Jun 03 2014, 04:55 IST
As per OECD, automatic exchange of information involves a systematic and periodic transmission of bulk taxpayer information by the source country to the residence country. This is a pro-active approach taken by the participating countries, wherein responsibility would be assigned to relevant financial institutions (FIs) to share taxpayer information in a timely and useful manner.
OECD has highlighted the need for IT security for electronic information exchange and ensuring that compliance with the standard does not impose an undue cost burden—both for businesses and the administration.
It has proposed a single global standard (SGS)—released on February 13, 2014—titled ‘Statement for Automatic Exchange of Financial Information’ which consists of two components, viz. Competent Authority Agreement (CAA) and Common Reporting Standard (CRS).
The CAA would define the modalities for exchange of information between countries and would be a reciprocal arrangement. OECD has recommended that agreement between countries be drafted taking guidance from Article 26 of Tax Treaties (DTAAs) and/or Article 6 of Multilateral Convention on Mutual Administrative Assistance. It may be pertinent to note that India is a signatory to this convention.
The CRS is a reporting and due diligence standard to be adhered to by the FIs to ensure smooth flow of information. It outlines the methodology to identify ‘reportable’ accounts. For CRS to have legal backing, countries would need to formulate or amend domestic laws. Domestic laws of several countries provide for banking secrecy, etc, which prohibit countries from sharing information with tax administrations of treaty partners.
The standard, in its present shape, raises important concerns, some of which are listed here:
n Only the tax information is to be mandatorily shared. Strictly interpreted, any other information would not be required to be disclosed.
n The exchange of information is required on an annual basis. This may defeat the very purpose of preventing a tax abusive arrangement at its inception stage.
n The mandatory requirement to ‘look through’ passive entities and report on beneficiary individuals that ultimately control such entities might be challenged as being too onerous and subjective to be realistically implemented.