Faroe Islands
This report analyses the implementation of the AEOI Standard in the Faroe Islands with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
The Faroe Islands’ legal framework implementing the AEOI Standard is in place and is consistent with the requirements of the AEOI Terms of Reference. This includes the Faroe Islands’ domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) and its international legal framework to exchange the information with all the Faroe Islands’ Interested Appropriate Partners (CR2).
Effectiveness of AEOI in practice
The Faroe Islands’ implementation of the AEOI Standard is partially compliant with the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. While the Faroe Islands is on track with respect to exchanging the information in an effective and timely manner (CR2), there are significant issues with respect to ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1).
Overall rating in relation to the effectiveness in practice: Partially Compliant
General context
The Faroe Islands commenced exchanges under the AEOI Standard in 2017.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, the Faroe Islands:
amended the Faroese Tax Act No. 86 of 1 September 1983 (by Act No. 50 of 6 May 2016); and
introduced the Regulation No. 11 of 19 February 2016, as amended in 2017, 2018, 2019, 2021 and 2022.
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 January 2016. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete the due diligence procedures on High Value Individual Accounts by 31 December 2016 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2017.
Following the initial Global Forum peer review, the Faroe Islands made various amendments to its legislative framework to address issues identified, the last of which was effective from 19 May 2022.
With respect to the exchange of information under the AEOI Standard, the Faroe Islands:
has the Convention on Mutual Administrative Assistance in Tax Matters in place1, and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2017; and
put in place two bilateral agreements.2
Table 1 sets out the number of Financial Institutions in the Faroe Islands that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that the Faroe Islands requires the reporting of Financial Accounts held by non-residents based on a prescribed list of exchange partners and some accounts may be required to be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of the Faroe Islands’ administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by the Faroe Islands in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to the Faroe Islands’ exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard, in the Faroe Islands:
the Tax Administration of the Faroe Islands (TAKS) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with the Faroe Islands’ exchange partners;
the technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place by dedicated reporting system Ognarskrá (OG); and
the Common Transmission System (CTS) is used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of the Faroe Islands’ legal frameworks implementing the AEOI Standard concluded with the determination that the Faroe Islands’ domestic and international legal frameworks are In Place. This has been taken into account when reviewing the effectiveness of the Faroe Islands’ implementation of the AEOI Standard in practice.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for the Faroe Islands are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
The Faroe Islands’ domestic legislative framework is in place and contains all of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (SRs 1.1 – 1.3). It also provides for a framework to enforce the requirements (SR 1.4).
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
The Faroe Islands has defined the scope of Reporting Financial Institutions in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
The Faroe Islands has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in accordance with the CRS and its Commentary.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
The Faroe Islands has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
The Faroe Islands has a legislative framework in place to enforce the requirements in accordance with the CRS and its Commentary.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
The Faroe Islands’ international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of the Faroe Islands’ Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from The Faroe Islands and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
The Faroe Islands has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
The Faroe Islands put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
The Faroe Islands’ exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for the Faroe Islands are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
The Faroe Islands’ implementation of the AEOI Standard is partially compliant with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures. More specifically, there are significant issues in relation to the Faroe Islands ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). The Faroe Islands should continue its implementation process to ensure its effectiveness, including by addressing the recommendations made.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, the Faroe Islands implemented some of the requirements in accordance with expectations. However, a significant issue was identified. The key findings were as follows:
The Faroe Islands implemented an overarching strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources, such as information from other financial regulators and feedback from exchange partners. The Faroe Islands’ compliance strategy facilitates compliance and incorporate a credible approach to enforcement. The Faroe Islands intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
The Faroe Islands has worked effectively to understand its population of Financial Institutions, including relevant non-regulated entities, utilising various relevant information sources, such as information from the financial regulators, the specific registration code of all entities, and the Foreign Financial Institution list for FATCA purposes. The Faroe Islands is taking action to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules. The Faroe Islands intends to keep its understanding of its Financial Institution population up to date on a routine basis.
The institution responsible for implementing the Faroe Islands’ compliance strategy appears to have the necessary resources to discharge its functions. The Faroe Islands has assigned two part-time staff to monitor and ensure compliance by Reporting Financial Institutions, which have access to IT systems and tools to conduct risk assessments. However, the Faroe Islands does not have legal powers to conduct onsite compliance reviews or audits of Financial Institutions, which could undermine the effectiveness of the implementation of its compliance strategy.
The Faroe Islands has conducted compliance control activities in relation to the four biggest Reporting Financial Institutions (accounting for 1/3 of the total number of Reporting Financial Institutions), including requiring them to respond to a compliance questionnaire that contains questions regarding various key elements of the AEOI Standard, e.g. specific verifications on whether self-certifications are always obtained as required. It appears that the Faroe Islands has a clearly defined procedure to apply sanctions where non-compliance is identified.
The Faroe Islands is ready to take effective action to address circumvention of the requirements if such circumvention is detected, to ensure self-certifications are obtained as required and to follow up on undocumented accounts.
The Faroe Islands also keeps its jurisdiction-specific lists of Non-Reporting Financial Institutions and Excluded Accounts under review to ensure they continue to pose a low risk of being used for tax evasion purposes.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
In terms of the Financial Account information collected and sent by the Faroe Islands, it was found to include a lower proportion of Tax Identification Numbers with respect to the individuals associated with the accounts when compared to most other jurisdictions. Furthermore, while the collection and reporting of dates of birth is generally higher across other jurisdictions, the Faroe Islands nevertheless reported a lower rate of collection of dates of birth when compared to other jurisdictions. These are key data points for exchange partners to effectively utilise the information. Information provided by the Faroe Islands also showed a significantly higher number of undocumented accounts reported by its Reporting Financial Institutions, when compared to other jurisdictions, which should only occur when it is not possible for the Reporting Financial Institutions to identify whether the accounts are held by Reportable Persons. Follow-up discussions confirmed that the Faroe Islands is aware of these issues and is taking steps to address them. Two exchange partners highlighted issues with respect to the information received, such as missing accounts. Follow-up discussions confirmed that the Faroe Islands is aware of these issues and is seeking to improve the situation. More generally, many of the exchange partners that received a significant number of records from the Faroe Islands indicated that they achieved a success rate when matching the information received from the Faroe Islands with their taxpayer database that was broadly equivalent to, or better than, what they usually achieve.
Based on these findings it was concluded that the Faroe Islands is partially meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. More specifically, a significant issue has been identified with respect to the lack of effective powers of the administrative authority to verify compliance by Financial Institutions. The Faroe Islands should therefore continue its implementation process accordingly, including by addressing the recommendation made.
The Faroe Islands should ensure that its administrative authority has effective powers to verify compliance by Financial Institutions, including by way of accessing records and obtaining information during onsite audits.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, it appears that the Faroe Islands implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. While no such notifications have yet been received, the Faroe Islands has the necessary systems and procedures to process them as required. It also appears that the Faroe Islands will notify its partners effectively of errors or suspected non-compliance it identifies when utilising the information received.
Based on these findings it was concluded that the Faroe Islands is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. The Faroe Islands is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
The Faroe Islands’ implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). The Faroe Islands is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Feedback from the Faroe Islands’ exchange partners did not raise any specific concerns with respect to their ability to process the information received from the Faroe Islands and therefore with respect to the Faroe Islands’ implementation of these requirements. One of the Faroe Islands’ exchange partners reported rejecting more than 25% of the files received, but not more than 50%, due to the technical requirements not being met. This is a low amount when compared to other jurisdictions. It was noted that the Faroe Islands has already successfully addressed the issue raised.
Based on these findings it was concluded that the Faroe Islands is fully meeting expectations in relation to sorting, preparing and validating the information. The Faroe Islands is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, the Faroe Islands linked to the CTS.
Based on these findings it was concluded that the Faroe Islands is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. The Faroe Islands is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Feedback from the Faroe Islands’ exchange partners did not raise any concerns with respect to timeliness of the exchanges by the Faroe Islands and therefore with respect to the Faroe Islands’ implementation of this requirement.
Based on these findings it was concluded that the Faroe Islands is fully meeting expectations in relation to exchanging the information in a timely manner. The Faroe Islands is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from the Faroe Islands’ exchange partners did not raise any concerns with respect to the Faroe Islands’ use of the agreed transmission methods and therefore with the Faroe Islands’ implementation of this requirement.
Based on these findings it was concluded that the Faroe Islands is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. The Faroe Islands is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
Feedback from the Faroe Islands’ exchange partners did not raise any concerns with respect to the Faroe Islands’ receipt of the information and therefore with the Faroe Islands’ implementation of these requirements.
Based on these findings it was concluded that the Faroe Islands is fully meeting expectations in relation to the receipt of the information. The Faroe Islands is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
The Faroe Islands appears ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by the Faroe Islands’ exchange partners and therefore with respect to the Faroe Islands’ implementation of these requirements.
Based on these findings it was concluded that the Faroe Islands appears to be meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended or additional information. The Faroe Islands is encouraged to continue to ensure the ongoing effectiveness of its implementation.