Cayman Islands: Taxpayer Allowed Judicial Review Of A Notice Under A TIEA

Last Updated: 24 May 2017
Article by Solomon Harris

The Court of Appeal of Guernsey ('GAC') has given leave to a foreign national and resident ('X') to apply for judicial review of the decision to issue a Notice to provide information pursuant to a foreign tax authority's request ('Request') under a Tax Information Exchange Agreement ('TIEA'). As an aside, the GAC also asked whether a system which does not allow taxpayers to be given information to challenge whether a Notice is lawful is missing a vital safeguard.

Cases: A, a taxpayer v Director of Income Tax, States of Guernsey Income Tax Office; and M.H. Investments and J.A. Investments v The Cayman Islands Tax Information Authority

How does the TIEA system work?

TIEAs not AEOI - TIEAs are specific bi-lateral agreements between countries which set out what information the relevant tax authorities can exchange. Cayman, for example, has signed 36 bi-lateral agreements and arrangements, of which 29 are in force (see here). Information exchange under a TIEA is not the same as agreements for the automatic exchange of information ('AEOI') under multilateral instruments such under the Common Reporting Standard ('CRS') or under intergovernmental agreements ('IGAs') with the UK and USA under the Foreign Account Tax Compliance Act ('FACTA'). Under a TIEA countries can obtain more information than is required to be provided under AEOI/FATCA.

Exchange under a TIEA – Under most TIEAs a competent authority in one country makes a formal request ('Request') to the competent authority of another to provide information which may be relevant to an enquiry into the tax liability of one of their taxpayers. The countries will each have domestic legislation in place to enable them to gather the information which they have agreed can be exchanged. The competent authority being asked to provide the information checks the Request has been made in accordance with the provisions of the relevant TIEA and then issues Notices to any relevant entities requiring them to provide relevant information and documents which are within their possession or power. Generally the recipient of a Notice must keep its existence and contents confidential and cannot pass the information to the taxpayer.

What happened in Guernsey?

A country ('the Requesting Country') made a request for information under its TIEA with Guernsey. The Director of Income Tax, States of Guernsey Income Tax Office ('DTO') issued a Notice under Guernsey tax legislation (the 'Law') on a trust company ('TrustCo') which required it to provide documents and information which the DTO considered might be relevant to an enquiry into the liability to tax of an individual ('X'). X is a national of and resident in the Requesting Country.

Did anyone appeal the Notice?

No, although TrustCo, as the recipient of the Notice, had the ability to do so. They complied with the Notice and did not participate in X's appeal. Somehow X found out about the Notice and instructed attorneys to ask the DTO to withdraw it on the basis that:

  • it asked for information which it did not have the power to ask for i.e. information which pre-dated the TIEA coming into force,
    • the information it sought was not foreseeably relevant to the tax investigation, and
    • it was premature as the Requesting Country had not yet exhausted domestic measures.

The DTO refused to withdraw the Notice and so X applied to the Guernsey court for judicial review of the DTO's decision to issue it. X also asked for permission to appeal the Notice, but this was rejected as only recipients are given the right to appeal.

What about judicial review?

X applied for judicial review of the Notice and was initially refused permission on the basis that:

1) the Notice related to an international agreement and the court only has the power to review domestic law and, and

2) X had a more suitable alternative remedy in the Requesting Country which should be pursued (following the decision in an English Court of Appeal case ('Wilford')).

X appealed to the GAC.

What did the Court of Appeal say?

The GAC looked at the two points above, and found:

1) X was asking the court to review the exercise of a power granted by a domestic law, not the international agreement. The power to issue the Notice was given to the DTO by a Guernsey tax law. Because a judicial review of that decision necessarily involved assessing the content of an international agreement did not prevent the court exercising its clear jurisdiction to review that domestic power, and

2) in Wilford the English court had found there was an alternative remedy which sat better with the statutory arrangements. Here, X had no suitable alternative. The only remedy was through judicial review of whether the Notice had been issued lawfully conducted by the Guernsey court under Guernsey legislation. In reaching this conclusion, the GAC referred to the Cayman Grand Court's decision in M.H. Investments and J.A. Investments v The Cayman Islands Tax Information Authority, ('MH Investments') where the applicants claimed the actions of the Cayman Tax Information Authority ('TIA') were unlawful because they were outside the terms of the relevant TIEA. The Grand Court found that such a claim could only be brought and decided in Cayman.

So who can apply for judicial review?

In MH Investments, Solomon Harris acted for the recipient of a Notice in a successful application for the TIA to provide details of what information the foreign tax authority was asking for, and armed with that information they were able to apply for judicial review of whether the Notice had been validly issued. The Judge in MH Investments recognized that the TIA's duty to assist the foreign tax office had to be balanced against its duty to protect the rights of the taxpayer and that its numerous failings in interpreting its powers and asking for information from before the TIEA was in force rendered the TIA's actions unlawful and liable to be set aside. The court then found the TIA's decisions unlawful and that they exceeded their powers. In MH Investments the application for judicial review was made by the recipients of the Notice. In the A, A Taxpayer case in Guernsey the argument was put forward that as the Law restricts appeals to the recipient no other person affected by the Notice could apply for judicial review. The GAC rejected this argument, saying it could find nothing in the Law which excluded or limited the right to apply for judicial review.

So how can taxpayers find out about a Notice?

At the end of its judgment, the GAC commented that as taxpayers are not allowed to know the Notice has been issued, let alone the information asked for, they are deprived of an opportunity to make what might be a successful judicial review of an unlawful or flawed Notice which affects them. Some jurisdictions (for example Jersey) send a copy of the Notice to the taxpayer to whom it relates. That is not the case in Cayman, where it is a criminal offence punishable by a fine and imprisonment to disclose that you have received a request (let alone tell anyone any of its details) unless you are authorised to do so by the TIA. The only exception is that you can tell your attorney, who must keep the information confidential.

So what should you do when you receive a Notice?

Unless the TIA gives you authority, then the only people you can tell about the existence of the Notice are your attorneys. They may consider whether it is appropriate to follow the steps taken by Solomon Harris in MH Investments and request further information.

Solomon Harris

Having acted on the leading case on judicial review of Notices we are ideally placed to advise you on what steps you might take if issued with a Notice and how best to respond to protect yourself from criminal liability and/or potential claims by the taxpayer concerned that you responded to an invalid Notice without first checking its validity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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