International Exchange of Tax Information. The Concept and Regulations

Key Concepts

Tax information, Tax data, Tax information exchange standards, Organization for Economic Cooperation and Development (OECD), Foreign Account Tax Compliance Act (FATCA), Tax Information Exchange Agreements (TIEA), Automatic exchange of information, Multilateral Competent Authority Agreement (MCAA), Common Reporting Standard (CRS), Country-by-Country Reporting (CbC), Permanent establishment (PE), Cryptocurrency Assets Reporting Framework (CARF).

Tax Information and Tax Data

The definition of tax information and tax data can change depending on the country and its laws. According to Kaplan Publishing, the following definitions exist:

• Data refers to facts, numbers, letters, symbols, transactions, and other events in their unprocessed form.
• Information refers to data that has been processed and analyzed, transformed for decision-making purposes. Data processing may involve structuring, sorting, analyzing, and interpreting data to extract useful information and draw conclusions.^[1]

Thus, data serves as the foundation for creating information. It is more structured and valuable for making tax decisions and managing tax matters.

Tax data may include specific values related to tax matters. Income, expenses, tax deductions, tax rates, and other factors that may affect tax calculations. Tax authorities and taxpayers use tax data for tax reporting and filing tax returns.

Tax information refers to processed tax data. Different stakeholders use tax information to calculate tax obligations and make tax decisions. It can be useful for taxpayers, tax authority representatives, and other authorized users. Tax information may include the results of analysis and interpretation of tax data, as well as reports and documentation necessary for compliance with tax requirements and making informed tax decisions.

Tax Information Exchange Standards

Because of the development of international relations, there is a need for the transmission and exchange of tax information between different countries.

The first instance of tax information exchange in history can be traced back to 1980, when the United States and Canada signed an agreement for mutual assistance in tax matters. This agreement involved the exchange of information on tax evasion and violations of tax legislation between the two countries. This case served as a precedent for the future development of international cooperation in tax information exchange.^[2]

To facilitate such exchange at the international level, the following standards and framework agreements have been developed:

• Foreign Account Tax Compliance Act (FATCA).
• Tax Information Exchange Agreement (TIEA).
• Common Reporting Standard.
• Common Reporting Standard Multilateral Competent Authority Agreement (CRS MCAA).
• Country-by-Country Reporting Multilateral Competent Authority Agreement (CbC MCAA)
• Crypto-Asset Reporting Framework (CARF), and others.

Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA) is a law enacted by the U.S. government in March 2010. Its purpose is to combat tax evasion by U.S. citizens and residents. The implementation of FATCA has had a significant impact on international economic relations as it requires foreign financial institutions to provide reports on the financial transactions of American taxpayers to the U.S. Internal Revenue Service (IRS).^[3]

Failure to comply with FATCA requirements results in sanctions, including 30% penalties on funds transfers from their correspondent accounts in U.S. banks and the potential closure of such accounts.

To regulate international information exchange under FATCA, countries sign intergovernmental agreements.

Figure 1. Ambassador Philip D. Murphy, Dr. Gertz Schmidt-Bremme (Ministry of Foreign Affairs), and Martin Kreienbaum (Ministry of Finance) Sign a First Bilateral agreement to Facilitate the Implementation of the Foreign Account Tax Compliance Act (FATCA). May 31, 2013.[4]

These agreements define two primary models of cooperation:

• Model 1 involves the exchange of information between foreign financial institutions and their country’s competent tax authorities. They then transmitted information to the IRS. This provides the basis for cooperation and information exchange under FATCA requirements.
• Model 2 entails direct information exchange between foreign financial institutions and the IRS. Financial institutions provide reports on the financial transactions of American taxpayers directly to the IRS. As of January 2023, 116 countries worldwide have entered into intergovernmental agreements with the U.S. under FATCA.^[5]

FATCA initiative also facilitated the creation of the International Data Exchange Service (IDES). This electronic platform enables financial institutions and receiving country tax authorities to exchange FATCA data with the United States.^[6]

To secure the exchange process, the sender encrypts the data before transmission, and IDES provides a secure channel. IDES operates on all major browsers, including Chrome, Edge, Safari, and Firefox. Also, it supports data transmission through the Secure File Transfer Protocol (SFTP). IDES strictly defines the data format for transmission, which uses an XML schema. IRS website provides further details on the IDES.^[7]

Tax Information Exchange Agreements (TIEA)

In 2002, member countries of the Organisation for Economic Co-operation and Development (OECD) began developing the initiative for tax information exchange known as Tax Information Exchange Agreements (TIEA). TIEA facilitates international cooperation in tax matters through the exchange of relevant information.

The need to improve the efficiency and transparency of international tax practices, particularly considering the absence of international tax information exchange, led to the creation of this agreement. TIEA initiative initially developed bilateral agreements for the exchange of tax information between countries. Currently, countries have signed 518 such agreements, demonstrating widespread international recognition and appreciation of this initiative.^[8]

Figure 2. Exterior View of the Muët Castle and the OECD Conference Center Grounds.[9]

Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is an internationally recognized standard that facilitates the automatic exchange of financial account information between jurisdictions. Its main objective is to combat tax evasion and promote transparency in cross-border financial activities.

The OECD Council approved CRS on July 15, 2014, in response to a G20 request for the development. CRS sets that each year, governments collect data from their financial institutions and automatically share it with other jurisdictions. The standard outlines the financial account information that must be shared, the financial institutions that must report, the various account kinds and taxpayers who must comply, as well as the common due diligence methods that financial institutions must adhere to.

The Standard consists of the following four key parts:

• A model Competent Authority Agreement (CAA), providing the international legal framework for the automatic exchange of CRS information.
• The Common Reporting Standard.
• The Commentaries on the CAA and the CRS.
• The CRS XML Schema User Guide.[10]

International Framework for the CRS

The International Framework for the Common Reporting Standard (CRS) is a set of agreements and guidelines that facilitate the automatic exchange of financial account information between jurisdictions.

There are two principal parts of the International Framework for the Common Reporting Standard:

Multilateral Competent Authority Agreement, MCAA

The Multilateral Competent Authority Agreement (MCAA) is a multilateral framework agreement that provides a standardized and efficient mechanism to facilitate the automatic exchange of information under the Common Reporting Standard (CRS, or the “Standard for Automatic Exchange of Financial Information in Tax Matters”). It avoids the need for several bilateral agreements to be signed.

Its design as a framework agreement means the MCAA always ensures each signatory has ultimate control over exactly which exchange relationships it enters, and that each signatory’s standards on confidentiality and data protection always apply.

The legal basis for the MCAA (which is agreed at competent authority level) rests in Article 6 of the “Multilateral Convention on Mutual Administrative Assistance in Tax Matters,”[11] which provides for the automatic exchange of information between parties to the convention, where two parties subsequently agree to do so.[12]

The CRS Multilateral Competent Authority Agreement

Exchange relationships between jurisdictions are typically based on the multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention), in which more than 100 jurisdictions participate, and the CRS Multilateral Competent Authority Agreement (CRS MCAA), which is based on its article 6. Over 100 jurisdictions have committed to exchanging information with each other under the CRS.

Alternatively, jurisdictions may rely on a bilateral arrangement, like a double tax treaty or an agreement for the exchange of tax information. Additionally, some CRS exchanges will occur in accordance with the relevant EU Directive, treaties between the EU and non-EU nations, and bilateral agreements like the ones between the UK and CDOT (Crown Dependencies and Overseas Territories).

The CRS MCAA is a multilateral framework agreement that specifies the details of what information jurisdictions will exchange and when. A particular bilateral relationship under the CRS MCAA becomes effective only if both jurisdictions have the Convention in effect, have filed the required notifications under Section 7, and have listed each other.

As of May 16, 2023, 120 countries have signed the MCAA for automatic exchange of information based on CRS.[13]

The CbC (Country-by-Country) Multilateral Competent Authority Agreement (CbC MCAA)

According to Article 6 of the multilateral Convention on Mutual Administrative Assistance in Tax Matters (“Convention”), the Competent Authorities of the Parties to the Convention must mutually agree on the scope of the automatic exchange of information and the compliance procedure. Regarding this, the Convention has served as the foundation for the creation of the Multilateral Competent Authority Agreement on the Exchange of CbC Reports (CbC MCAA).

Additionally, two model competent authority agreements for the exchange of CbC Reports have been created. One for the exchange of CbC Reports under Double Tax Conventions, and the other for the exchange of CbC Reports under Tax Information Exchange Agreements.

The CbC MCAA establishes rules and procedures for Competent Authorities of jurisdictions implementing OECD Base Erosion and Profit Shifting (BEPS) Action 13.^[14] It governs the automatic exchange of CbC Reports prepared by the Reporting Entity of a multinational enterprise (MNE) and filed annually in the country of tax residence with all jurisdictions where the MNE operates. 

The CbC MCAA provides a standardized and coordinated approach for the exchange of CbC reports between tax authorities. A particular bilateral relationship under the CbC MCAA becomes effective only if both jurisdictions have the Convention in effect, have filed the required notifications under Section 8, and have listed each other.

“Multinational corporations doing business in foreign countries are typically subject to the domestic tax laws of the countries where they are engaged in business activities. The permanent establishment concept creates a minimum threshold below which the source country does not attempt to tax a foreign enterprise’s business income. That threshold is set in terms of a minimum physical connection to the jurisdiction. There are two means by which an enterprise may cross that threshold and thereby come to have a permanent establishment in a country: by maintaining a fixed place of business in that country, or by means of a dependent agent.”

Bloomberg Tax.[15]

The original proposal for a Country-by-Country reporting was put forward in 2003 and came from the organisation called Tax Justice Network.[16]

As of July 26, 2023, 99 countries have signed an agreement to implement the CbC reporting requirements under Action 13.[17]

Crypto-Asset Reporting Framework (CARF)

Because of the rapid development and growth of the crypto-assets market, as well as the aim to enhance global tax transparency, the G20 instructed the OECD in April 2021 to develop a methodology for the automatic exchange of tax information on crypto-asset transactions.

As a result, in August 2022, the OECD approved the Crypto-Asset Reporting Framework (CARF),[18] which provides a standardized format for reporting tax information on crypto-asset transactions for automatic exchange of such information. CARF defines categories of crypto-assets and requires intermediaries and other service providers to report on relevant transactions involving them. It also incorporates the latest developments in global anti-money laundering standards set by the Financial Action Task Force.

CARF provides countries with a tool for exchanging tax information related to crypto-assets, facilitating more efficient data collection, and ensuring consistency in the taxation of crypto-asset transactions at the international level.

Within the CRS, comprehensive due diligence procedures require the identification of both individuals and legal entities, as well as their Controlling Persons. CARF includes consolidated reporting, categorized by the type of crypto-asset and type of transaction.

In August 2022, the OECD also approved amendments to the CRS to expand its application to certain electronic money products and central bank digital currencies. Changes were also made to CARF to account for indirect investments in crypto-assets through derivative instruments and investment vehicles within the CRS.

Furthermore, amendments were made to strengthen the requirements for due diligence and reporting, including the disclosure of the role of each Controlling Person. An exception was also provided for genuine non-profit organizations to consider their specific reporting obligations.

These changes and amendments ensure a broader coverage and accuracy in the collection and exchange of tax information on crypto-assets, contributing to the development of global tax transparency and the fight against tax evasion in this field.

Conclusion

International standards for the exchange of tax information enable countries to establish effective cooperation in combating tax evasion and illegal tax optimization.

The use of international standards offers the following advantages:

1. Improved transparency and fight against international tax evasion. The exchange of standardized tax information helps governments gain access to income and asset information that individuals and companies may hide abroad.
2. Strengthened international cooperation. International standards provide a framework for information exchange between governments, creating conditions for a more equitable distribution of tax obligations for international corporations among countries.
3. Enhanced investment climate. Standardized exchange of tax information helps create conditions for more transparent and predictable taxation, which promotes foreign investment attraction and national economic development.

However, the effectiveness of using international standards for tax information exchange may be limited by inadequate implementation and compliance with these standards in some countries. There may also be challenges related to confidentiality and the protection of personal data during the exchange of tax information between countries. Overall, the effectiveness of using international standards for tax information exchange depends on the willingness of countries to cooperate and adhere to standardization requirements.

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[1] Chapter “Information, technologies, and systems for organisational performance”. 2020. p. 23. Kaplan Publishing UK, ACCA Performance management (F5), Great Britain.

[2] United States – Canada, Income Tax Convention, IRS data. URL: https://www.irs.gov/pub/irs-trty/canada.pdf  Accessed: July 19, 2023. 

[3] Foreign Account Tax Compliance Act (FATCA), IRS data. URL: https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca Accessed: July 19, 2023.

[4] Image by usbotschaftberlin (https://commons.wikimedia.org/wiki/File:U.S._-_German_Bilateral_Tax_agreement_is_signed_12.jpg), „U.S. – German Bilateral Tax agreement is signed 12,” marked as public domain, more details on Wikimedia Commons: https://commons.wikimedia.org/wiki/Template:PD-US

[5] Foreign Account Tax Compliance Act, the Table of FATCA Agreements by countries, U.S. Department of the Treasury. URL: https://home.treasury.gov/policy-issues/tax-policy/foreign-account-tax-compliance-act Accessed: July 19, 2023.

[6] International Data Exchange Service, IRS. URL: https://www.irs.gov/businesses/corporations/international-data-exchange-service Accessed: July 19, 2023.

[7] FATCA XML Schemas and Business Rules for Form 8966, IRS. URL: https://www.irs.gov/businesses/corporations/fatca-xml-schemas-and-business-rules-for-form-8966 Accessed: July 19, 2023.

[8] Tax Information Exchange Agreements (TIEAs), OECD. URL: https://www.oecd.org/ctp/exchange-of-tax-information/taxinformationexchangeagreementstieas.htm Accessed: July 19, 2023.

[9] Image by MySociety (https://commons.wikimedia.org/wiki/File:Château_de_la_Muette,_Paris_20_March_2019_004.jpg), „Château de la Muette, Paris 20 March 2019 004,” https://creativecommons.org/licenses/by/2.0/legalcode

[10] What is the CRS? (n.d.). OECD. URL: https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/ Accessed: July 19, 2023.

[11] Convention on Mutual Administrative Assistance in Tax Matters. March 2023. OECD. URL: https://www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm. Accessed: July 19, 2023.

[12] What is the Multilateral Competent Authority Agreement. (n.d.) OECD. URL: https://www.oecd.org/tax/transparency/documents/whatisthemultilateralcompetentauthorityagreement.htm. Accessed: July 19, 2023.

[13] OECD. May 16, 2023. Signatories of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and Intended First Information Exchange Date. URL: https://www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/crs-mcaa-signatories.pdf Accessed: July 19, 2023.  

[14] OECD. Action 13 on Country-by-Country Reporting. OECD Base Erosion and Profit Shifting (BEPS). URL: https://www.oecd.org/tax/beps/beps-actions/action13/ Accessed: July 19, 2023.

[15] Permanent Establishment (PE). August 23, 2022. Bloomberg. URL: https://pro.bloombergtax.com/brief/permanent-establishment/ Accessed: July 19, 2023.

[16] Shaxson, Nicholas (21 December 2020). “Corporate taxation—momentum is building.” Social Europe. URL: https://www.socialeurope.eu/corporate-taxation-momentum-is-building Accessed: July 19, 2023.

[17] OECD. July 26, 20-23. Signatories of the Multilateral Competent Authority Agreement on the exchange of Country-by-Country reports (CBC MCAA) and signing dates. URL: https://www.oecd.org/ctp/exchange-of-tax-information/CbC-MCAA-Signatories.pdf Accessed: July 19, 2023.

[18] OECD. (Publishing date: October 10, 2022). Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard. URL: https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.htm. Accessed: July 19, 2023.