Governments and their respective tax authorities impose charges on assets and profits held by business and individuals within their territory. In a global setting where companies often have multiple establishments in different countries, taxation has cross-border connotations. Several international arrangements and tax treaties prevent double taxation at the expense of heavy administrative burdens. The international Common Reporting Standard (CRS) and FATCA are examples of ways governments gain access to data that is automatically exchanged between tax authorities.
The distinction between personal and corporate income tax often causes public confusion. Where multinationals and high net worth individuals may fully benefit from gaps in international regulation, the layman must consider and obey to local tax rules. Violation of these local tax rules is often considered a crime and thus punished as such. Yet, corporate tax planning still invites for tax avoidance, whilst the global approach to combat tax evasion and counter money laundering and terrorism financing gains altitude.
Having a bank account or IBAN number outside the country of residence may require tax authorities to share specific data with the home country of a customer. This is possible under the framework of the automatic exchange of information which in the European Union for example utilizes the Common Reporting Standard and DAC6. These tools further the possibility of disclosure personal financial information between member states whilst respecting the rules on personal privacy.
Active non-financial entities are considered legitimate enterprises that serve a purpose in the corporate world. Passive financial entities on the other hand may shield assets from local taxation and accumulate wealth for alternative purposes. The risk of such deposits is that they can be withdrawn at any moment or used for obscure purposes. As such, financial institutions need to consider these deposits for the calculation of their mandatory capital cushion. Banks are therefore not always eager to accept such passive financial entities as their client, especially when these deposits are held by offshore financial institutions.