Istvan Csovari

Csovári István is an attorney and a registered tax expert, who has been working with the Jalsovszky Ügyvédi Iroda law firm in Hungary as a senior tax lawyer since 2006.

Almost every week a new piece of information is published on the development in the ways tax authorities can exchange information between each other. It is not a surprise that taxpayers are unable to follow these developments.

The most common questions raised by taxpayers on this topic in my country are: what information can be provided by non-Hungarian tax authorities to Hungary?; can exchange of information apply even to events that happened before a treaty was signed?; what is the difference between exchange upon request and automatic exchange information?; do information exchange provisions also apply to companies held beneficially by individuals?

Automatic information exchange; exchange upon request

Before we move into the depth of the topic we need to understand the key difference between automatic and “upon request” information exchange.

Normally, tax authorities exchange information with other countries’ authorities upon the request of  the other country. This means that tax information is only passed along upon the request for specific information regarding a specially identified taxpayer. The “upon request” information exchange does not authorize tax authorities for non-specific data fishing. therefore only those persons may be worried about this type of information exchange against whom a tax investigation has already been started by their local tax authorities.

As the other main alternative, automatic information exchange becomes more and more frequent between tax authorities. In the framework of automatic information exchange the tax authority of one of the countries collects financial information that may be relevant for the other country’s tax authority and passes over such information without specific request. Obviously, this method of exchange of information can be the most frightening for taxpayers who want to hide their income and assets from their own tax authorities. While automatic exchange of information is not yet widespread, there is a strong pressure towards this way of cooperation from the Office for Economic Coordination (OECD) and the EU.

EU guidelines call for the international exchange of citizens' bank account data to catch tax evaders. Source: www.dw.de

EU guidelines call for the international exchange of citizens’ bank account data to catch tax evaders. Source: www.dw.de

Treaty-based information exchange — double tax treaties

Hungary entered into about 75 double tax treaties and all contain a provision for the exchange of information. Normally, the treaties allow an “upon request” exchange of information. Although the treaties provide the legal basis for automatic exchange of information as well, in practice only a few countries adopt this method. On the basis of a survey the OECD conducted in 2012, currently 14 counties provide automatic tax information to the Hungarian tax authorities. The identity of these countries is, however, not available publicly.

It should be kept in mind that the scope of information exchanged between the tax authorities is not restricted to certain transactions or to bank account details. Any information that may be relevant for tax perspective can be exchanged with the country’s tax authority also being able to request the identity of beneficial owners of companies’ incorporated in the other country.

Information exchange provisions can have retroactive effect. This means that even if, at the present, no double treaty exist between Hungary and the other country involved, Hungarian taxpayers cannot feel fully safe with hiding tax information in the other country: if, at a later time, Hungary enters into a treaty with the respective country then even today’s tax information can be collected by the Hungarian tax authority.

These agreements contain similar provisions on exchange of information as double tax treaties do. A key difference is, however, that, as opposed to the double tax treaties, no retroactive information can be collected on the basis of these agreements.

To date, Hungary has entered into such an agreement with Guernsey only, but the Hungarian Government is authorized to negotiate TIEAs with almost all tax haven centers, like Lichtenstein, Andorra, Jersey, British Virgin Islands or Bermuda.

The OECD multilateral treaty

As a recent development, on Nov. 12, 2013, Hungary joined the OECD Multilateral Agreement On Mutual Administrative Assistance In Tax Matters. The treaty has 61 member states, with Belize being the only member coming out of traditional tax haven countries. It is also noteworthy that about a month ago Switzerland also joined this treaty.

The objective of the treaty is to provide  a platform for cooperation between tax authorities. Apart from allowing an “upon request” exchange information the agreement itself does not oblige tax authorities for a deeper cooperation but, based on the treaty, various exchange of information mechanisms can develop between the member countries.

The Swiss Rubik Agreements

The concept of Rubik Agreements became well known recently when Hungary indicated its willingness to enter into such agreements with  Switzerland. Up to now only the United Kingdom and Austria entered into such agreement with Switzerland, but Switzerland has expressed its willingness to enter into a Rubik agreement with any other countries.

Rubik Agreements offer three alternatives for nationals of other countries having bank accounts in Switzerland. First, such persons can move their savings to another country without any sanction. Switzerland will, however, provide information to the home country of these persons on the 10 most preferred locations where such persons moved their funds to, so that the home tax authorities can follow where to locate these funds. As a second alternative, the bank account holder can opt for the deduction of a one-off, 30-35 percent tax from the savings placed in the Swiss bank account. The majority of this tax would be transferred from Switzerland to the home country of the bank account holders. Finally, if the account holder does not choose any of the options above, then the Swiss tax authorities will automatically exchange information regarding the identity and the bank account details of the holder with the home tax authority of that person.

Csovári István is an attorney and a registered tax expert, who has been working with the Jalsovszky Ügyvédi Iroda law firm in Hungary as a senior tax lawyer since 2006.

About Exchanges

Tax Information Exchange Agreements (TIEAs) were developed by the OECD Global Forum Working Group on Effective Exchange of Information to address harmful tax practices. The agreement, which was released in April 2002, is not a binding instrument, but contains two models for bilateral agreements between countries.

A TIEA can do the following

Provides for exchange of information that is “foreseeably relevant” to the administration and enforcement of domestic tax laws on the contracting parties. Information provided under TIEA is protected by confidentiality obligations.

Information requested can relate to a person who is not a resident of a contracting party. Information is defined in an expansive manner to cover banking details, ownership details of companies, persons, funds and trusts, etc.