Uncooperative Bilateral Partners

Three options for the legal instrument to base automatic exchange of information
Once the Financial Institutions have collected and reported the information to their tax administration, it is exchanged with the jurisdiction’s automatic exchange partners. This requires a legal instrument to be in place beforehand to provide the necessary protections in relation to data safeguards and confidentiality to ensure the information is treated appropriately.

Jurisdictions may elect any one of three legal instruments as the basis to permit automatic exchange under the Standard :
  1. Double Tax Agreements containing the standard OECD Model Article 26, referred to as the Bilateral
  2. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters, referred to as the Convention, Article 6 of which specifically provides for the optional use of automatic exchange. Note that this method still requires partner countries to agree individually with each other prior to exchanging information.
  3. Tax Information Exchange Agreements that provide for the automatic exchange of information, referred to as the TIA.
A handful of countries have chosen the Bilateral instead of the Convention as the legal instrument for the automatic exchange of information. None have selected the TIA.
The Model Competent Authority Agreement, herein “CAA”, is termed as such because it is an agreement between two Competent Authorities dealing with tax information exchange, usually the tax authorities or Economic Ministry or Finance Ministry. It’s a model because it’s a standard agreement with a few fields to complete.

The Model CAA links the CRS and the elected legal instrument for the exchange, such as Convention or Bilateral. The model CAA consists of :
  • A number of “whereas” clauses - Representations on the domestic reporting and due diligence rules
  • Representations on confidentiality safeguards and existence of necessary infrastructure for an effective exchange relationship
  • Seven sections providing for the way the exchange is to be undertaken :
    1. Section dealing with definitions
    2. Type of information exchanged
    3. of exchange
    4. Consultations between competent authorities
    5. Confidentiality data safeguards that must be met
    6. Collaboration on compliance and enforcement
    7. Amendments, suspension and termination clauses
There will be no list of unsafe countries regarding data confidentiality for the OECD CRS. A participating member such as Bahamas cannot refuse to sign a CAA with other participating members merely because "Bahamas has a flash drive proving leaked cases" or it is generally known that that country sells its tax data to kidnappers and extortionists. Rejection or suspension can only be based on (a) unsatisfactory completion of questionnaire, or (b) actual data leakage after exchanging info according to the CRS. In ether case the OECD will become involved.

Tax confidentiality is the cornerstone of the CRS. As such jurisdictions will give Mexico an identical questionnaire regarding data confidentiality that the US gave Mexico for FATCA. This is published in the CRS.

Mexico completed in the questionnaire to the satisfaction of USA. Mexico will give the same answers to the questionnaire to all the other CRS participants, including Bahamas.

USA officially approved that Mexico is a safe country to exchange info. Mexico is on the list of countries that USA can AEI with. See the IRS published list of countries USA exchanges info in Rev Proc 2014-64.

Mexico is listed on page 4 of 6. USA has subsequently been automatically exchanging info with Mexco (Interest on depository accounts for individuals)

The first paragraph of Rev Proc 2014-64, states this updates Rev Proc 2012-24. The USA removed 8 countries from the previous list, which are all ex-CIS such as Georgia, Kazakhstan, etc. Mexico remains on both lists.

In summary, Bahamas will not be able to simply reject signing with Mexico or any other participating jurisdiction based on their subjective concerns. The OECD will quickly peer review Bahamas if they do not sign CAA with other participating jurisdictions. OECD says although it usually takes two years to commence a peer review, however in Bahamas case they will give them three months as from January 2018 before expediting a peer review, because Bahamas is viewed as abusing the bilateral legal instrument instead of basing the agreement on the multilateral convention route.
1. Bahamas Bahamas elected the Bilateral legal instrument and refused to accept the Convention route.

However Bahamas claims it won't be exchanging information with most countries its clients reside in because the Bahamas has definitive proof on a flash drive that these other countries' tax information is not confidential.
2. OECD Peer Review The Bahamas is seen to be abusing the privilege that the legal instrument need not be the Convention. The OECD says it will peer review these countries like Bahamas if they are found to be uncooperative in exchanging information. For example if Bahamas refuses to sign an agreement with Mexico, and Mexico is deemed to have tax information confidentiality by peer members of the OECD, then Bahamas will be subject to a peer review.
3. Redacting the Bilateral and TIA legal basis for the Common Reporting Standard Due to the uncooperative willingness and outright abuse of such countries who do not elect the Convention as the legal instrument to base the CAAs, the OECD is reconsidering that all countries must base their CAA on the Convention rather than the Bilatera or TIA legal instruments.
4. Effect on obliging Countries to go the Convention route Once Bahamas is obliged or coerced into converting the legal basis for their CAAs from the Bilateral to the Convention route, and starts exchanging information with countries that all peers regard as having data confidentiality, such as Mexico, it will have to report on the closure of any accounts by Mexican Reportable Persons. Bahamas will also have to automatically exchange information with countries like Mexico as from January 2017, even if Bahamas only starts the Conventionroute in say 2019 or 2020, because that is the date they were supposed to collect information from.
5. Financial Institutions should collect and store information and possibly report to their tax authorities for countries that will eventually join the Standard or in case a CAA is concluded at a later date The OECD Standard's handbook for implementation page 19 par 23 - 26, advises Financial Institutions to collect and store information ready to report when automatic exchange of information eventually commences at a later date, for whatever reason. So if Bahamas starts exchanging information with say Mexico at a later date due to peer review conclusion of Bahama's unfounded concerns of data confidentiality.

It would not be efficient for financial institutions to later have to re-establish whether an account is reportable each time new automatic exchange relationships are entered into. To minimise these costs jurisdictions could therefore consider

Requiring or making it possible as an option for Financial Institutions to collect and retain the information, ready to report, in relation to all non-residents rather than just residents of those jurisdictions with which the implementing jurisdiction has concluded a CAA; or

Requiring or making it possible as an option for information to be collected and a record maintained, ready to report, in relation to all residents of those jurisdictions with which the implementing jurisdiction has an underlying legal exchange relationship that permits for automatic exchange (e.g. a DTC or other signatories of the Convention), including where a CAA has not been concluded.

In either of these cases the financial institutions could also report all the information held to the tax authority, rather than only the information currently required to be exchanged, which would again require less sorting of information by the financial institution.

Such wider approaches (and other possible options) could significantly reduce costs for financial institutions (and possibly tax administrations), because they would not need to perform additional due diligence procedures to identify their account holders each time a jurisdiction enters into a new automatic exchange relationship.

There could also be other benefits from adopting a wider approach, such as improving the quality of the information collected in relation to reportable accounts and therefore the overall effectiveness of the system in tackling tax evasion.