Efficiency 2015 Annual Report

New Tax Administration Standard

Globalization provided more freedom to move wherever your heart goes and reside anywhere in the world while not identifying yourself with any country when it comes to paying taxes. In order to combat the trend, the Organisation for Economic Co-operation and Development (OECD) approved the Standard for Automatic Exchange of Financial Account Information in 2014. Aleksandrs Pāže, ABLV Bank Chief Compliance Officer, tells what the new standard is and how it will influence client servicing.

Lately, tax authorities of numerous countries have been fighting against tax evasion even harder. The taxmen turned their attention to financial accounts of taxpayers held with foreign banks. For credit institutions of the European Union, 2015 was marked by basic preparations for the implementation of a new standard for automatic exchange of information on tax matters, initiated by G20 member states. Let me explain what it means and how it will influence our client service.

Global information exchange

Financial institutions have already experienced automatic exchange of information while complying with the requirements of the Foreign Account Tax Compliance Act of the United States of America (FATCA), the key purpose of which is to prevent US residents from keeping accounts with foreign financial institutions in order to hide their financial assets and avoid paying taxes in the USA. Upon approving the FATCA in the USA, G20 finance ministers and a group of top managers of the central banks issued the OECD a mandate to elaborate a standard for automatic exchange of information based on FATCA principles, which would make the automatic exchange of information further European and international standard for ensuring tax transparency and data exchange.

Based on the mandate, the Common Reporting Standard (OECD CRS) was elaborated and approved on 15 July 2014 by the OECD Council.

The primary aim of the standard is to prevent tax evasion via accounts with foreign banks. In order to achieve it, the annual automatic exchange of information will take place between tax authorities of OECD CRS member states regarding accounts which belong to or are controlled by the residents of other CRS countries.

In response to the appeal of the OECD, the Council of the European Union actively engaged in the process and approved the amendments to the EU Directive on Administrative Cooperation providing for the automatic exchange of information between EU member states.

Upon the approval of the OECD CRS, the process of making commitments by countries all around the world has started. As a result, by the end of 2015, the wish to participate in the automatic exchange of information as per the OECD CRS confirmed 97 countries. From the above-mentioned, 80 countries joined the CRS Multilateral Competent Authority Agreement on the automatic exchange of information about financial accounts. On the list of parties, there are both highly developed countries and those that are considered “tax havens”.

The primary aim of the standard is to prevent tax evasion via accounts with foreign banks.

Latvia as direct participant

Latvia together with other EU member states joined the OECD CRS Multilateral Competent Authority Agreement on the automatic exchange of information about financial accounts in autumn 2014.

In order to integrate OECD CRS requirements into the legal enactments of Latvia, the amendments to the Law on Taxes and Fees and Law on Credit Institutions were approved and entered into force in January 2016 binding Latvian financial institutions to carry out verification of financial accounts and submit information about financial accounts owned or controlled by residents of the participating countries to the State Revenue Service of Latvia. In such a manner, our country is absolutely ready for meeting the international commitment. Both the local tax administration and Latvian credit institutions, including ABLV Bank, are legally prepared for submitting the first report already in 2017. At the moment, preparation and organizational issues are taking place before launching the project.

OECD CRS and client service

According to the requirements set in the above-mentioned legal enactments, the bank is obliged to gather and document data on client’s / client’s beneficiaries’ tax residency, as well as submit to the State Revenue Service of Latvia information about financial accounts of the residents of the countries which joined the process of exchanging tax information.

In order to meet the commitments mentioned, the bank will need to acquire clients’ and their beneficiaries’ evidences of tax residency; shall the client be a legal entity, the bank will also require specific documents proving the type of the client’s organization: financial or non-financial, passive or active one.

What is notable, the OECD CRS does not offer a standard definition of tax residency, therefore, when defining tax residency, the client / client’s beneficiary shall be guided by the local taxation laws. Currently, the OECD CRS actively works on receiving from the participating countries explanations and figuring out a unique definition for tax residency. Our bank will also be guided by the explanations submitted to the OECD CRS, though one needs to admit there remain numerous questions in the whole process.

In general, a person is considered the resident of a particular country, if according to the local legal enactments they are the subject of income taxation based on their domicile / belonging to this particular country (criteria for individuals) or residency / country of top management / country of establishment / country of registration (criteria for legal entities). At the same time, various criteria might be the reason to consider an individual or a legal entity a tax resident of several countries (double residency), even if the individual or legal entity tries their best to evade belonging to a particular jurisdiction in terms of taxation.

Ready for new standard

ABLV Bank is now scrupulously elaborating its inner operation algorithm to adjust it to the new operation mode. We already are in the process of obtaining and processing information, as well as ask clients to fill out respective declarations on tax residency. As of 2016, all new clients are required to mark information on their residency and the residency of each beneficiary when submitting documents for establishing business relationships with the bank.
From our current clients who opened accounts with us prior to 2016 we will be receiving the above-mentioned data gradually and only if the information at our disposal is not enough.

As a result, based on the data received from our clients and the information at our disposal, we will execute annual reports for the State Revenue Service of Latvia on residents of those countries which joined the OECD CRS. The State Revenue Service, in its turn, will pass the information further to the competent tax authorities of OECD CRS member states without estimating or verifying the data submitted by the bank.

In September 2017, Latvia will carry out the first automatic exchange of information with 55 countries. So, the bank will submit the information about financial accounts to the State Revenue Service of Latvia for the first time approximately in the middle of 2017, and the information will contain data about 2016. The following will be submitted: balances of financial accounts, information on incomes transferred to the account; should the account holder be a passive non-financial organisation, also data on the beneficiary. The information on the beneficiary shall not be disclosed if the company is an active organisation (when more than half of the income is non-passive, i.e. the organisation gains profit from sources different from dividends, securities, etc., for example, from trading operations).

Those clients of Latvian financial institutions who are the local tax payers will be excluded from the automatic exchange of information. However, the tax administrations of other countries will submit similar information to the State Revenue Service of Latvia about Latvian residents who hold or control financial accounts at credit institutions in the participating foreign countries.

We always remember that each innovation in the banking area concerns not only a credit institution as such but also its clients. Therefore, we carry out awareness-raising activities and inform our clients on the requirements of legal enactments in advance. What is the most important, prior to submitting particular information about an individual or a legal entity to tax authorities, we will inform our clients about the fact of disclosure and the volume of the information to be submitted.

Upon comprehensive implementation of the OECD CRS, the new standard will become an important tool in tackling cross-border fraud and tax evasion.

* The information about the OECD CRS provided in the article is for information purposes only, it does not contain a comprehensive list of requirements and is not a guideline or consultation on determining the tax residency or classification of clients. The tax residency and classification, if applicable, depend on individual facts and conditions. The article is prepared by using publicly available information which was not specifically verified.

Table of Contents

Creative team: Arnis Artemovičs, Ernests Bernis, Jānis Bunte, Anna Celma, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Samanta Priedīte, Jūlija Surikova, Romans Surnačovs
Project managers: Anna Celma, Jūlija Surikova
Interviews: Jānis Bunte, Ingrīda Drazdovska, Konstantīns Gaivoronskis, Katrina Gordejeva, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Romāns Meļņiks, Sergejs Pavlovs, Romans Surnačovs, Jānis Šķupelis
Text authors: Leonīds Aļšanskis, Jānis Bunte, Anna Celma, Vladislavs Hveckovičs, Jānis Grīnbergs, Māris Kannenieks, Ļubova Kazačenoka, Jekaterina Koļesina, Zane Kurzemniece, Aleksandrs Pāže, Gints Pumpurs, Dmitrijs Semjonovs, Jūlija Surikova, Kaspars Vanags, Benoit Wtterwulghe
Photography: Arnis Artemovičs, Uldis Bertāns, Mārtiņš Cīrulis, Ieva Čīka, Krišjānis Eihmanis, Andrejs Hroneloks, Alise Jastremska, Valdis Kauliņš, Valts Kleins, Marks Litvjakovs, Sergejs Mazurs, Reinis Oliņš, Samanta Priedīte, Gatis Rozenfelds, Polina Viljun, LETA foto, Marka.photo, Studija F64
Proofreader: Jānis Frišvalds
Translators: Jekaterina Koļesina, Nataļja Malašonoka, Lidija Marsova, Jūlija Surikova
Design: Aivis Lizums, Valters Horsts

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