The international exchange of tax information on request (EOIR) has become commonplace and widespread in recent years, driven by governments’ desire to ensure asset and income transparency for their taxpayers. Regardless of the taxpayer’s location and legal status, they are required to comply with all international standards and requirements, including promptly responding to an international inquiry from the tax authority of a participating jurisdiction.

 

Countries’ efforts to control asset and income transparency were initially limited by national laws regarding banking and tax secrecy, as well as limited access to corporate information. However, mechanisms for international cooperation between tax authorities have evolved, and even these obstacles no longer prevent them from obtaining the information they need from their foreign counterparts. Therefore, it is crucial for every taxpayer to understand how to respond to an international tax inquiry. The specialists at Lawrange Attorneys Association have extensive experience in such matters and understand the appropriate actions, response deadlines, and taxpayers’ rights and obligations. This will be discussed below.

 

 What is an International Tax Request

Exchange of Information Request (EOIR) is a popular method for one country to obtain taxpayer information from the competent authorities of another country. An EOIR is sent when tax authorities suspect a tax violation or for the purpose of a full investigation of a taxpayer conducting international business. It differs from automatic and spontaneous requests.

 

Data exchange is only possible under a relevant international treaty, such as the  Double Taxation Avoidance Convention (DTAC) or under the OECD CRS standard. An international tax request involves the transfer of information on beneficiaries, bank accounts, etc. Information may be withheld due to legal restrictions or public policy reasons in the requested country.

 

Automatic and Proactive (Initiated) Tax Exchange

Every year, countries participating in the Automatic Exchange of Information (AEOI) exchange a standard set of taxpayer information with each other. This process occurs electronically and does not require individual requests.

 

The essence of proactive exchange is that tax authorities in one country may voluntarily transfer information about a taxpayer to another country if they believe this data may be useful for tax audits in the other jurisdiction.

 

When a Request from a Foreign Tax Authority May Receive

Any activity related to cross-border financial transactions or asset ownership that may be known to a foreign Regulator may potentially result in a request for information, especially if there is suspicion of tax non-compliance. Requests from foreign tax authorities may be received in some of the most common cases, in which, it is important to note, legal support during for tax audit .

 

Discrepancies In Tax Returns Or Reporting Information

  • Failure to disclose foreign income/assets is one of the main reasons for receiving a tax inquiry from abroad. If a foreign tax authority learns of an individual or legal entity holding an account or investment in their jurisdiction that is not reflected in the national tax return, it is highly likely that a request will be issued.
  • Incomplete or inaccurate information – providing partial or inaccurate information about foreign financial activities often leads to an audit.
  • Claims of tax treaty benefits – if a tax return is prepared in accordance with an international tax treaty that provides, for example, the opportunity to take advantage of a foreign tax credit, tax exemption, or reduced rate, but the taxpayer has not proven their eligibility, the foreign tax authority may require confirmation of your claims.

 

Discrepancies In Automatic Exchange Of Information (AEOI)

Under international agreements such as the Common Reporting Standard (CRS) or FATCA, financial institutions automatically submit information about foreign resident accounts to their local tax authorities. If the tax authority receives this automatic information from a foreign country, and it doesn’t match your domestic tax return, it will issue a request for clarification or documentation.

 

Targeted Tax Audits and Investigations

  • Ongoing tax audit – If a foreign government is conducting a tax audit of a company or individual with whom you have financial relationships or transactions, you may be asked to provide information about those specific transactions.
  • Suspected tax evasion or avoidance – If evidence indicates that funds have been transferred abroad for the purpose of concealing income or other illegal activity, the relevant authority will initiate a targeted request for information.
  • Complex cross-border structures – individuals or entities with complex international business or asset ownership structures may face increased scrutiny and targeted requests for information. Very often, even a bank asking for source of funds  when opening an account for a company with a complex business structure.

 

Legal Framework for the Exchange of Tax Information

The international legal framework for the exchange of tax information is a set of multilateral and bilateral agreements aimed at increasing transparency and combating tax evasion. It primarily consists of several important documents.

 

Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMA ATM)

This is an important and universal instrument in the area of ​​international tax cooperation. Its development was co-sponsored by the Council of Europe and the OECD (Organization for Economic Co-operation and Development). Its main objective is to provide a legal basis for all types of administrative assistance between the parties, including the exchange of information upon request, automatic and spontaneous exchange, as well as assistance in tax collection and service of documents. The Convention has been signed by over 140 jurisdictions, making it the broadest international agreement in this area.

 

Common Reporting Standard (CRS)

CRS is a global OECD standard that facilitates the automatic exchange of financial account data. It requires financial institutions in participating countries to collect information on the accounts of foreign tax residents. The information collected must be reported annually to their national tax authorities, which then automatically exchange this data with the relevant foreign authorities. Over 100 jurisdictions have already implemented this standard.

 

Bilateral Treaties

Most countries have signed double tax treaties (DTTs). Bilateral treaties, in addition to income tax rules, contain clauses on information exchange (usually based on the OECD Model Tax Convention). There are also bilateral tax information exchange agreements (TIEAs), which are typically concluded with offshore jurisdictions that are not party to broader conventions.

 

What Information May Be Requested

An international tax inquiry may require a wide range of financial, corporate, and personal information, particularly regarding income, accounts, assets, and business transactions received from abroad.

 

Financial Information

  • Bank details – account numbers, balances, transaction history, and information on the beneficial owners of foreign bank accounts.
  • Asset ownership – foreign authorities may be interested in financial assets and property.
  • Income information – all forms of income from abroad, including, but not limited to, wages, dividends, and interest.
  • Information on foreign investment accounts and related income.
  • Tax returns – forms and returns filed in other jurisdictions.
  • Payment and transfer information – evidence of payments or transfers of income from one jurisdiction to another may be requested.

 

Corporate and Business Information

Transfer pricing documentation may be required to support the arm’s length principle in intercompany transactions within multinational groups. Furthermore, information on the ownership of foreign entities and complex international group structures is often requested. Companies conducting cross-border transactions may be required to provide full financial statements. Information on foreign trusts, partnerships, and other pass-through entities may also be part of the request.

 

Personal Identification and Residency

International requests may require identification numbers, such as a Social Security Number (SSN), Employer Identification Number (EIN), or Individual Taxpayer Identification Number (ITIN). A certificate confirming tax residency in a specific country may also be required, especially when claiming treaty benefits.

 

How to Proceed Upon Receiving an International Tax Inquiry

It is crucial to respond to the inquiry through the official channels of your country’s tax service. Doing so directly is impractical. A tax litigation lawyer will help successfully complete this process within the prescribed timeframe.

 

Verify the Legitimacy and Source of the Inquiry

It is important to ensure that the inquiry was received through official channels, that is, from your local tax office, acting on behalf of a foreign tax authority. Direct interaction with the foreign regulator should be avoided.

 

Prepare an Official Response With Legal Support

A free-form letter should be written to the local tax office. It must include the number and date of the international foreign inquiry.

 

All requested documents and information should be attached to the letter. It is important that the information provided is complete and accurate to avoid potential problems. If you are unable to provide certain documents, provide a clear and reasoned explanation for their absence.

 

Important! Given the complexity of international tax law, it is highly recommended to seek legal assistance to ensure compliance with all procedural requirements and protect your rights. This will subsequently help avoid various penalties and additional investigations or audits (both nationally and internationally).

 

What Are the Response Deadlines and the Consequences for Failure to Respond

Deadlines are established by the domestic legislation of the country through whose tax authority the request was received. For example, if a Ukrainian citizen receives an official request for information from the State Tax Service (which, in turn, received the request from a foreign tax authority), they are obligated to respond within the timeframe established by the Tax Code of Ukraine.

 

The specific deadline will be specified in the official written request from the State Tax Service of Ukraine. Typically, the response deadline for tax authority requests is 10 to 15 calendar days from the date of receipt of the request. If the request concerns the submission of a report on controlled foreign companies (CFC), the deadline may be different, for example, 30 days for providing clarifications in the event of errors in the report.

 

Possible consequences of non-compliance:

  • Penalties.
  • Enhanced oversight in the form of additional investigations or inspections, both nationally and internationally.
  • Special sanctions for foreign organizations include fines related to controlled foreign companies (CFCs) and failure to report foreign assets.

 

At Lawrange Attorneys Association, we understand how to appeal the results of a tax audit: action algorithm   is offered based on the specifics of the situation.

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Protection of Personal and Financial Data

Personal and financial data in the international exchange of tax information are protected by strict privacy rules established by the OECD and enshrined in international agreements. These principles stipulate that the information exchanged must be used only for tax purposes and treated with the same level of security as domestic tax data.

 

Key data protection mechanisms include:

 

  • The OECD Common Reporting Standard (CRS) is a global standard for the automatic exchange of financial account information. A key requirement is that all participating jurisdictions have privacy guarantees and data protection standards comparable to OECD standards. The CRS system uses secure electronic communication channels to transmit data between tax authorities, ensuring encryption of information and protection against interception.
  • The Multilateral Convention on Mutual Administrative Assistance in Tax Matters requires that any information received in accordance with its provisions be treated as confidential and disclosed only to persons or bodies involved in assessing or collecting taxes.
  • Tax Information Exchange Agreements (TIEAs) typically limit the use of exchanged data to tax matters only.
  • The OECD Privacy Guidelines set out basic data protection requirements that serve as the basis for a common international approach to cross-border information flows.

 

Important! Despite security measures, breaches can still occur. The OECD and tax authorities have systems in place to respond to and investigate such incidents. Furthermore, the increasing reliance on digital data transfer has led to the implementation of effective cybersecurity measures.

 

When Information Exchange Is Not Applicable

The international exchange of tax information is only possible if there is a valid legal instrument between the two countries, such as a Double Taxation Agreement (DTA) or a Tax Information Exchange Agreement (TIEA). Without one, exchange is impossible. Some jurisdictions may not fully implement the standards required for information exchange, potentially complicating the process.

 

The automatic international exchange of tax information under the Common Reporting Standard (CRS) is not possible without a specific legal instrument. This requires both countries to be parties to the CRS and to have the necessary legal and technical infrastructure.

 

Legal assistance from Lawrange

When receiving an international tax inquiry, professional legal assistance from Lawrange is crucial. It helps avoid serious mistakes, protect your rights, and minimize potential risks.

 

Key benefits of partnering with our Attorneys Association:

 

  • Accurate interpretation of requests – our team members can accurately determine what information is being requested and on what basis. This prevents the provision of redundant or confidential data that was not requested.
  • Compliance with procedures and deadlines – Lawrange professionals ensure that responses are prepared and submitted within the established deadlines and through the correct channels, eliminating the risk of fines for non-compliance with procedures.
  • Risk assessment – ​​our specialists help identify potential issues related to tax evasion or incorrect declarations and develop a strategy to resolve them.
  • Privacy protection – our lawyers help protect trade secrets and confidential information unrelated to the tax request.
  • Competent representation – in the event of disputes with tax authorities, our lawyers can represent clients, ensuring the protection of their rights and interests at all stages.

 

Furthermore, professional advice can help optimize your tax strategy and avoid excessive claims based on misinterpretations of international agreements.

 

FAQ

What should you do if a request from a foreign tax authority arrives unexpectedly?

It’s not recommended to panic or take spontaneous, ill-considered actions. In such a situation, it’s better to seek professional assistance from the specialists at Lawrange. We will help you correctly interpret the request, determine the necessary information, ensure compliance with due legal procedures, and protect your rights.

 

Can I refuse to provide information to a foreign tax authority?

The circumstances under which you can refuse to provide information requested by a foreign tax authority are strictly limited. A refusal requires a legal basis established by the relevant international agreement under which the request is made. Without professional legal assistance, you won’t be able to handle this task on your own.

 

Who can help prepare a response to an international request?

The tax lawyers at Attorneys Association Lawrange can provide legal advice on complex tax issues, assisting in the development and analysis of international legislation and regulations. With their help, you can provide a response that respects your rights and stays within the scope of what may be requested. They can also represent your interests.

 

 

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