The Financial Express

Last month, at the Ministerial Level meeting of the OECD council, the declaration on Automatic Exchange of Information in Tax Matters was endorsed by 34 member countries, as also leading non-members countries including Brazil, China, India, Saudi Arabia, Singapore, and South Africa. This is a significant development and a milestone for governments in the pursuit of offshore funds.

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.

OECD would do well to reconsider its position over the above three points, before it provides detailed commentary and finalises the standard in mid-2014.

India in between

On May 01, 2014, the Supreme Court (SC) had reconstituted the Special Investigation Team (SIT) for a comprehensive probe into the so-called black money problem.

India’s requests for access to bank account information have been consistently rejected by the Swiss authorities citing their domestic laws. Switzerland is a member of OECD and also a signatory to the declaration. It would be interesting to see if the reaction is different after this declaration.

It seems, the Swiss would have to modify their domestic laws to ensure free flow of information to India. The only catch is that this information must be tax-related, otherwise a refusal to share information might not be invalid under the OECD standards.

I doubt that the so-called black money is due to any conscious exercise of tax evasion. Public perception largely appears to support the contention that criminal activities have led to generation of offshore money. It would be important for the SIT to delve deeper into the reasons leading to generation of such money and the process through which such enormous flight of capital took place.

The path to a perfect automatic exchange of information would undoubtedly be long. OECD’s head for Centre for Tax Policy and Administration (CTPA), Pascal Saint Amans told PTI that such exchange would not start before 2017. He was positive that taxpayers in future would no longer be able to “hide money on offshore accounts”. I sincerely hope for the best!

The author is Managing Partner, BMR Legal. Views are personal

With inputs from Rahul Aggarwal