Tax information exchange aims to enable tax authorities to receive information about their residents' foreign financial accounts and assets and identify potential tax evasion or non-compliance.
1. What is a tax information exchange?
Tax information exchange aims to enable tax authorities to receive information about their residents' foreign financial accounts and assets and identify potential tax evasion or non-compliance. One example of such exchange is obtaining and sending information on controlled foreign companies (“CFC”). The reporting burden under the CFC rules is on a taxpayer, which means that the person controlling a CFC must submit notifications to the tax authorities in case of an acquisition or alienation of a share in a CFC.
However, the exchange of CFC information might be subject to some risks. Namely, there is a risk of non-compliance since the taxpayer may decide to keep some information undisclosed. In addition, the whole process of obtaining information and then sending it to foreign tax authorities is quite lengthy.
In general, there are three different ways to exchange tax information:
• exchange upon request (jurisdiction B requests jurisdiction A to provide information on specific operation in jurisdiction A conducted by jurisdiction B’s taxpayer);
• spontaneous exchange (jurisdiction A on its own will sends to jurisdiction B’s tax authorities the information it has about jurisdiction B’s taxpayer);
• automatic exchange (jurisdiction A regularly transfers to jurisdiction B information on the accounts and financial transactions of jurisdiction B’s taxpayers in jurisdiction A).
Automatic exchange is the most effective method since it provides an opportunity to receive information quickly and systematically.
The interaction under the Common Reporting Standard (the “CRS”), which sets out the rules and procedures for automatic exchange, takes place as follows:
1) financial institutions of jurisdiction A (participating jurisdiction) carry out due diligence to identify reportable financial accounts;
2) reporting financial institutions transfer the obtained information to the jurisdiction A’s tax authorities;
3) once a year, jurisdiction A’s tax authorities send to tax authorities of jurisdiction B (reportable jurisdiction) the information they have about all residents of jurisdiction B.Financial institutions collect, store and transmit tax information to reportable jurisdictions in electronic form by maintaining an electronic database of accountable accounts.
2. What is the Ukrainian approach to CRS?
In Ukraine, the CFC rules came into force in January 2022. Shortly after, on 19 August 2022, Ukraine acceded to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the “CRS MCAA”).
To implement the CRS, the Ukrainian parliament adopted the relevant Law (the “Law”), which adapts Ukrainian legislation to the named international standards. In addition, the Ukrainian government has undertaken to develop some relevant secondary legislation.
The full-scale russian invasion of Ukraine affected the speed of CRS implementation, but good progress is still being made.
3. What are the main implications for clients?
Tax residents of Ukraine should be careful to comply with Ukrainian CFC rules. Foreign tax residents should comply with their local CFC rules and declare their assets and income originating in Ukraine.
4. What information will Ukrainian tax authorities obtain and exchange?
According to the Law, financial institutions shall collect and exchange information on reportable financial accounts, including bank accounts, payment accounts, securities accounts, and other accounts and agreements defined by the FATCA Agreement or the CRS MCAA.
Particularly, financial institutions shall inform the tax authorities about the following:
• name, address, tax identification number, jurisdiction of residence and date and place of birth (in the case of an individual) of an account holder;
• account number
• account balance or value at the end of the reporting period;
• total gross income generated with respect to the assets held in the account.
5. Who is a reportable person?
Tax authorities will collect and exchange information about reportable accounts of individuals and legal entities that are not tax residents of Ukraine.
To determine whether an account is reportable, financial institutions consider some criteria established by CRS. For instance, entities’ accounts whose aggregate balance at the end of the reporting year is at most USD250,000 are not subject to review.
6. What jurisdictions will exchange information?
Ukraine will share all collected information with other signatories of the CRS MCAA that chose to participate in information exchange with Ukraine. For instance, Switzerland has already expressed its intention to exchange financial account information with Ukraine, and Germany has included Ukraine in the list of participating states.
Once Ukraine completes the process of the CRS implementation, the full list of participating states may be found in the “Activated exchange relationships for CRS information” section on the OECD webpage.
7. What is the first reporting period?
The first reporting period will cover the time span from 1 July 2023 to 31 December 2023.
8. What should be done?
Banks and other financial institutions should be prepared to bear an additional compliance burden by creating mechanisms for collecting and processing more information about their clients. This might include (1) expanding existing departments or establishing new ones for information processing; (2) setting up infrastructure, namely the electronic system necessary for information exchange; and (3) allocating funds for such actions.
The clients should comply with CFC rules, duly reporting their income and assets.
By Anton Zaderyholova, Counsel, and Olha Rudevych, Associate, Avellum
