Automatic Exchange of Information - What does it mean for Albanian and the Albanian banks

The purpose of financial information reporting is to identify different types of investment income, including interest, dividends and similar types of income, and to identify situations where the taxpayer seeks to conceal income, on which taxes have been avoided. Enkelejda TOTOSenior Specialist, Compliance Programs and Controls, Compliance, AML and FCM DivisionRAIFFEISEN BANK  ALBANIA The rapid globalization of the international economy has been accompanied by an inevitable expansion of international movement of capital, goods, services and individuals. This process has been accompanied by increased investment, outside the countries of residence, and consequently with the management of these investments, through financial institutions in host countries. This includes, also, keeping the capital in "offshore" countries, as one of the consequences of bypassing tax obligations in their countries of origin, i.e. tax evasion. This is a major problem for all jurisdictions, around the world. As all countries have a common interest in maintaining the integrity of their tax systems and combating tax evasion, there is a need for cooperation between tax administrations to exchange information on financial accounts, for individuals and businesses, according to certain rules, as defined in the form of a common reporting standard.In February 2014, G20 Finance Ministers and Central Bank Governors adopted the Common Reporting Standard (CRS) for Automatic Exchange of Tax Information. The aim was to promote and implement policies for international economic and financial stability.Through this legislation and process, Albania holds an additional and very effective tool, in the fight against tax evasion, while the banking system is a powerful mediator in this process, which primarily enjoys a strong reputation, related to integrity in performing financial activity, in the market.Albania has joined the Multilateral Competent Authority Agreement (“MCAA”) for the exchange of information, by signing it in October 2014 and through the approval with DCM No.178 dated 09.03.2016, has agreed to exchange automatically the financial account information in 2020, under the Law No.4/2020. The first reporting by banks in Albania will be on July 31st, 2020 and in the following years it will be effective at the end of May of each year. What are the obligations for Albanian banks in this regard?Pursuant to Law No.4/2020, the Albanian banks must report annually to the General Tax Directorate the information on reporting financial accounts, for individuals and businesses, as follows:For individuals: generalities, jurisdiction of residence, account or value balance, total amount of gross interest generated during the year, and other individual data, according to the template.For businesses: Company data, name, jurisdiction/s of residence, TIN(s), account number and status, total amount of gross interest generated during the year, by type of account (custody, or deposit), as well as data on the individual, as the last beneficial owner/controlling person of a passive NFE, or Investment Fund, based in a non-participating country/jurisdiction, according to the relevant template.To implement such reporting requirement, banks have the obligation to identify customers tax residence, as well as the TIN (number), according to the tax residence. An individual, or business, may have one or more tax residences, and consequently one or more TINs (tax identification numbers). So, banks must fulfil two key obligations for the automatic exchange of financial account information: Identification of reporting persons (individuals and businesses) and their respective reporting.In order to carry out the identification and reporting process, the bank must carry out some preparatory processes and take action, in accordance with the regulatory framework. The identification of clients’ tax residence is done through the self-declaration template of clients. Banks have the obligation to inform their customers about the obligation to self-declare their tax residence, as well as collecting these templates (forms) within a certain period, according to the applicable regulatory framework. Currently, under current conditions, the process of reporting financial accounts to the General Tax Directorate is really a challenge for the banking system. What are the obligations for Albania and the Albanian authorities in this regard?Albania has signed the Multilateral Competent Authority Agreement for Automatic Exchange of Financial Accounting Information. This agreement was approved by DCM No.178, dated 9.3.2016 and provides that the exchange of information can be carried out on a bilateral basis, by competent authorities. According to the agreement, Albania should start implementing automatic exchange of information by end-2018, but this deadline was postponed for 2020, in order to have time to create the legal basis and infrastructure needed for its implementation.To implement this obligation, a system must be put in place, which will exchange confidential data between local tax administrations and the countries of the declared tax residence. Also, a regulatory basis is needed for procedures about proper vigilance, information reporting by financial institutions to the Tax Directorate, as well as measures to ensure the effective implementation of the law. What is the purpose of such legislation and what are the benefits for banking sector and Albania itself?The main purpose of such legislation is to avoid tax evasion. The purpose of financial information reporting is to identify different types of investment income, including interest, dividends and similar types of income, and to identify situations where the taxpayer seeks to conceal income, on which taxes have been avoided (eg: seeking information on account balances).In addition to reporting, the legislation aims to limit the attempts from taxpayers to avoid reporting, through the use of intermediary legal entities, or such structures. So, banks and financial reporting institutions will have to carry out a proper and expanded vigilance process.So, through this legislation and process, Albania holds an additional and very effective tool, in the fight against tax evasion, while the banking system is a powerful mediator in this process, which primarily enjoys a strong reputation, related to integrity in performing financial activity, in the market.