Jersey: Jersey’s First Challenge Against Disclosure Under A Tax Information Exchange Agreement

Last Updated: 5 July 2013
Article by David Dorgan

[Volaw Trust v Comptroller of Taxes [2013]JRC095]

The Royal Court of Jersey has dismissed the first appeal against a decision of the Jersey Comptroller of Taxes ("Comptroller") to serve notice pursuant to a Tax Information Exchange Agreement ("TIEA") requiring the production of certain information relevant to the tax affairs of a foreign resident.

Facts:

In 2010, the Comptroller, having received a request from foreign authorities, issued a formal notice to Volaw Trust requiring it, pursuant to regulation 3 of the Taxation (Exchange of Information with Third Countries) (Jersey) Regulations 2008 ("Regulations"), to furnish "all information, documents, correspondence, financial statements, files and details of any other information concerned with or connected to the named subjects" (being an individual and four companies).

Grounds for Appeal

Whilst there is somewhat of a convoluted history to the issue of the notice by the Comptroller, the main issues on appeal before the Royal Court were as follows:

  1. Can a foreign authority obtain information which pre-dates the TIEA?
  2. Was the threshold, set out in the Regulations for requiring the production of that information, met?
  3. Was the scope of the Comptroller's notice excessive extending to documents not requested by the foreign authorities?
  4. Was the purpose for which the information sought relevant and within the scope of the TIEA (i.e. this is a fishing expedition to enable the foreign authority to undertake a civil tax assessment)?

Decisions of the Court

1 Obtaining Information Pre-Dating TIEA

Upon interpretation of the TIEA, it was clear to the Royal Court that if information relates to criminal tax matters, but not otherwise, a foreign authority can obtain information which pre-dates the TIEA; the TIEA's terms making a distinction between the date on which the TIEA "enters force" and the periods of time which its provisions "have effect". On this basis, if the criminal criteria is satisfied, a request can be made for the production of pre-TIEA information and, because the TIEA is not limited to the use such information can thereafter be put, the information could also be used to conduct a civil tax assessment which would not otherwise be the case

2 Threshold

The Regulations require the Comptroller, not to reach any final conclusion on where the truth lies, but, having regard to the material before him, to:

  1. have reasonable grounds for believing:

    1. that a taxpayer may have failed to comply, or may fail to comply, with a domestic law of a third country concerning tax; and
    2. that any such failure has led, or is likely to lead to serious prejudice to the proper assessment or collection of tax; and
  2. properly say that in his "reasonable opinion" the information sought is relevant.

In this case, the Royal Court was entirely satisfied that the Comptroller had such reasonable grounds (noting that the individual in question had been subject to an indictment, which had proceeded to trial, for breaches of his domestic tax laws).

Furthermore, the Royal Court noted that the Comptroller had "very good grounds for believing" that the foreign tax authority's suspicions were well founded and that the individual's interests in, at least, some of the companies, and the transactions in question, were more extensive, or different, from what he would have the outside world believe.

3 Scope of Notice

The Royal Court found, that whilst the request by the foreign authorities to the Comptroller did not describe the required documents in quite a clear manner, on a "fair reading it was obvious" what was being asked and "equally obvious from the course of events subsequent to the Request that...this... was and is at the heart of the dispute."

4 Relevance of Information Sought / A Fishing Expedition

It was contended that the real reason for the request by the foreign authorities was to be able to conduct a civil tax assessment, not alleged criminal offences, by "giving the impression" that a civil assessment of tax was necessary for the purpose of a criminal prosecution. Consequently, there was an assertion of "bad faith" by the foreign authorities. The Royal Court reviewed the totality of correspondence in the matter and concluded as follows:

  1. whilst their command of the English language was impressive, the foreign authorities do not always express themselves in quite the way that a native user of the language might and, therefore, there did not, of itself, appear to be an attempt to mislead;
  2. it was plain that there was genuine difficulty and confusion on both sides: on the Jersey side in trying to understand exactly how the unfamiliar foreign system worked and, on the foreign side, in endeavouring to explain their system;
  3. that, whilst the foreign authorities did not emphasise the practical importance to their criminal prosecution process of having a tax assessment, there was nothing sufficient to justify a conclusion of bad faith on their part; and
  4. there would have to be compelling evidence available before the Court would be justified in making a finding of bad faith.

Comment: Whilst a landmark case providing helpful guidance as to the practical effect of the Regulations and TIEAs, it cannot read as representing the position in all cases. Whilst TIEAs follow a form set down by the OECD, but not all TIEAs will have identical terms. More importantly, the Comptroller's decision whether or not to issue notice for disclosure will be entirely conditional upon circumstances as to whether reasonable grounds exist and he can form a reasonable opinion that disclosure is relevant.

However, it is worth noting that, due to the nature of the facility afforded by any TIEA, much will probably still be unknown to the requesting foreign authorities who will likely to be undertaking an investigation at the time of a request. Consequently, there is a practical limit as to how much specific detail a foreign authority can realistically be expected to provide to the Comptroller. Therefore, much will depend upon the Comptroller's reasonableness as he is not required to reach definitive conclusions.

On this basis, it would seem sensible to assume that further challenges against disclosures to foreign authorities will be forthcoming and, in that regard, it will be interesting to see how the law develops in this area.

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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