new initiative to encourage international cooperation – the automatic exchange of information (AEoI).
AEoI can be defined as a procedure that dictates how tax authorities in participating countries exchange data relating to taxpayers. It ensures that people are paying their fair share of tax in the right place at the right time. The system is already widely in use across the world: 56 jurisdictions signed up as early adopters for 2016 and 41 additional countries are scheduled to follow their lead in 2017.
Over the last year, Equatex has been working to ensure its platform is compliant with the new regulation. “We implemented an approach that complied with the new regulation but at the same time made it easy for our clients and their equity plan participants,” explains Björn Hofer, Equatex’s Operations Change Director.
The project involves two phases. Plan participants are requested to complete an AEoI self-certification form online through our platform. Plan participants who have not completed the self-certification will be asked to do so via email. The second phase of the project will involve reporting the data to the local tax authorities, which will include account and demographic data as well as dividend and sale proceeds information.
Reporting to tax authorities
“We require due diligence from our clients as well as certain information on participants, such as the confirmation of identification,” continues Alfred Siebenhaar, Equatex, Business and System Analysis. “We collect and ratify that information, and then simply confirm whether the participant is a taxpayer or not to the right government. Everything has been done online to make it as streamlined as possible.”
It is Equatex’s responsibility to pass on the relevant information to the appropriate tax authorities. “Our clients will not be required to do anything else after the first phase of the project,” adds Björn. “Equatex will report the data to tax authorities in a year’s time.”
The OECD believes that the main benefit of automatic exchange will be the prevention of tax evasion through the timely sharing of information. Additional benefits include increased voluntary compliance, encouraging taxpayers to report relevant information and educating taxpayers in their reporting obligations. “The main benefit is that the regulation will prevent tax evasion – it will be very difficult to hide money,” says Alfred. “It will also help reporting standards. The only issue is that it requires agreement between every single country.”
The success of AEoI will depend on the level of understanding between participating countries. As the OECD suggests, the true measure of success will be in the compliance achieved from AEoI in a year’s time.
What is AEoI?
The automatic exchange of information is understood to involve the systematic and periodic transmission of ‘bulk’ taxpayer information by the source country to the residence country concerning various categories income (e.g. dividends, interest, royalties, salaries, pensions etc.). The information, which is exchanged automatically, is normally collected in the source country on a routine basis, generally through reporting of the payments by the payer (financial institution, employer, etc.). Automatic exchange can also be used to transmit other types of useful information such as changes of residence, the purchase or disposition of immovable property, value added tax refunds etc. As a result, the tax authority of a taxpayer’s country of residence can check its tax records to verify that taxpayers have accurately reported their foreign source income.
The seven steps of AEoI
- Payer or paying agent collects information from the taxpayer and/or generates information itself.
- Payer or paying agent reports information to the tax authorities.
- Tax authorities consolidate information by country of residence.
- Information is encrypted and bundles are sent to residence country tax authorities.
- Information is received and decrypted.
- Residence country feeds relevant information into an automatic or manual matching process.
- Residence country analyses the results and takes compliance action as appropriate.