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Automatic Exchange of Information in Tax Matters

Automatic Exchange of Information in Tax Matters

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As national borders lose their importance when it comes to capital mobility, tax revenues have decreased significantly and tax avoidance has become a matter of common concern for countries. Therefore, exchange of information in tax matters has become one of the most important topics on the agenda of countries and international organizations in recent years.

Although the exchange of information was already addressed in many double taxation treaties concluded based on the models introduced by OECD and United Nations, the issue was treated for the first time on an exclusive basis by the USA following the 2008 economic crisis, with the adoption of the Foreign Account Tax Compliance Act. While there are three main methods of exchange (i.e., on request, automatic, and spontaneous), automatic exchange of information seems to be the main focus.

Where Does Turkey Stand in Terms of Automatic Exchange?

The Convention on Mutual Administrative Assistance in Tax Matters (the “Multilateral Convention”), which forms the framework for all types of exchange of information, was signed by Turkey on November 3, 2011 by Turkey. However, the ratification process to put the Multilateral Convention into force took more than six years, and it was ultimately concluded on November 26, 2017.

Following the USA’s FATCA, the OECD presented the Common Reporting Standard (CRS): a common system to be used for the automatic exchange of information regarding financial accounts. In this respect, under Article 6 of the Multilateral Convention, the CRS Multilateral Competent Authority Agreement (the “CRS MCAA”) was drawn up and signed by Turkey on April 21, 2017. Despite having undertaken to start automatic exchanges by 2018, it took Turkey almost another two and a half years to keep its word, and the CRS MCAA was eventually put into effect on December 31, 2019.

Turkey sent data regarding 2017 and 2018 to 1 and 2 partners, respectively. As of 2020, Turkey will be receiving financial account information from 75 jurisdictions, while it will only share its information with 55 jurisdictions, according to the list of activated exchange relationships published by the OECD; which means that some exchange relationships will be non-reciprocal by nature. It should be noted that these numbers include not only the exchange relationships based on the CRS MCAA but also the ones based on double tax treaties or specific bilateral treaties aiming to enable exchange of information. With that being said, Turkey currently has only two bilateral treaties on the exchange of information: with Norway and Latvia.

A FATCA Model 1 Agreement signed on July 29, 2015, also serves as a basis for automatic exchange of information between Turkey and the USA.

Is It Effective?

Despite the international framework described above, the lack of secondary legislation for the effective application of the automatic exchange remains a chink in Turkey’s armor. Although Turkey intended to introduce legislation to implement the FATCA Agreement by September 30, 2015, it wasn’t able to complete the internal approval process until the publication of the Council of Ministers’ decision regarding the ratification of the Agreement on October 5, 2016. But yet, diplomatic negotiations to start the exchange of information persist. Once the reporting begins, all the information that would have been reported had the Agreement been in force as of September 30, 2015, will be subject to exchange.

With regard to the CRS, a “Draft General Communiqué on Automatic Exchange of Financial Account Information on Tax Matters” was sent to the banks and other relevant institutions by the Ministry of Finance back in May 2017. Although that draft communiqué is still to be finalized, several Turkish banks have already declared that they are required to obtain certain information from customers to be able to comply with the CRS.

It should also be noted that the term of declaration in order to benefit from the wealth amnesty that allowed Turkish taxpayers to regularize their undisclosed assets in and outside of Turkey expired on June 30, 2020. Taxpayers with undeclared assets in countries having an activated exchange relationship with Turkey now may be faced with tax penalties, as their financial data will be subject to exchange with Turkish tax authorities. We will see how and to what extent automatic exchange will affect tax revenues in upcoming days.

By Ali Keskin, Partner, and Irem Nacar, Trainee Associate, Keskin & Keskin Attorneys at Law

This Article was originally published in Issue 7.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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