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Update on the Automatic Exchange of Information with Turkey - The clock is ticking –Turkey is now sending tax data to Germany after all

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I. New developments

In August 2020, the Turkish Ministry of Finance published an “information handbook” for the automatic exchange of tax data (Automatic Exchange of Information in tax matters, or AEOI) on its homepage, listing the countries to which Turkey transfers data. At the time, Germany, among other countries, was expressly excluded from the data transfer list.

This has now changed; the relevant clause excluding Germany, among other countries, has been removed. The Turkish Ministry of Finance updated the aforementioned information handbook based on presidential decree no. 4025 of 31 May 2021. It has now also included Germany in the updated list of countries to which Turkey transfers tax data in 2021. This concludes the “grace period” for German residents with accounts etc. in Turkey.

 

II. Background

Since the presidential decree and the updated AEOI information handbook have been in place, the exchange of information also applies for German-resident clients of Turkish financial institutions (banks and insurance).

This means that Turkish financial institutions are obligated to report information on accounts, account holders, balances and earnings such as interest, dividends and capital gains, as well as life and endowment insurance payouts and pension contracts, to the Turkish tax authorities.

Under certain conditions, Turkish financial institutions are also obligated to report such information on company accounts to the countries in which the company shareholders are resident. This applies, for example, to companies whose primary activity is not commercial (i.e. production or trade), or companies registered abroad with accounts in Turkey.

 

III. Exchange of Tax Information

The Turkish tax authorities send this tax information from the Turkish financial institutions on to the German tax authorities, which in turn check whether foreign income has been declared in tax returns. If not, there may be allegations of tax evasion. Even though the (automatic) reports only comprise income and account balances from 2019 onwards, this information can generally be used to draw conclusions about account balances and income in previous years. In case of doubt, the tax office may estimate income from previous years.

As a rule, the exchange of information between the countries takes place until 30 September of the following year, i.e. between Turkey and Germany, the tax information will be reported for the first time by 30 September 2021.

 

IV. What can be done?

First of all, the following should be noted:

  1. If the German tax authorities learn that income from sources in Turkey was not declared, or not correctly declared, in German tax returns, they will usually assume intentional tax evasion. This may be penalised with fines or imprisonment of up to five years, or six months to ten years for severe cases.

With this in mind, special attention should be paid to gifts and inheritance. Anyone who gifts or bequeaths undeclared assets is leaving their children a difficult, corrupted inheritance. Anyone who accepts this inheritance and continues the testator’s tax transgressions is also liable to prosecution. Such cases often quickly become a serious case of tax evasion.

  1. There is always the risk that tax evasion will be discovered. Even before the automatic exchange of information, instances of tax evasion were detected, brought to light, and penalised.

Now that Turkey is also preparing to exchange tax information automatically with Germany going forward, “the clock is ticking”. The time until the exchange of information should be put to urgent use ascertaining and implementing the options and formal requirements for a voluntary self-disclosure to avoid penalty. If a voluntary disclosure is submitted properly and on time, the individual in question is not liable to penalty, and an entry in the Federal Central Criminal Register or a criminal record can be avoided. This is particularly important for professions or professional licenses which require a police clearance certificate or “clean hands” (there may be a risk of an occupational ban). “Clean hands” are equally important for the naturalisation process. The same applies for tradespeople, who could be considered untrustworthy in the event of a conviction.

Past experience with Switzerland, Austria and Liechtenstein shows that it often takes a considerable amount of time to collect the information and (bank) documents required for a valid voluntary self-dis-closure. The fact that reporting to Germany is only beginning in 2021 could present a final chance to submit a voluntary self-disclosure in time and avoid penalty, as one of the requirements for a voluntary self-disclosure is that the tax offence has not yet been detected.

Anyone who wants to be on the safe side should submit a voluntary self-disclosure before information is exchanged. After this time, it may be too late to submit a voluntary self-disclosure and avoid penalty.

We have many years of experience in disclosing cross-border matters and provide professional consultation regarding voluntary self-disclosures to avoid penalty.

An informal, initial consultation is free of charge.

Please do not hesitate to contact us if you have any questions regarding this matter.

For download PDF-Version ENG click here

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KPMG Law

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