Following an emphasis on information exchange on request and the commencement of peer reviews by the OECD Global Forum on Tax Transparency and Information Exchange, the exchange of tax information is being taken to a further level with the introduction of automatic exchange of information as a new standard in international tax affairs. The G20 finance ministers and central bank governors endorsed automatic exchange of information as the new standard in international affairs in April 2013 and the OECD has prepared a report on the issue that was considered by the G8 meeting in June 2013.

The report deals with the question of how to implement multilateral exchange of tax information, looking at what information is to be exchanged, what is the legal basis for the information exchange and the means by which it is to be exchanged.  The report notes that a global solution rather than piecemeal measures will be necessary because an agreement involving only part of the world will simply shift the problem of tax evasion elsewhere rather than solving it altogether. The Convention on Mutual Administrative Assistance in Tax Matters provides a suitable legal foundation for automatic exchange of information with protection of confidentiality.

Where a standardized process exists, the system can be more effective as the procedures are clear and this can save compliance costs for tax administrations. There needs to be agreement on the amount of information that must be reported by domestic financial or other institutions and on how much of the information reported needs to be exchanged with the residence jurisdictions of taxpayers. Obviously the information reported by the domestic institutions would need to be closely aligned with the information needed by the residence jurisdictions. If this is done correctly the residence jurisdiction of the taxpayer can with minimum expenditure of money and time match the information to the domestic tax position of the taxpayer and make maximum use of the information exchanged.

The scope of information reported must be sufficiently broad to discourage taxpayers from shifting their funds to entities or activities that will not be covered by the information exchange. The scope would therefore include a wide range of income categories and capital assets that may have been acquired using funds that have escaped the tax net. The reporting requirements must extend not just to individuals but to other entities including trusts where funds could be sheltered. In addition to covering just financial institutions the reporting obligations would need to cover insurance, collective investment vehicles and entities involved as intermediaries. The quality of the information reported could be ensured by appropriate due diligence procedures to be performed by the reporting entities.

A legal basis would need to exist for both elements of the information exchange, these being the reporting by the domestic institutions and the exchange of information with the residence jurisdictions of the taxpayers. The first part of the process, the domestic reporting obligation, would need to be introduced in domestic law which would set out the procedures to be followed by the entities covered by the obligations. The automatic exchange of information with other jurisdictions could take place under the Multilateral Convention for mutual Assistance in Tax Matters or the article on exchange of information in double tax treaties.  The channels for exchange of information include safeguards on confidentiality of the information. Measures to ensure confidentiality would need to be incorporated in the domestic law of countries receiving the information together with administrative procedures to put this confidentiality safeguard into effect. Compatible technical and information technology systems would also need to be in place including appropriate encryption methods.