Tax Information Exchange Agreements

Exchange of information between the tax authorities of states can be done through Double Taxation Avoidance Agreements (DTAAs) and Tax Information Exchange Agreements (TIEAs).

Tax Information Exchange Agreements (“TIEAs”) are generally bilateral agreements under which territories agree to co-operate in tax matters through exchange of information. The OECD Global Forum Working Group on Effective Exchange of Information (“the Working Group”) is the organization behind the development of the TIEAs. Various low tax jurisdictions such as Bermuda, the Cayman Islands, Cyprus, the Isle of Man, Malta, Mauritius, and the Netherlands Antilles form a part of the Working Group. The mandate of the Working Group was to develop a legal instrument that could be used to establish effective exchange of information.

TIEAs are intended for use with countries where DTAAs are not considered appropriate. They are entered into with jurisdictions which levy very low or no tax at all. Thus, it enables the tax authorities to exchange information on specific points. The corresponding article in a DTAA is modeled similar to Article 26 of the OECD Model Convention on Income and Capital.

Governed by the terms of the agreement, the requesting party generally would furnish the following information:

• the identity of the taxpayer/person under examination or investigation;
• the period for which information is requested;
• the tax purpose for which the information is sought;
• Grounds for believing that information is held in requested state;
• Name and address of person believed to be in possession of requested information;
• Statement that request is in conformity of law and administrative practice of applicant state;
• Statement that request is in conformity of law and administrative practice of applicant state;

This information would be then processed and the requested party would proceed to provide for:

• information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees, as well as;
• full information regarding the ownership of companies, partnerships, trusts, foundations and other entities and all persons in an ownership chain, including settlers, trustees, beneficiaries, founders, members of foundation council and so on, as the case may be.

It is clear that TIEAs are a positive step towards tax transparency and to bring to book, the probable offenders. As per the terms of the agreement/s, the requesting state is not required to state a ‘probable cause’ to get the relevant information. The terms used in these treaties run along the lines of the country requesting the information claiming that they believe the information to be relevant to their tax investigation. This means that the scope for seeking information is not limited, and can be sought in a variety of causes.

On the other hand, there may be a violation of the privacy of individuals as their information would be open to access by the government. Also, there is a limitation on the lines that there is no automatic exchange of information. The request document is supposed to contain a lot of information, including the purpose for which the information is sought and exhaustion of local remedies. This may then be a stumbling block to the free access of information.

Similarly, the old argument of the non-existence of an independent tribunal raises concern as to the impartial adjudicator. Though the agreement provides for a Mutual Agreement Procedure (MAP), the absence of a time limit for the conclusion of the same raises concerns. It is argued that the information may be provided too late, be outdated or worse, help the person/tax evader cover his tracks.

However, the major limitation stems from the simple fact that most low-tax jurisdictions do not maintain any financial records, nor have any norms to identify shareholders or KYC (Know Your Client) norms. The absence of information with the jurisdiction itself gives it a valid reason to avoid providing relevant information, if at all provide any information. Therefore, there may not be any information to share at all!

As is seen from the limited practice of these treaties across various jurisdictions, The Model TIEA is a slow, largely ineffectual, resource-intensive process that seems unlikely to be used much more in the future than it has been in the past, despite the increased number of haven jurisdictions adopting it. At the same time, it would be completely unfair to rubbish these treaties as a mere hogwash since these are the first steps towards tax transparency across jurisdictions.

Under the Indian laws, these agreements (TIEAs) are duly executed by the Government of India under the provisions of section 90(c) of the Income Tax Act, 1961 and are notified thereunder.

The text of the agreement as drafted by the Working Group of the OECD is available here.