www.pwc.co.uk
Information exchangeThe Real Story
Diane Hay
Kay Kimkana
October 2012
Quiz – what links the following?
• Gordon Brown?
• Osama bin Laden?
• Nicolas Sarkozy?
• Senator Obama?
• The man who was Heinrich Kieber?
• Bradley Birkenfeld?
PwC
2
Agenda
• What is it about exchange of information?
• Introduction to exchange of information
• Recent developments
• The UK picture
• What happens in practice…the real story
PwC
3
What is it about exchange of
information?
PwC
4
What is it about exchange of information?
“tax havens, banking secrecy, that’s all over”
“we agree to take action against non-co-operative
jurisdictions, including tax havens. We stand ready to
deploy sanctions to protect our public finances and
financial systems. The era of bank secrecy is over.”
PwC
5
What is it about exchange of information?
“ what we are witnessing is nothing short of a
revolution. By addressing the challenges posed by the
dark side of the tax world, the campaign of global tax
transparency is in full flow…. With the crisis, global
public opinion’s expectations are high, their tolerance
of non-compliance is zero and we must deliver”
PwC
6
Introduction to exchange of
information
PwC
7
Exchanges of information
Three main types of information exchanges
• Information on request – request for specific information.
• Spontaneous exchanges – where one fisc believes the
information it has obtained may be of interest to one of its
treaty partners.
• Routine/electronic exchanges – typically information
comprising many individual cases of the same type eg interest,
royalties. Usually a prior agreement between the fiscs as to
what information they want and the format to send it. OECD
has designed standard paper and electronic formats.
PwC
8
Legal bases for exchanging information
• Bilateral tax treaties – usually based on Article 26 of OECD Model
Convention (basis of exchanges under JITSIC as well)
• Tax Information Exchange Agreements (TIEA) – usually based on
the 2002 OECD Model Agreement on Exchange of Information on
Tax Matters .
• Multilateral instruments such as the Council of Europe/OECD
Convention (signed by only 21 countries prior to 2011 G20
meeting) Nordic Assistance Convention etc.
• EC Directive on Mutual Assistance 1977 – now repealed and
replaced by EU Directive 16/2011 on Administrative Cooperation
in the field of taxation.
PwC
9
OECD Exchange of Information models
Article 26
• Most widely accepted legal basis for bilateral exchange of
information for tax purposes. More than 3,600 bilateral treaties
are based on the Model Convention.
• Updated in 2005 when paragraphs 4 and 5 added to cover bank
secrecy.
• Commentary last updated July 2012.
TIEAs
• Introduced in 2002 as a stand-alone agreement following work of
OECD’s Global Forum.
• By 2008, only 23 TIEAs signed!
• Numbers have rocketed since then.
PwC
10
TIEAs signed annually
197 200
67
0
PwC
1
1
6
1
0
2
0
12
24
11
TIEAs signed between G20 Summits (cumulative)
600
505
500
421
400
366
300
200
159
100
0
PwC
518
44
TIEAs Signed
between G20
Summits
(cumulative)
65
12
160
140
120
100
80
60
40
20
0
Israel
Italy
Jamaica
Japan
Jersey
Kenya
Republic of Korea
Liechtenstein
Luxembourg
Macao, China
Mayalsia
Malta
Marshall Islands
Mauritius
Mexico
Monaco
Montserrat
Netherlands
New Zealand
Nigeria
Norway
Panama
Philipines
Poland
Portugal
Qatar
Russian Federation
St Kitts and Nevis
St Lucia
Sint Maarten
Saint Vincent and…
Samoa
San Marino
Saudi Arabia
Seychelles
Singapore
Slovakia
Slovenia
South Africa
Spain
Sweden
Switzerland
Turkey
Turks and Caicos
United Arab…
United Kingdom
United States
Uruguay
Vanuatu
Andorra
Anguilla
Antigua and Barbuda
Argentina
Aruba
Australia
Austria
The Bahamas
Bahrain
Barbados
Belgium
Belize
Bermuda
Botswana
Brazil
British Virgin islands
Brunei Darussalam
Canada
Cayman Islands
Chile
China
Columbia
Cook Islands
Costa Rica
Curaçao
Cyprus
Czech Republic
Denmark
Dominica
Estonia
Finland
F.Y.R. Macedonia
France
Georgia
Germany
Ghana
Gibralter
Greece
Grenada
Guernsey
Hong Kong, China
Hungary
Iceland
India
Indonesia
Ireland
Isle of Man
TIEAs/DTCs signed with OECD/G20 countries
160
140
120
100
80
60
40
20
0
PwC
TIEAs/DTCs with OECD/G20 countries
TIEAs/DTCs with non OECD/G20 countries
13
Article 26 and TIEAs
Similar features – foreseeable relevance
• In both instances ‘shall’ means it is mandatory to exchange
information.
• Both envisage information exchange to ‘ the widest possible extent’
but do not allow ‘fishing expeditions’.
• Balance between these two is captured in the standard of
‘foreseeable relevance’.
• ‘Foreseeable relevance ‘replaces previous Art 26 wording of
‘necessary’. Not intended to be very different – but it is! A lower
standard and moves the burden of proof from the tax authority to
show that the information is ‘necessary’.
• July 2012 guidance – reasonable to suppose that the information
requested will be relevant. Requesting authority best-placed to
determine this.
PwC
14
Article 26 and TIEAs
Similar features - reciprocity
• Another key concept is the principle of ‘reciprocity’.
• A tax authority is obliged only to obtain and provide such
information that the requesting tax authority could obtain under its
own laws under similar circumstances.
• Art 26 – extends this to information that the requesting authority
could obtain in the normal course of administration i.e. the
requesting authority should not be able to take advantage of an
information system that is wider than its own.
• Could even lead to a refusal to provide information where the
requesting authority’s lack of resources effectively results in a lack
of reciprocity.
• July 2012 update - to be interpreted in a broad and pragmatic way.
PwC
15
Article 26 and TIEAs
Similar features –use of powers
• The requested tax authority must use its information gathering
powers if information not already available (subject to other
conditions).
• A tax authority cannot refuse information exchange solely because
it has no domestic tax interest in the information (Art 26(4) and
TIEA Art5 (2)).
• TIEA sets out the type of information that a requesting fisc should
provide (Article 5 (5)), Art 26 more vague – OECD manual (2006)
gives list of items that should be included in an information request.
• May be able to exchange information on third country residents,
but only if already have it or there is ‘power or possession’.
PwC
16
Article 26 and TIEAs
Limitations
• Limitations on exchange - Art 26(3) and TIEA (but not a
prohibition)
• If not in accordance with domestic laws or administrative
practice.
• If not obtainable under the laws in normal course of
administration.
• Trade or business secrets or (in extreme cases)contrary to public
policy (ordre public).
• Time limits for making exchanges? July 2012 commentary update
suggests default of two months from receipt of request (!)
PwC
17
Tackling bank secrecy
Article 26 (5) changes and TIEAs
• State cannot refuse a request for information solely because it is
held by a bank or other financial institution (Art 26 (5) and TIEA
Art 5(4).
• Bank secrecy is not incompatible with the requirements of Article
26 or TIEA.
• Austria, Belgium, Luxembourg and Switzerland entered
reservations to Article 26 in 2008, subsequently withdrawn in
2009.
• But limitations in both Art 26 and TIEA have contributed no
doubt to introduction of FATCA rules by US.
PwC
18
Article 26 and TIEAs
Important differences
• Taxes covered
• TIEA applies to the administration and enforcement of taxes
covered by the TIEA.
• Art 26 applies to all taxes ‘of every kind and description’ and not
limited by Art 2.
• Scope - TIEA only covers information on request! But could be
expanded to other types.
• Confidentiality - no obligation under TIEA to exchange
information that would reveal client/lawyer communications.
PwC
19
Recent developments
PwC
20
Foreign Account Tax Compliance Act
U.S. persons are using foreign entities to invest and avoid U.S.
reporting and back-up withholding.
• Certifying to be foreign persons
• Availing themselves of treaty benefits
• U.S. loses an estimated $100 billion in tax revenues annually due
to offshore tax abuses.
• Financial institutions may be facilitating international tax evasion
• The provisions are intended to provide the Internal Revenue
Service (“IRS”) with an increased ability to detect U.S. tax evaders
hiding their money in foreign accounts and investments;
PwC
21
Joint International Tax Shelter Information
Centre
• Formed by the Tax Commissioners of Australia, Canada, the United
Kingdom and the United States in April 2004.
• Now includes Japan, Korea and China and observers from France and
Germany
• A joint task force to identify and curb abusive tax transactions
• Share expertise, best practices and experiences to combat abusive tax
schemes
• Exchange information on abusive tax schemes, in general, and on
specific schemes, their promoters, and investors within vires of Art 26
• Successful because of physically co-located, develop relationships and
understandings
PwC
22
The UK picture
PwC
23
Overview
The UK signed 6 new agreements in the year ended 31 March 2012.
145 agreements in total which provides for the exchange of information
(121 double tax agreements and 24 TIEAs ).
PwC
24
Article 26 (4) and (5)
• UK treaties have a version of Article 26, which provides for the
exchange of information.
• Paragraphs 4 and 5 of the OECD model were updated in July
2005 which set out the following:
• Paragraph 4 – state cannot refuse information request
because it has no domestic tax interest.
• Paragraph 5 – information held by a bank or other financial
institution.
• Updated paragraphs 4 and 5 reflected in the double taxation
agreement between the UK and the following states:
• the Netherlands (in force 2010)
• Switzerland (in force 1978, updated)
• Mauritius (in force 1981, updated)
• Luxembourg (in force 1968, updated)
PwC
25
Article 26 (4) and (5)
• The following agreements do not reflect the updated paragraphs 4
and 5 (and these tend to be the older agreements):
• Cyprus (in force 1974)
• Austria (in force 1970)
• Belgium (in force 1989)
• Can HMRC get around the issue by using the Multilateral
Convention on Mutual Assistance in Tax Matters or for EU
Member States, the Council Directive (2011/16/EU)?
PwC
26
TIEAs signed by the UK
•Liberia
•Liechtenstein
•San Marino
•Antigua and Barbuda
•St Christopher and Nevis
•St Lucia
•St Vincent and the Grenadines
•Bermuda
•Isle of Man
•Jersey
•Guernsey
•British Virgin Islands
•Gibraltar
•The Bahamas
•Anguilla
•Turks and Caicos Islands
•Belize
•Dominica
•Aruba
•Grenada
•St Kitts and Nevis
•Grenada*
•Liberia*
•Netherlands Antilles*
*not entered into force
PwC
27
FATCA
• On the day the FATCA regulations were released (Feb
2010), the US Treasury released a joint statement with the
governments of the UK, France, Germany, Italy, and
Spain announcing an intergovernmental framework for
FATCA implementation and international tax compliance.
?
?
?
PwC
28
FATCA
• Under this approach, "FATCA Partner" countries will
enter into agreements with the US to collect information
from financial institutions and automatically forward this
to the IRS.
Bilateral automatic exchange of information
• US commits to reciprocity [with the 5 FATCA partners]
with respect to collecting on an automatic basis to the
authorities of the 5 FATCA partners on US accounts of
resident FATCA partner.
PwC
29
FATCA
• First agreement signed 18 September 2012 between the
US and UK.
• Financial institutions in the UK will comply with FATCA
by reporting to HMRC, who will send the details on to the
IRS.
• Provides for:
• Annual exchange on an automatic basis; and
• Aims for reciprocity – equivalent levels of information
exchange between FATCA partners.
• Isle of Man, Jersey and Guernsey to negotiate FATCA
agreement with the US based on the UK agreement.
PwC
30
What happens in practice ....
the real story
PwC
31
The real picture?
“Information exchange under the standard agreement
is sporadic, difficult, and unwieldy for tax
administrators even under the best of circumstances”
“ It is common knowledge that the OECD TIEA has
been ineffective in limiting international tax evasion
and aggressive tax avoidance’
PwC
32
Peer Reviews - Putting the teeth into information
exchange
• Phase 1 examines the legal and regulatory framework of member
jurisdictions
• Phase 2 looks at the actual implementation of the international
standard of transparency and exchange of information in practice
• Key areas
• availability of any relevant information in tax matters
• the power of the administration to access the information
• the administration’s capacity to deliver this information to any
partner which requests it.
• Phase 1 nearly completed – 96 reviews. Phase 2 just beginning
• Nearly all peer reviews show improvement needed and 32 countries
lack one or more essential element. 13 held back from phase 2
PwC
33
Some real life observations
• Volumes of requests – more than you think, the angry Belgians
• Rubbish in, nothing out – requests need to be well formulated
• Tax authorities need for effective electronic interfaces to make
routine exchanges work, the stolen bank discs
• Also need universal identification – not NINOs!
• Good responses from Crown Dependencies – unless one of their
residents – in their interests to be above board
• ‘One can always find a reason and a way to answer a request if one
wants to’ – enthusiasm and experience
• ‘What is the best information an investigator can have-that which a
taxpayer in his worst nightmare could never imagine the tax
authority could get hold of. And that happens more often than people
realise.’
PwC
34
Final Thoughts
“but being as this is a .44 Magnum, the most powerful
handgun in the world, and would blow your head clean
off, you've got to ask yourself one question: Do I feel
lucky? Well, do ya, punk?”
PwC
35