On 27 November 2001 an Agreement between the Government of the United States of America and the Government of the United Kingdom and Northern Ireland, including the Government of the Cayman Islands was signed to facilitate the exchange of information relating to taxes (the "Agreement"). The Agreement confirms with the commitment made by the Cayman Islands to the Organisation for Economic Co-operation and Development (OECD) in May 2000. The Cayman Islands is one of six jurisdictions which made advance commitments to the OECD and did not appear on the organisation's list of tax havens published in June 2000.
On 15 March 2005, the Cayman Islands' legislature enacted The Tax Information Authority Law, 2005 ("the Law") to give effect to the Agreement, and the Agreement appears as Schedule 1 to the Law.
SCOPE OF THE LAW AND THE AGREEMENT
Section 3(1) of the Law states that the Law shall apply for the purpose of giving effect to the terms of the Agreement for the provision of information in taxation matters including for the purposes of any proceedings taken by the parties to the Agreements or by any persons acting on their behalf, connected with, arising from, related to or resulting from taxation matters.
The Agreement provides for assistance through the exchange of information relating to the administration and enforcement of federal income tax laws including information that may be relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons. Criminal tax evasion under the Agreement requires a wilful and dishonest intent to defraud the public revenue, evading or attempting to evade any tax liability where an affirmative act constituting an evasion or attempted evasion has occurred. The tax liability must be of a significant or substantial amount, either as an absolute amount or in relation to an annual tax liability, and the conduct involved must constitute a systematic effort or pattern of activity designed or tending to conceal pertinent facts from or provide inaccurate facts to the tax authorities of either party.
Information may be provided in accordance with this Agreement whether or not the person to which the information relates is a resident or national of the jurisdiction answering such request, provided that the information is within the territory or in the possession or control of a person subject to the jurisdiction of the party accepting such request.
EXCHANGE OF INFORMATION UPON REQUEST
Information may only be provided pursuant to specific request made in accordance with the Agreement. Request for the information may be made by and to the "competent authority" which in the case of United States of America is the Secretary of the Treasury or his delegate and for the Cayman Islands is the Cayman Tax Co-operation Authority or a person or authority designated by it.
Section 4 of the Law designates the Financial Secretary as the Tax information Authority for the purposes of the Law and the scheduled Agreement.
The Financial Secretary has power to do all things necessary or convenient to be done in connection with the performance of its functions under the Law or Agreement. In particular, the principal functions of the Financial Secretary are:
1. executing requests, including providing assistance in relation to taking the testimony or statement of any person; providing information and articles of evidence; serving documents and executing searches and seizures;
2. ensuring compliance with the Agreement;
3. advising the Governor on matters relating to any proposal or agreement for the provision of information in tax matters or any matter relating thereto;
4. making determinations pursuant to the term of any Agreement as to any costs and the apportionment of costs arising from any request;
5. entering into agreements with competent authorities on matters relating to the operation thereof; and
6. performing other functions as may be prescribed under the Law or any other Law.
Content of Request and Determination of Compliance
In accordance with Article 5 (5) of the Agreement, where a request is submitted, the competent authority requesting the information shall provide the following in order to demonstrate the relevance of the information sought:
1. the identity of the taxpayer under examination or investigation;
2. the nature of the information requested;
3. the tax purpose for which the information is sought;
4. reasonable grounds for believing that the information requested is present in the territory of the requested party or is in the possession or control of a person subject to the jurisdiction of the requested party;
5. to the extent known, the name and address of any person believed to be in possession or control of the information requested; and
6. a declaration that the request conforms to the law and administrative practice of the requesting party and could by obtained by the requesting party under its laws in similar circumstances, both for its own tax purposes and in response to a valid request from the requested party under the Agreement.
The Agreement provides that where such request for information is made, the competent authority of the party to whom the request for information has been made shall confirm receipt of the request in writing and notify the competent authority of the requesting party of any deficiencies in the request within 60 days of receipt of such request. Pursuant to Section 7(2) of the Law, the Financial Secretary may request such additional information from the requesting Party as may be necessary to assist it in executing the request.
Section 7(1) of the Law states that upon receipt of a request, the Financial Secretary shall determine whether the request is in compliance with the Agreement and if it is in compliance, the Financial Secretary shall execute the request. This is subject to 2 general exceptions:
(a) the Financial Secretary may notify the Attorney General if it considers that issues of public policy arise; and
(b) a person who is the subject of a request for information (not being related to a criminal matter), may make a written submission to the Financial Secretary specifying any grounds which he wishes the Financial Secretary to consider in making its determination (including that the information is legally professionally privileged).
Failure to provide information
Where the competent authority of the requested party has been unable to obtain and provide the information requested or refuses to provide the information, it shall immediately inform the competent authority of the requesting party giving reasons for such failure.
POSSIBILITY OF DECLINING A REQUEST
In accordance with Article 7(1) of the Agreement, the competent authority of the party requested to provide information may decline to assist:
1. where the request is not made in conformity with the Agreement;
2. where the requesting party has not pursued all means available in its own territory, except where recourse to such means would give rise to disproportionate difficulty; or
3. where the disclosure of the information requested would be contrary to the public policy of the requested party.
The party who has received a request to provide information is not required to obtain or provide information which the requesting party would be unable to obtain in similar circumstances under its own laws for the purpose of the enforcement of its own tax laws or in response to a valid request from a requesting party under the Agreement.
A request for information shall not be refused on the ground that the tax liability giving rise to the request is disputed by the taxpayer.
POWERS OF THE FINANCIAL SECRETARY PURSUANT TO A COMPLIANT REQUEST
The Law sets out the powers of the Financial Secretary to gather information pursuant to a compliant request from a competent authority. They include:
1. the Financial Secretary may to apply to a Judge for the Judge to receive testimony as appears to him to be appropriate for the purpose of giving effect to a request: section 8(1) of the Law;
2. in the case of a request for information required for proceedings in the territory of the requesting party to the Agreement, the Financial Secretary may apply to a Judge for an order to produce such information: section 8(4)(a) of the Law;
3. in the case of a request for information, other than where the information is required for proceedings in the territory of the requesting party to the Agreement, the Financial Secretary may issue a notice requiring production of such information: section 8(4)(b) of the Law; and
4. where the Financial Secretary considers it necessary to enter and search any premises, he may apply to the Grand Court for the issue of a search warrant for specified premises to search for and seize specified information or information of a specified description: section 17(3) of the Law.
CONFIDENTIALITY AND LEGAL PROFESSIONAL PRIVILEGE
The Agreement provides for confidential treatment of information exchanged. Information may not be used for purposes other than those stated in the Agreement without prior consent of the competent authority who provided the information and information provided shall be disclosed only to persons or authorities officially concerned with the purposes specified in the Agreement. Where information is provided under this Agreement the requesting party may not disclose such information to any third party.
Sections 11 and 12 of the Law provide that a person who divulges any confidential information or gives any testimony in conformity with an order or notice issued pursuant to a request shall be deemed not to commit an offence under the Confidential Relationships (Preservation) Law (1995 Revision) or under any other Law, and that section 4 of the Confidential Relationships (Preservation) Law (1995 Revision)1 does not apply to confidential information given by any person in conformity with an order or notice issued pursuant to a request.
Items which are legally professionally privileged are immune from production: section 8(6) of the Law.
OFFENCES UNDER THE LAW
The Law provides that it is an offence:
1. for a person, in certain circumstances, to make any disclosure which is likely to prejudice criminal proceedings or investigations to which a request relates. A person guilty of this offence is liable on summary conviction to a fine of CI$10,000 and to imprisonment for five years;
2. for a person who, having been required under the Law to produce any information which is in his possession or under his control, (a) without lawful excuse fails to do so, or (b) destroys, mutilates, defaces, hides or removes any information. A person guilty of this offence is liable on summary conviction to a fine of CI$10,000 and to imprisonment for two years;
3. for a person who informs any person, of the fact of the issue of a request or of any communication relevant to the matter to which the request relates, where the Financial Secretary has advised that the particulars of and all matters relating to a request shall be treated as confidential. A person guilty of this offence is liable on summary conviction to a fine of CI$1,000 and to imprisonment for six months; and
4. for a person who, when required to attend to provide testimony pursuant to a request, refuses to attend as required or provide testimony. A person guilty of this offence is liable on summary conviction to a fine of CI$5,000 and to imprisonment for one year.
The Agreement does not affect any rights a person may have under the laws or administrative practice of the jurisdiction making the request, provided and to the extent that such rights are not so burdensome or time-consuming as to act as impediments to access the information requested.
The Agreement provides that the party requesting information shall reimburse the requested party for the direct out of pocket costs of processing each request (including direct out of pocket costs of litigation directly relating to such request), as agreed by the parties.
ENTRY INTO FORCE
The Agreement is not retrospective and shall only enter into force when each party has notified the other of the completion of its necessary internal procedure for entry into force. Upon entry into force it shall have effect for criminal tax evasion beginning on 1 January 2004 and with respect to civil and administrative tax matters relating to federal income tax it shall have effect beginning on 1 January 2006. Therefore the Agreement shall have effect with respect to criminal tax evasion for taxable periods commencing from 2004, and for civil and administrative tax matters for taxable periods commencing from 2006.
The entry into force provisions are confirmed by section 3 of the Law.
Sandie Corbett, Partner
Diarmad Murray, Partner
David Whittome, Partner
Peter Harris, Partner
British Virgin Islands
Jack Husbands, Partner
Hugh O'Loughlin, Partner
Rod Palmer, Partner
1 For further information regarding the Confidential Relationships (Preservation) Law (1995 Revision), please contact your usual contact or one of the contacts listed at the end of this note
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.