Automatic Exchange of Information

Some marketers within the offshore finance industry often engage in deceptive practices, omitting crucial information to entice potential clients into establishing offshore structures in locations like Mauritius. This has prompted me to write an article to shed light on a fundamental aspect of offshore structuring: the Automatic Exchange of Information (AEOI). This term refers to a reporting requirement established by the Organisation for Economic Co-operation and Development (OECD) through the Standard for Automatic Exchange of Financial Account Information in Tax Matters. This standard mandates financial institutions in participating jurisdictions, known as CRS participating jurisdictions, to disclose essential financial account information of account holders to their respective tax administrations. Currently, 123 countries have committed to exchanging information under this framework as of November 7, 2023.

To illustrate this further, let’s focus on the reporting obligations concerning offshore trusts under the Common Reporting Standards (CRS). According to CRS guidelines, trustees are obligated to identify the settlor, beneficiaries, and any other individuals associated with a trust under their management. Subsequently, trustees must disclose the financial information of these individuals to the tax administration of the country where the trust is established. If any of these individuals are deemed residents of a CRS participating jurisdiction, their information will be shared with the tax administration of their country of residence through the Automatic Exchange of Information.

Information sharing between tax administrations is a critical aspect of international tax compliance and transparency. There are three methods through which this sharing occurs, each serving a specific purpose in ensuring that relevant financial information is disclosed and accessible to the appropriate authorities.

1. Spontaneous Exchange: Tax administrations may voluntarily share information with each other without a specific request. This often occurs when one jurisdiction uncovers information relevant to another jurisdiction’s tax affairs and decides to share it in the spirit of cooperation and transparency.
2. Exchange of Information on Request: Tax administrations can formally request information from each other regarding specific taxpayers or transactions. This process is typically governed by bilateral or multilateral agreements, such as tax treaties or information exchange agreements, and is initiated when there is suspicion of tax evasion or when additional information is needed for tax audits.
3. Automatic Exchange of Information (AEOI): AEOI is a systematic and regular exchange of financial account information between jurisdictions. Under frameworks like the Common Reporting Standard (CRS), financial institutions in participating countries are required to report certain information about foreign account holders to their local tax authorities. This information is then automatically exchanged with the tax authorities of the account holders’ home countries, helping to detect and deter tax evasion.
   
   Furthermore, it is crucial to recognise that information can also be automatically shared under Article 26 of Double Tax Treaties between treaty partners. This provision enables the exchange of information to prevent tax evasion and ensure the proper enforcement of tax laws between countries that have signed such treaties.

Understanding these mechanisms is essential for those considering setting up offshore structures, as it empowers them to make informed decisions regarding their global operations. Being aware of how information is shared between tax authorities helps individuals to assess the potential tax implications and compliance requirements associated with offshore investments or accounts. By understanding these processes, individuals and multinational corporations can navigate the complexities of international taxation more effectively and ensure they remain compliant with relevant regulations.

Author: Lorna Chuttoo