Financial and fiscal transparency – The battle for ‘financial privacy’ is a long agony

In recent years, many countries signed an agreement with the United States, known as the Foreign Account Tax Compliance Act. This enables automatic reporting to the US tax authorities of financial data of any Americans with bank accounts in their territory, such as income from savings.

These agreements inspired the OECD and the G20 to extend the approach of the United States by establishing a system of automatic exchange of information between Member States.

Big Brother exists! The world is financially transparent!

After 20 years of tinkering, the breakthrough followed on the 28th and 29th of October, 2014.

The Member States of the OECD, the G20, and almost all major financial centres signed an agreement that will enable the automatic exchange of tax information. This automatic exchange of tax information can be considered the new standard which will ensure full global transparency.

The first automatic exchange of tax information is planned for September 2017. At least, that is the intention … Although it looks serious, we should not be naive …

However, as appears from the information below, the basis of the new standard (automatic exchange of tax information) is not new. The scale and scope of the new standard, on the other hand, is innovative and this has far-reaching consequences in terms of tax planning.

Forerunners of the new standard

  1. European Union Savings Tax Directive

The European Union Savings Tax Directive, introduced in 2005, provided for the automatic exchange of information between EU Member States (and certain dependent or associated territories of EU Member States) concerning income from interest.

In other words, the goal of the European Union Savings Tax Directive is to tax savings income, acquired in a Member State of the European Union by a natural person resident in another Member State of the European Union (or in one of the dependent or associated territories of the Member States of the European Union), in accordance with the tax laws of that individual’s country of residence.

After the launch, it turned out that the initial European Union Savings Tax Directive contained a number of weaknesses. This enabled tax residents of the EU Member States to slip through the net:

  • The concept ‘interest’ was too narrowly defined. As a consequence, one could use financial products which do not generate pure interest in order to avoid reporting,
  • The concept ‘paying agent’ was too narrowly defined. This enabled financial institutions to redirect the payments to outside the territory of the European Union Savings Tax Directive in order to avoid reporting,
  • The concept ’beneficial owner’ was defined as an individual who directly collects interest from a paying agent. This means that the European Union Savings Tax Directive could be legally avoided if that same individual was working with an interposed entity to collect interest. For example, international business companies, foundations, trusts, and partnerships could be used to avoid reporting.

Not without a struggle and after severe opposition from Luxembourg and Austria, a comprehensive and amended EU Savings Tax Directive was signed on the 24th of March 2014. The loopholes mentioned above were largely closed by this amended European Union Savings Tax Directive.

The scope of the concept ‘interest’ was broadened, the scope of the concept ‘paying agent’ was enlarged and the scope of the concept ‘ultimate beneficial owner’ was enlarged, covering beneficiaries of traditional offshore entities such as international business companies, foundations, trusts, and partnerships.

The EU Member States were forced to implement this amended EU Savings Tax Directive into national law before the 1st of January 2016.

Austria and Luxembourg start with the automatic exchange of information regarding interest received in year 2016 on the 1st of January 2017, a year later.

Nevertheless, this amended EU Savings Tax Directive could still be bypassed, simply because the European Union doesn’t have enough power on the international stage. The bottom line is that one can simply avoid all the countries and jurisdictions which fall within the scope of the EU Savings Tax Directive for: (1) the interposed entity’s country of incorporation (such as an International Business Company), (2) the country of the bank account and other financial products, and (3) the country where the actual management of the entity will take place.

  1. Foreign Account Tax Compliance Act (FATCA)

Recently, the automatic exchange of information also became the standard reporting mechanism under the Foreign Account Tax Compliance Act (FATCA).

The Foreign Account Tax Compliance Act (FATCA) is a United States federal law. FATCA is intended to detect and deter the evasion of US tax by United States persons (including those living outside the US) who hide money outside the US.

FATCA enforces the requirement for United States persons to file yearly reports on their non-U.S. financial accounts. FATCA also requires all non-U.S. (foreign) financial institutions (banks for example) to search their records for individuals with a U.S. person-status and to report the assets and identities of such persons to the U.S. Department of Treasury.

In case of non-compliance with the reporting obligations, the financial institutions concerned are subject to a withholding tax of 30% in the United States on all outgoing cross-border payments originating in the United States. In other words, U.S. payors making payments to non-compliant foreign financial institutions are required to deduct and withhold from such payments a tax equal to 30 percent of the amount of such payment.

As mentioned earlier, this FATCA legislation made other countries realise that they, too, would benefit from a transparent and automatic exchange of information mechanism with regard to their taxpayers.

A first reaction/imitation came from the United Kingdom. The United Kingdom concluded agreements with its overseas territories (Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands) and its Crown dependencies (Guernsey , Jersey and the Isle of Man). Financial institutions in these British overseas territories and Crown dependencies are required to automatically provide financial information of taxpayers in the UK to the tax authorities of the United Kingdom. One refers to these agreements by using the term UK FATCA because they are based on the concept of the FATCA legislation in the United States.

The FATCA legislation was also a great source of inspiration for the OECD and the G20 and actually forms the basis for the new standard on the automatic exchange of tax information.

The new standard: automatic exchange of tax information

Automatic exchange of tax information means global tax transparency. Financial institutions will provide information about different kinds of income and assets to the authorities, without these authorities having to request it.

Countries will thus register all different types of income that are earned within their country (dividends, interests, royalties, salaries, pensions, etc.). Then, every government can exchange this information automatically in bulk to the other governments concerned. There will be an annual bulk exchange of this information by making use of secure IT networks.


  1. The tax authorities of the country in which an individual is resident is able to check whether the individual in question has indicated his or her revenues correctly.
  2. The tax administrations of the countries are able to determine and map the worldwide assets of each of their residents.


  1. The exchange of data is done electronically, so there will always be a risk of data theft (both during the data transfer or from local government databases).
  2. Financial privacy disappears. A government will have a complete view on the wealth of its residents. This opens the door to capital taxes and all kinds of ‘see-through fees’. There is a real danger that the effective tax rate is pushed up even further in certain countries. The potential access to large amounts of capital will tantalise many politicians – it is much easier to simply increase tax revenue than to cut government spending. The dictatorship is being installed …

The new standard versus TIEAs

In an international context, this automatic exchange of tax information can be considered as the new standard in comparison to the current Tax Information Exchange Agreements (TIEAs).

TIEAs are bilateral agreements between jurisdictions in which they agree to cooperate if they ask one another for tax information in order to aid any tax investigations. Under the current system of TIEAs, which will soon be replaced by the new standard, these governments ensure that this exchange of financial information will take place, but only upon request.

TIEAs thus allow a government to apply its national tax legislation through the exchange of tax information. However, this exchange of information is always done upon request. In addition, this request must be relevant to a particular case and must relate to an item that is covered by this bilateral agreement.

The volume of information which is exchanged according to the ‘old-fashioned’ TIEAs is limited though. Namely, the exchange under a TIEA requires, in many cases, a complete identification of the taxpayer concerned or it may even be required that there is an ongoing official tax investigation for this particular taxpayer.

The new standard eliminates the limitations of TIEAs and ensures that governments can benefit from automatic information exchange without having to ask for it anymore. The new standard will thus ensure greater financial transparency and is an important step at global level in terms of using the exchange of information in the fight against tax fraud.

Pandora’s box

The new standard for automatic exchange of tax information is offered as the ultimate solution against tax fraud. However, it is important to put this new standard in perspective.

We can do this by looking at the evolution of the individual member states, apart from the new standard. This calls for an example so let’s take Belgium as a case study (the same process is underway in many other Western countries).

In Belgium, once a country with banking secrecy and financial privacy, taxpayers have had to process a whole list of measures against tax fraud in recent decades:

  • Since 1996: requirement to declare foreign bank accounts.
  • Since 2011: abolishment of the internal Belgian fiscal banking secrecy.
  • Establishment of a central point of contact with the National Bank of Belgium where financial institutions have to report their clients’ identity, account numbers, and contract numbers.
  • Since 2013: requirement to declare foreign life insurance policies.
  • Requirement for Belgian companies to declare payments to suppliers based in certain tax havens, once they reach more than EUR 100 000 annually.
  • Since 2014: requirement to declare and identify the founders and beneficiaries of international business companies, trusts, foundations, and other private wealth structures. In other words, Belgian taxpayers, who have placed a portion of their assets in a foreign legal construction, and the beneficiaries hereof, must report this on their tax return.
  • Since 2015: introduction of the so-called Cayman Tax, a ‘see-through’ tax. Belgium has opted, like several other (European) countries, for fiscal transparency and CFC legislation (Controlled Foreign Corporation). The aim is to avoid the creation of tax-exempt wealth vehicles abroad and to avoid the decreasing tax base that comes with it. The creation of a foreign construction is not made legally impossible, but the favorable tax effect has been completely neutralised. The income of foreign structures, including companies which are not taxed at a rate of at least 15%, are now charged directly in respect of the founder, his heirs, ‘third party beneficiaries’, or shareholders. This is done according to the original classification of the income. For example, 27% on investment income such as interests and dividends versus progressive rates up to 50% on business income.
  • Since end of 2015: establishment of online reporting system for social fraud and undeclared employment. This online ‘snitch’ hotline gives civilians the opportunity to report their neighbour for engaging in undeclared employment or other offenses.

The trend in several (European) countries is obvious and can only frighten the attentive taxpayer… Public authorities are quietly mapping all private wealth in order to strike even harder in the pockets of the taxpayers who have already been taxed completely numb. The new standard for automatic exchange of tax information will actually be a godsend for many governments that are running at a loss, including the Belgian one. Or perhaps not quite?

Anyone who is paying attention will recognise that the new standard could well be a poisoned chalice for various countries with high government spending. The new standard is ultimately forcing taxpayers to make a difficult decision: accept legal confiscation and help filling bottomless government pits OR vote with their feet.

Governments which do not work towards creating acceptable tax rates (such as the Belgian one) will be confronted with the undesirable effects of the new standard of transparency. Value-adding taxpayers not only can, but will choose to become resident and taxpayer elsewhere.

Not only a resident! but some, people just are going for more for another citizenship! And they are smart!!

Iven De Hoon, Tax Lawyer

Date submitted: 23 March 2016

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