Maybe it is just my personal perception of time, but Christmas and New Years seem to be like it was just yesterday. Already in week 10 of the new year and 2016 seems to go faster than ever. And with that we are also quickly closing in on the long anticipated launch of the Common Reporting Standard (CRS) and Automatic Exchange of Information (AEOI).
The OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (the world’s leading multilateral body in the area of transparency and exchange of information for tax purposes), published their annual “Report on Progress” a couple of weeks ago. It was a great pleasure to read the progress being made on AEOI starting off with the message of Kosie Louw (Chair of the Global Forum):
"There is widespread understanding of the importance of tax, and tax transparency in particular, for developing countries [...] greater awareness of the importance of transparency and exchange of information in combatting tax evasion and illicit financial flows [...] we are equipped to work alongside all of our members as peers in ensuring that exchange of information is not a compliance burden, but an effective tool available to all."
This is indeed key in my opinion! Countries should not experience CRS (or the US counterpart FATCA for that matter) as a compliance burden. They should embrace it as a tool to fight all the illicit financial flows leaving their countries without the tax authorities’ ability to collect any tax revenues.
Combatting illicit financial flows
As I’ve mentioned in my previous blogs Why the world needs Automatic Exchange of Information and Global tax transparency will impact all tax-authorities: illicit financial flows are the most damaging economic problem faced by the world’s developing and emerging economies. The vast amount of illicit financial flows leaving countries, especially developing & emerging countries, exceed 1 trillion US Dollars annually. To combat this, countries must start sharing financial information of non-residents through AEOI.
The following video of SwissBank explains how AEOI works in a nutshell:
Once AEOI goes live financial information of non-residents will start being automatically exchanged between participating countries, enabling tax authorities to see their taxpayers’ foreign bank information. This will change international tax evasion forever as it will become increasingly difficult to hide overseas financial accounts. So far 97 countries have already committed to the implementation of AEOI in 2017/2018:
The expectation is that AEOI and the increased challenges of individuals and corporations to hide money in offshore accounts, will directly lead to increased tax revenues for participating countries.
Impact on tax authority
Even though tax authorities should embrace AEOI, my experience in dealing with governments is that implementing AEOI will not be done easily. Complying with all regulations has a great impact on tax authorities. A streamlined business process and an automated technical system that meets international requirements and all stringent regulations will greatly relieve the burden on a tax authority. Building this non-core process in-house will most often result in unfavorable results, high cost of maintenance, big cost overruns, delays and an increased risk of non-compliance. Buying a proven solution that meets all international standards and is already in use in other countries, like for example our Multi Data Exchange Solution, is the much safer route to choose.
I applaud the efforts of the Global Forum to use AEOI in order to reduce illicit financial flows. Reducing illicit financial flows will lead to increased tax revenues, which eventually have a positive effect on the economic development and financial system of developing and emerging countries. I look forward to the rest of 2016 (what’s left of it) to see how countries will implement AEOI.