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.

Foundation for International Taxation Conference, 2010: Day Two

This was the most awaited session in the sense that the chairperson for the first session was the tax guru, Mr. Soli Dastur, Senior Advocate, India. The day was dedicated to the Resolution of International Tax Disputes and country experiences in the same.

Mr. Jerome Libin, Partner, Sutherland Asbill & Brennan, US spoke on Advance Pricing Agreements and its forms such as unilateral, bilateral and multilateral. He listed the procedure for solving disputes through the Mutual Agreement Procedure (MAP). He suggested an alternative in the form of a Panel of Experts which would provide non-binding advice to the parties and try to reach a settlement.

Prof. Kees van Raad, Professor of Law, University of Leiden, The Netherlands focalized his presentation on arbitration as a method, to be invoked if the MAP fails. He confessed how arbitration could be used only as a mechanism to expedite the MAP process.

On similar lines, Mr. Dave Hartnett, Head of Tax, Her Majesty’s Revenue & Customs, UK threw light on how Alternative Dispute Mechanisms in Taxation had resulted in speedy dispute resolution and a higher tax collection for his department. In his opinion, the formulation of a litigation settlement strategy for his ‘customers’ – the taxpayer, seemed to be the most effective in resolving disputes.

Next was the erudite dissertation from Mr. Soli Dastur who pinpointed the loopholes in the existing and proposed provisions. He sought answers to questions such as: Whether matters pertaining TDS Deductions can be referred to MAP?; What happens to MAP procedures when the underlying treaty goes away?; If the same issue has been decided by different High Courts laying down different principles, which one would be followed?, inter-alia. Definitely some food for thought for the drafters!

In the session which highlighted the inter-country experience, the view of the judiciary was expatiated by Mr. R. V. Easwar, President, ITAT. This was followed by the New Zealand experience and the US experience where Ms. Carmel Peters, Advice Division, Inland Revenue, NZ and Mr. Marc Levey, Partner, Baker & MacKenzie, US shared their thoughts, respectively. Next, Mr. Porus Kaka, Senior Advocate was called upon to share his experience as a practitioner for 20 years, which he ably fulfilled. He also gave certain suggestions to improve the dispute resolution process in India.

In the following panel session, Ms. Anita Kapur, Director General of Income Tax (Administration), put forth the Governments’ stand on arbitration, and its non-inclusion in the Indian DTAA’s and other related matters. She expressed her view that the arbitration process was highly unfair as it is non-binding on the assessee. Her concern was that the method would also be used as a Damocles sword on the competent authority, which would not be able to function efficaciously under this constant threat. The other panelists included previous speakers who also discussed arbitration as an effective ADR mechanism and concluded the discussion for the day.