The Larsen case and implications for information exchange
Tax information exchange agreements in the form of the OECD Model Tax Information Exchange Agreement (TIEA) are still in practical terms a relatively new development and it is only now that aspects of the model treaty are being explored through the legal process in Jersey, with many of our treaties only ratified and operational for a few years.11 October 2013
The recent case of Larsen focused very much around the nature and form of the request, whilst alluding to some potentially criminal matters, but with the notice of request issued through the Tax Comptroller as opposed to the Attorney General, the latter being the historic and conventional route for criminal investigations.
The contention of the Norwegian authorities was they did not have complete information on companies where Mr Larsen had interests that they deemed to be relevant to Mr Larsen’s Norwegian tax affairs.
This was an interesting and in some respects complex case but it has given an indication of how the courts will interpret treaty obligations and some clarity on the roles of the requesting and requested competent authorities.
The whole point of creating civil administration processes under the Model TIEA programme was to simplify and streamline the process of information exchange in civil matters with competent authorities, usually the tax administrations, under the auspices of an appropriate Ministry, usually Finance or Treasury, exchanging information that is foreseeably relevant to the tax affairs of the citizen under investigation. The intention is information will flow from one tax administration to another without the involvement or intervention of additional parties.
A helpful briefing has been produced by the Ogier Trust Group who were not involved in the Larsen case and it can be found Here. I don't propose to go into the case in detail (the judgement is here) but the Ogier summary extract is very helpful in respect of key aspects of the judgement:
"One of the key issues on this ground of appeal was whether Article 10 of the TIEA (recited above), which allows for information on "criminal tax matters" to be obtained from an earlier date than civil tax matters, operates as a restriction on use by the requesting party.
The Court held that there was nothing in the TIEA to the effect that, if information is obtained in relation to one or more of the purposes set out in Article 1, it cannot be used for any of the other purposes set out in Article 1, and therefore information requested in relation to a "criminal tax matter" could be used for any other of the purposes set out in Article 1 (which included a civil tax assessment)."
"The case is important as it sets out the principles which the Comptroller should adhere to when determining whether he or she has "reasonable grounds for believing" that a taxpayer may have failed to comply with the domestic tax laws of a third country and in doing so made clear that it is not the role of the Comptroller to resolve contentious issues of foreign tax law or come to definitive conclusions."
"However, the Court also stated that any request for information should be carefully considered by the Comptroller and that the procedure was not to be used as a vehicle for a "fishing expedition" by the requesting party."
My interpretation of the judgement and the actions of the Jersey Comptroller can be summarised under the following points:
- International treaty obligations are an important and weighty matter. Compliance is important and if requested in the prescribed manner, will be pursued vigorously by the Jersey authorities including through the courts.
- The onus of determination of foreseeably relevant must lie principally with the requesting party, provided again the request is made in the prescribed format and with sufficient information. It is not for the Jersey Comptroller to become enmeshed in foreign tax law disputes.
- If the request is not made in the prescribed form and has insufficient information or is clearly not relevant to the tax affairs of the requested party it could be treated as a fishing expedition and is likely to be refused. However this statement needs qualification, the OECD Commentary makes it clear that once the requesting State has provided an explanation as to the foreseeable relevance of the requested information, the requested State may not decline a request or withhold requested information because it believes that the information lacks relevance to the underlying investigation or examination. The presumption is that it is difficult if not impossible for the requested party to say what is or is not relevant.
Citizen’s rights are covered under the model treaty, as are the competent authority obligations:
I quote: –
"Article 1. The competent authorities of the Contracting Parties shall provide assistance through exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Contracting Parties concerning taxes covered by this Agreement. Such information shall include information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters. Information shall be exchanged in accordance with the provisions of this Agreement and shall be treated as confidential in the manner provided in Article 8. The rights and safeguards secured to persons by the laws or administrative practice of the requested Party remain applicable to the extent that they do not unduly prevent or delay effective exchange of information.”
"Article 8. The rights and safeguards secured to persons by the laws or administrative practice of the requested Party remain applicable to the extent that they do not unduly prevent or delay effective exchange of information."
The latter part of the articles are key. The treaty and the judgement we have seen confirm, to me, that the requesting authority is the best placed party to determine what is foreseeably relevant for tax purposes.
How should we interpret this practically?
There is a strong reciprocal commitment between nations to make government to government information exchange work, citizen's rights and data privacy must be protected, but if they are used to frustrate the process and cause the prevention or significant delay of information exchange in reasonable circumstances then governments will not tolerate this and the courts will not support it.
Citizen’s rights of appeal through an independent judicial process are a fundamental right in a healthy functioning democracy. However, those who appeal against the exchange of tax related information between governments are likely to face significant costs and it appears based on this judgement and the actions of the Jersey government, a fairly slim chance of success.