by John Ridgway (Managing Partner) and Anthony McFarlane (Lawyer)

Since our report on the implementation of the OECD international tax standard on transparency and exchange of information (International Tax Standard) earlier this year (see 'OECD International Tax Standard - Tax Information Exchange - Pacific Islands Update') the global community has continued to crackdown on offshore tax haven activity. Whilst tax information exchange agreements (TIEAs) continue to be signed in record numbers and more countries are moving onto the OECD 'White List', individual governments such as the United States and France have implemented their own measures to discourage tax haven investment.1 It will be interesting to see if this trend continues.

The OECD Global Forum's peer review process is now underway to check the progress of implementation of the International Tax Standard. This will take place in two phases:

  1. phase one will assess the adequacy of a jurisdiction's legal and regulatory framework for the exchange of information and transparency; and
  2. phase two will look at practical operation and implementation of that framework.

The review process will identify jurisdictions that are not implementing the International Tax Standard and provide guidance on the changes required, including deadlines to implement peer review recommendations. The first group of peer review reports will remain confidential until September 2010.

Vanuatu is the first Pacific Island country to be reviewed in the first half of 2011. This review will comprise an assessment of the adequacy of Vanuatu's legal and regulatory framework for the exchange of information.

The Pacific - implementation of TIEAs

In the Pacific, jurisdictions continue to enter into TIEAs. To date the Cook Islands, Samoa (the only Pacific jurisdiction on the OECD 'White List'), Vanuatu and the Marshall Islands have entered into TIEAs with Australia. See 'OECD International Tax Standard - Tax Information Exchange - Pacific Islands Update' for a discussion of the main TIEA provisions.

Under the TIEAs, treaty partners must implement legal and administrative frameworks to support their commitment to the exchange of information and transparency. For example, a revenue authority's ability to exchange information cannot be hindered by offshore or banking secrecy laws or restrictions under domestic tax administration laws.

Although enabling legislation (discussed below) will be effective in overriding secrecy and confidentiality provisions, it is likely to be ineffective in improving the inherent transparency limitations of certain ownership structures. For example, international company legislation which permits the issue of bearer shares to company members.2 On the share certificate of a bearer share the word "bearer" is inserted instead of the true owner, effectively masking the ownership of the shares.

To improve the transparency of this type of ownership structure, changes will need to be made at source level. For example, pursuant to amendments introduced in Samoa under the International Companies Amendment Act 2008 all bearer shares and bearer debentures must be registered within a 6 month transitional period with the trustee company which provides the registered office (for the relevant international company).3 Where a holder fails to lodge the bearer debenture or bearer share within the specified transitional period, all rights exercisable by the beneficial owner are suspended until lodgment of the relevant certificate.

Enabling legislation

Enabling legislation is now the next step for countries like the Cook Islands, Samoa and Vanuatu to implement the International Tax Standard. Enabling legislation is necessary to give legal effect to TIEA obligations in a country. It is important that such legislation mirrors the TIEA provisions.

In forming TIEA enabling legislation, the following points are important.

  1. Powers - A key risk is that enabling legislation could give too wide (or not wide enough) powers to the relevant authority to collect bank account and general ownership information. TIEA provisions do not currently allow the relevant authority to embark on general 'fishing expeditions' for classes of taxpayers; rather a specific taxpayer must be identified. Depending on enabling legislation drafting, a relevant authority may be able to succeed making a broader than permitted information request.
  2. Foreseeably Relevant - The enabling legislation should only permit the exchange of information that is in accordance with the relevant TIEA (ie. exchange of information that is "foreseeably relevant"4 to the determination and assessment of taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters).
  3. Jurisdiction - The information must be held by authorities in the requested jurisdiction or be in the "possession or control"5 of persons who are within the requested jurisdiction.
  4. Applicable date - Article 13 of the Australia/Cook Islands and the Australia/Samoa TIEA clearly state that requests for information (other than criminal tax matters) are prospective and therefore can only relate to taxable periods from 1 July 2010.6 Article 13 of the Australia/Vanuatu TIEA is silent on this point and, if left unqualified in the Vanuatu enabling legislation, would permit the Australian Tax Office to make information requests for matters prior to 1 January 2011.7
  5. How will a request work - The enabling legislation should set out clear procedures to make and fulfill an information request. When making a request, the applicant jurisdiction must also provide the necessary supporting information to demonstrate the foreseeable relevance of the information requested.8 The requested jurisdiction, on confirming that the information request is TIEA compliant, should in the first instance be given the authority to issue a written notice requiring the production of the information. Alternatively the requested jurisdiction may need to apply for a court order for the production or seizure of the information. Currently the abovementioned TIEAs do not impose a time limit to fulfill a request.
  6. Opportunity to dispute request - For tax matters other than criminal tax matters, it may be appropriate to give the recipient of the information request the right to make a written submission stating the grounds which he or she wishes the requested authority to consider in making a decision whether or not the request is in compliance with the terms of the TIEA.9
  7. Respect for Taxpayer rights - Confidentiality of any information received must be maintained under the terms of the relevant TIEA. Further, legal professional privilege must be preserved including confidential communications between a client and lawyer where the communications are for the purposes of legal advice or for use in existing or contemplated legal proceedings.
  8. Circumvention of secrecy provisions - Enabling legislation should provide that disclosure of information by a person will not result in an offence under banking or offshore legislation which prohibits the disclosure of certain information. Alternatively, all relevant legislation containing secrecy or confidentiality provisions should provide an exception for disclosures by compulsion of law.

What next?

It is yet to be seen how TIEA obligations will be legislated across the Pacific although Government departments are aware time is running out before requests commence. Key stakeholders including banks, accountants and trustee companies should be taking an active role in consulting Governments on the drafting of TIEA enabling legislation. It is also important that stakeholders such as banks ensure there systems can efficiently respond to taxpayer specific requests.

1 For a summary of the US and French measures please see the following articles "U.S. Focuses on Overseas Account Holders: New Obligations for Foreign Financial Institutions" and "France Creates Tax Haven Black List".

2 For example, Section 22 of the International Companies Act [Cap 222] (Vanuatu).

3 See section 6 and 8 of the International Companies Amendment Act 2008 (Samoa).

4 For example, see Article 1, Agreement between the Government of Australia and the Government of Vanuatu on the Exchange of Information with Respect to Taxes.

5 For example, see note 4, Article 2.

6 For example, see Article 13, Agreement between the Government of Australia and the Government of the Cook Islands on the Exchange of Information with Respect to Taxes.

7 See Article 13, Agreement between the Government of Australia and the Government of Vanuatu on the Exchange of Information with Respect to Taxes.

8 For example, see note 7, Article 5(5).

9 The Cayman Islands enabling legislation provides a similar right to information request recipients, see clause 17(1) Tax Information Authority Las (2009 Revision).

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.