What is AEOI?
In very simple terms: jurisdiction sign the Common Reporting Standard (CRS) which dictate what information is to be shared and the MCAA (Mutual Competent Authority Agreement) which sets out the authority or authorities that will be responsible for handling the information. Ultimately, this leads to AEOI.
Automatic Exchange of Information is an initiative led by OECD, whereby jurisdictions enter into agreements to automatically (i.e. not upon request as was the case with TIEAs) exchange information between each other about bank accounts held by people who are resident in any of the other signatories.
To make this at all possible, a common reporting standard has been set up which dictates how the information should be shared so that all parties can streamline the processing of all received information. Previously under TIEAs, information received could be in different formats and this led to a lot of time lost trying to decipher the information.
The MCAA determines which authority should collect, send, and be the recipient of information to be shared.
What about companies, trusts, and foundations?
Corporate ownership, trust deeds, and foundation charters are not in scope for AEOI, meaning that jurisdictions are not obligated to send other jurisdictions automatic information about corporate ownership.
Governments have realized that the shortest path between a tax evader and his or her money is the bank account. As such, company ownership is only shared by financial institutions.
This means that forming a company in an AEOI jurisdiction while banking in a non-AEOI jurisdiction would keep you out of scope for AEOI.
Trusts are specifically mentioned in the Common Reporting Standards. Under the CSR, trusts should be reportable to where they are resident which typically is the jurisdiction of the trustee (which in most cases is in a tax haven). However, there are provisions for reporting taxable income or income deemed taxable to the jurisdiction of residence of recipients of such income (which can include beneficiaries).
If you look at for example Seychelles IBC, Costa Rica SA, or Marshall Islands LLC, there are no provisions in the CSR that would compel the registered agent in the Seychelles, the law or accounting firm in Costa Rica, or the corporate registry of the Marshall Islands to report anything. Reporting duty falls on Reporting Financial Institutions, which does not include those types of service providers or authorities (Section VIII: Defined Terms).
A Reporting Financial Institution is an institution, which is not:
a) a Governmental Entity, International Organisation or Central
Bank, other than with respect to a payment that is derived
from an obligation held in connection with a commercial
financial activity of a type engaged in by a Specified Insurance
Company, Custodial Institution, or Depository Institution;
b) a Broad Participation Retirement Fund; a Narrow Participation
Retirement Fund; a Pension Fund of a Governmental Entity,
International Organisation or Central Bank; or a Qualified
Credit Card Issuer;
c) any other Entity that presents a low risk of being used to
evade tax, has substantially similar characteristics to any of
the Entities described in subparagraphs B(1)(a) and (b), and
is defined in domestic law as a Non-Reporting Financial
Institution, provided that the status of such Entity as a
Non-Reporting Financial Institution does not frustrate the
purposes of the Common Reporting Standard;
d) an Exempt Collective Investment Vehicle; or
e) a trust to the extent that the trustee of the trust is a Reporting
Financial Institution and reports all information required
to be reported pursuant to Section I with respect to all
Reportable Accounts of the trust.
What and who gets reported?
Suppose you open or have a bank account in an AEOI jurisdiction. In general terms, this jurisdiction will automatically report information about the bank account to the jurisdiction in which the account holders are resident.
You may have read about a number of thresholds. There are several that have been tossed around: 50,000 USD, 250,000 USD, one million USD, or millions of USD.
You may also have read about schemes whereby an account holder would set up a paper-only residence in some tax haven.
The reality is that the thresholds are mostly in place to alleviate banks which are unable to gather data automatically and these limits will likely decrease and eventually go away. But for the time being, banks are given the option to under certain circumstances not report on accounts under the limit.
Which banks do not report low-balance accounts?
The kind of banks you probably don’t want to bank with anyway because they are unable to gather information about customers in a timely manner.
Look to Africa and the lesser developed parts of Asia and Latin America, where few foreigners bank anyway.
To whom is it reported?
The reported data is sent to the competent authority of the recipient jurisdiction.
The recipient jurisdiction should under normal circumstances be the jurisdiction of residence of the account holders.
However, in cases of doubt or simply over-compliance, banks may report to multiple jurisdiction. For example, if you show up with a Norwegian passport but a sketchy-looking residence in Panama, a diligent bank may determine that your residence is not reliable enough and report to both Panama and Norway.
Multi-jurisdictional reporting is not yet fully understood and the reality thereof remains to be seen, but blatant abuse of easy-going residency schemes and intra-EU relocation to dodge reporting are concerns banks struggle with and one solution is to report to all involved jurisdictions.
Why would a (secretive) jurisdiction sign up for CSR, MCAA, and AEOI?
For the time being, the repercussions are reputational. As I mentioned two weeks ago when I discussed FATF and OECD, OECD does not carry the same degree of influence as FATF.
However, reputation is becoming more and more important in financial services.
What about the US and FATCA?
FATCA is separate and the US has not signed up for AEOI, nor does it intend to. The US has decided that FATCA is good enough.
As mentioned in my article Offshore, USA, the US does usually not live up to its obligations under FATCA, which means that the US is in fact not up to OECD standards but the OECD lacks the influence to strong-arm the US into committing to AEOI.
So the US is more secretive than Switzerland, Singapore, and the Cayman Islands?
Yes, it certainly can be. Hiding money in the US has quickly become very attractive to non-resident non-citizens of the US. It is politically stable, wealthy, and has sophisticated financial services to offer.
What can I do to avoid or prevent AEOI?
There are complex schemes available, but what they all come down is one or both of the following:
- Relocate to a tax haven.
- Surrender ownership of the assets.
- Use non-AEOI jurisdictions.
Relocate to a Tax Haven
This is easier said than done, since most tax havens have very tough immigration regulations.
However, as noted above, with multi-jurisdictional reporting being conducted, relocating may not be enough. It does however alleviate the tax burden in most cases (notably not for US citizens).
Surrender Ownership of the Assets
If you don’t own the assets and you aren’t the UBO of the assets, then you are not in scope for reporting.
This commonly means settling the assets in a trust, establishing a foundation, or similar non-ownership arrangement. You might be able to maintain a degree of control, but not ownership.
This is not something done easily and on a whim. It can also cost a lot of money.
You have by now probably read every pixel of the PDF linked above with the signatories and tried to figure out which jurisdictions aren’t on there, hoping to find one where you can open a bank account and stash your cash.
Before you jump on a flight to Lebanon or Azerbaijan, even though those jurisdictions might not have signed up right now, they may in the future. In a long-term perspective, it’s unlikely many jurisdictions worth talking about and looking into will remain outside of AEOI.
It might be many years – if not decades – before the AEOI initiative succeeds in line with OECD’s vision. The question is if you want to spend those years jumping from jurisdiction to jurisdiction, moving into ever more irreputable territory with each jump. Hours if not entire days per year will be spent setting up bank accounts and making sure only the barest minimum paper trail is left behind.
It’s your time and your dime, but it’s a cat and mouse chase that can end up being very tiring.
AEOI is here and it’s here to stay. It will continue to spread across the globe.