What is Automatic Exchange of Information?

The increasingly globalised world renders businesses and investments no longer hindered by territorial factors. However, global financial transactions raise issues related to tax avoidance and evasion efforts.

These issues arise partly due to the absence of complete and accurate information on financial transactions conducted by taxpayers outside their country. On the other hand, to obtain such information, tax authorities may be faced with bank confidentiality rules that apply in other countries.

This condition has led to global efforts by G20 members together with the Organisation for Economic Cooperation and Development (OECD) to automatically exchange information between countries or referred to as Automatic Exchange of Information (AEoI).

Thus, what exactly is meant by AEoI?

Definition
Referring to the IBFD International Tax Glossary (2015), AEoI is an exchange of information that involves the systematic and periodic transmission of ‘bulk’ taxpayer information by the source to the residence country.

The taxpayer information concerns various categories of income, such as dividends, interest, royalties, salaries and pensions. The information that is exchanged automatically is normally collected in the source country on a routine basis generally through reporting of the payments by the payer, including financial institutions, employers and so forth.

AEoI can also be used to transmit other types of useful information, such as changes of residence, the purchase or disposition of immovable property, value added tax refunds and so forth.

Thus, AEoI makes the tax authority of a taxpayer’s country of residence able to check the taxpayer’s tax returns to verify that taxpayers have accurately reported their foreign-source income.

Legal Basis
The legal basis of the AEoI system in Indonesia is outlined in Law No. 9/2017 concerning the Stipulation of Government Regulation in Lieu of Law No. 1/2017 concerning Access to Financial Information for Tax Purposes into a Law.

In addition, the government has also promulgated MoF Reg. No. 70/PMK.03/2017 as amended by MoF Reg. No. 19/PMK.03/2018 as the technical guidelines for access to financial information for tax purposes.  

Article 1 number 2 of MoF Reg. No. 70/PMK.03/2017 as amended by MoF Reg. No. 19/PMK.03/2018 defines the exchange of  financial information or hereinafter referred to as the exchange of information as follows:  

“Activities to convey, receive and/or obtain financial information relating to taxation under International Agreements, which aim to: 

1. prevent tax avoidance;
2. prevent tax evasion;
3. prevent the misuse of Tax Treaties by unauthorised parties; and/or
4. obtain information related to the fulfilment of Taxpayers’ tax obligations.”

On the other hand, based on Article 1 number 1 of MoF Reg. No. 70/PMK.03/2017 as amended by MoF Reg. No. 19/PMK.03/2018, international agreements refer to: 

“Agreements, in certain forms and names, stipulated in international law, which, among others, provide for the exchange of information on matters relating to taxation, including:

1. Tax Treaties;
2. Tax Information Exchange Agreement;
3. Convention on Mutual Administrative Assistance in Tax Matters;
4. Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information;
5. Bilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information;
6. Intergovernmental Agreement for Foreign Account Tax Compliance Act; or
7. other bilateral or multilateral agreements.”

Based on Article 1 number 4 of MoF Reg. No. 70/PMK.03/2017 as amended by MoF Reg. No. 19/PMK.03/2018, automatic exchange of information is “the exchange of information at a certain time, periodically, systematically and continuously on financial information prepared based on CRS.” 

Referring to Article 1 number 3 of MoF Reg. No. 70/PMK.03/2017 as amended by MoF Reg. No. 19/PMK.03/2018, CRS or Common Reporting Standard refers to: 

“Reporting standards for the automatic exchange of information listed in section II.B and commentaries for section III.B Standard for Automatic Exchange of Financial Account Information in Tax Matters and the amendments thereto.”

In summary, CRS contains rules regarding data collection and reporting of financial information. Quoting the OECD website, the CRS was developed in response to the G20’s request and was approved by the OECD Council on 15 July 2014.

The CRS sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered as well as general provisions on the procedures that financial institutions must comply with.

Conclusion
AEoI is a plan of G20 members and was initiated by the OECD. The AEoI system works through the exchange of financial data of foreigners residing in a country. The financial data is exchanged between the competent tax authorities in each country. (Bsi)