Introduction of Automatic Exchange of Financial Information in Ukraine in 2020: How Shall the Business Prepare Itself for the First Exchange?

05/ 03/ 2019

Nina Bets

Lawyer at Ilyashev & Partners Law Firm

Today, one of the issues on the agenda is whether Ukraine will accede to the Common Reporting Standard (CRS), and whether the first automatic exchange of non-resident’s financial information under the international standard will take place in 2020.

According to the OECD, 49 Member States have already made their first exchange of financial information in 2017, in 2018 they have been joined by 4 more jurisdictions, and in 2019-2020 another 3 new jurisdictions plan to join. Consequently, according to the official information, 56 countries have already implemented the CRS, and Ukraine is not on the list.

What needs to be done in order to make the first exchange in 2020?

In order to qualify to participate in the automatic exchange, Ukraine shall fulfill one mandatory condition, namely, sign the OECD Multilateral Competent Authority Agreement for the automatic exchange of information.

Once this is done in order to activate the exchange Ukraine shall:

  • adapt its national legislation;
  • sign a number of bilateral agreements with specific jurisdictions willing to exchange information with Ukraine; and
  • notify the OECD Secretariat of the start of such exchange.

In order for other participating jurisdictions to express their intention to exchange information with Ukraine, our country shall guarantee the reliability of storage of data obtained in the process of such exchange. After all, we are talking about bank secrecy, which in no case shall be disclosed to the public. 

What Ukraine has actually done?

Starting from 2017 Ukraine continuously declares its desire to join the CRS.

On 25 May 2017 a draft Law On Amending the Tax Code of Ukraine (Regarding the International Automatic Exchange of Tax Information) was submitted to the Verkhovna Rada of Ukraine. At the moment this Law is not yet adopted.

Thereafter, there was a number of draft laws more or less related to the implementation of the CRS into the national legislation, which were not adopted as well.

The most recent document related to the issue in question was the Order of the Cabinet of Ministers of Ukraine “On approval of conceptual directions to reform the system of authorities implementing the state tax and customs policy” dated 27 December 2018.

The said Order once again declares the intention to sign an international agreement on MCAA CRS, bilateral agreements on cooperation between the competent authorities on the automatic exchange of information under the CRS, as well as to fulfill all obligations for the establishment and execution of an automatic exchange of financial information.

Having analyzed the actions taken by our State, it becomes obvious that they are of a purely declarative nature. Also, given the fact that only few of the EU citizens open bank accounts in Ukraine – which means that such exchange with Ukraine is not a first priority task for these states, – it is possible to conclude that the first exchange with Ukraine will not take place anytime soon.

It would definitely be the case, if not for example, Russia, which joined in 2018 and quite a wide list of states agreed to information exchange with Russia, including Switzerland and Cyprus, financial institutions of which are unlikely to be interested in transferring bank secrecy to the tax authorities of the Russian Federation.

Given the fact that most offshore jurisdictions have already joined the CRS, and also bearing in mind that the OECD is actively struggling to reduce the number of jurisdictions evading the CRS exchange, in order not to be blacklisted by the international community Ukraine, nevertheless, will have to sign the MCAA CRS in the near future.

Moreover, it should be noted that on 9 March 2018 the OECD adopted rules for mandatory disclosure of information on tax optimization and offshore structures within the CRS. These rules oblige corporate agents, brokers, insurance and auditing companies to provide tax authorities with the information on all possible ways to avoid CRS, covering or distorting the information about the beneficiary which became known to them during their work with a particular client. Responsibility for the failure to comply with these rules is determined by the legislation of each state individually.

Who will be affected by the first CRS exchange?

The CRS standard envisages that the banks collect information on financial activities on individual accounts of non-resident individuals and on corporate accounts of non-resident beneficial owners, and transfer it to the tax authorities of their country which, in turn, automatically send such information to the country of tax residence of the owner of such account.

Amount of information to be exchanged

The following amount of information is transferred as related to the private accounts of individuals: name and surname of beneficiary, address in the country of residence, taxpayer individual number, date and place of birth, account number, account balance at the end of the reporting period, gross amount of income from the relevant financial assets paid in the reporting period, the gross amount of income from the sale of the relevant financial assets paid in the reporting period.

The peculiar feature of the exchange as regards the corporate accounts is that it is only the accounts of companies whose passive income is more than 50% (dividends, interest, royalties, etc.) that are subject to such exchange with the beneficiary’s country of residence. The amount of information is identical to the amount of information transmitted on individual accounts (plus information about the company as such).

Information about corporate accounts of companies, the active income of which accounts for more than 50% (income from the company’s business activities) is to be transferred to the country of tax residence of that company only. Information about the beneficiary of the account holding company is not included in the amount of information to be exchanged.

Weaknesses of the CRS

The CRS has certain weaknesses that the OECD is trying to overcome, but which still continue to exist.

The inadequate AML procedures, the unwillingness of some states to join the standard, and the possibility to change the tax residency are not an exhaustive list of ways to avoid automatic exchange of financial information.

On 19 February 2018 the OECD began public discussions on the inappropriate use of the Residence/Citizenship-by-Investment Programs (RBI/CBI Programs). The public discussion focused on: evaluating the use of investment programs in undermining the CRS, identifying the types of investment programs with the highest risk to harm the CRS, recommendations to financial institutions to combat the inappropriate conduct of due diligence of all customers, and the OECD’s further steps in combating misuse of investment programs. Perhaps in the future the OECD will remove the aforementioned factor posing a threat to the successful use of CRS, but so far it ends up with public discussions only, which do not prevent some countries from continuing to successfully grant residence for the investments made.

In order for the CRS exchange not to become a surprise for the foreign business owners, there is a need to take appropriate preparatory measures not to be at disadvantage with the tax authorities.

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