In order to honour its commitment to the OECD to broaden its ability to exchange tax information, the Isle of Man has, since 2002, entered into a number of tax information exchange agreements (TIEAs).
A TIEA allows the Isle of Man government, via the Assessor of Income Tax (Assessor), to exchange tax information with another country in relation to criminal, civil and administrative tax matters. The information may already be held by the Assessor. If the information is not held by the Assessor, then the Assessor may use their legal powers to obtain it.
If greater disclosure is made than a trustee is compelled to give, the trustee may be left open to claims of breach of confidentiality or breach of trust
The TIEA obliges the country requesting the information to follow a strict set of rules. If the rules have not been followed, the request for information will be declined. These rules are designed to protect the legitimate confidentiality of a taxpayer and the holders of information in both countries. In particular, they guard against what are often known as ‘fishing expeditions’, whereby a tax authority may look for a large amount of general information, hoping that it may be useful.
TIEA procedure
A trustee may be the recipient of a request from the Isle of Man Income Tax Division (ITD). The ITD does not expect compliance with the initial letter of request. The trustee should wait until they receive formal notice,1 as they are not compelled by law to comply until the notice is issued. The letter of request is a voluntary request and precursor to the notice: it has no force in law. There will be no defence to a breach of confidentiality claim, for example, if a trustee complies with the letter of request. Trustees must carefully consider their obligations and their duties as trustees prior to making a disclosure to the ITD.
The usual procedure, if no queries arise concerning the request, is that the trustee would, in compliance with the formal notice, collate the relevant documents, liaise with the ITD and disclose the relevant documents or information within the notice period given for compliance.
A TIEA partner country that receives information must keep it confidential and only use it for the purpose of the administration or enforcement of its tax laws. The information cannot be passed to another country without the Assessor’s written consent.
Complying with a notice
A trustee receiving a request under a TIEA must also consider its obligations under other Isle of Man legislation as a result of the request and make any relevant notifications to its relevant regulatory body, (the Isle of Man Financial Supervision Commission or the Isle of Man Insurance and Pensions Authority), and, where necessary, make a suspicious transaction report to the Isle of Man Financial Crime Unit.
A disclosure must be made where there is any suspicion that an offence has been committed, and trustees should note that a tax saving made by failing to declare offshore assets can taint otherwise legitimate funds in an offshore structure.
Usually the taxpayer in question is notified of the request; therefore, no issues in respect of ‘tipping off’ offences arise. Note that in certain cases it is not necessary to notify the taxpayer in question.2 Compliance with a request will require a careful and critical analysis of its specific terms.
Critical analysis
Trustees, or any other recipient of a request, must review the request line by line, beginning with ensuring that the addressee is correct. For example, a request should not be addressed to the trust itself, as it is not a separate legal entity; rather, the correct addressee would be the trustee or trustees.
The only documents or information to be disclosed should be those within the specific date range set out in the request. The date range itself should be checked to confirm that it is within the scope of the relevant TIEA, as TIEAs all come into effect on different dates and all differ in their terms.
The wording in relation to each category of documents or information requested must also be considered carefully. If greater disclosure is made than a trustee is compelled to give, or if disclosure is made in response to an invalid request, the trustee may be left open to claims of breach of confidentiality or breach of trust.
The review of the documents should also include an assessment of any potential ‘foot faults’ that could be a cause for concern for the trustee with the requesting tax authority. It is often advisable to consider taking tax and/or legal advice in the jurisdiction of the requesting tax authority as to any impact the investigation may have on the trustee, the trust and its beneficiaries.
A request under a TIEA will present an opportunity for the trustee to review its files and, if appropriate, take independent legal advice in the Isle of Man and in the other jurisdiction to which the request relates, to protect its position against any potential action.
Complying with a TIEA request may place a large financial and administrative burden on a trustee. The trustee must consider the funding of complying with a request. Modern trust deeds may include clauses permitting the trustee to pay any tax liability arising from the trust fund, and providing for corporate trustees to be remunerated in accordance with their terms of business. A trustee should ensure that their terms of business permit them to recover the costs of complying with a TIEA request.
Considering challenging the request?
If a request is not complied with, the ITD may apply to the Isle of Man High Court of Justice for an order compelling compliance.2 It is our view, although yet to be tested before the Court, that, in the interests of open justice and fairness, the Court would require any such application to be served on the recipient of the request and the recipient to be given an opportunity to put forward their explanation for non-compliance.
In the Isle of Man, other than raising queries with the ITD and in the absence of any opportunity to oppose an application under s105K ITA 1970, a challenge can only be made by way of judicial review.3
Other offshore cases
Challenges have been brought before the Royal Court of Jersey. The first-ever appeal to the Jersey Court against a decision of the Comptroller to serve a notice under Jersey’s exchange of information regulations was not allowed.4 However, an appeal was allowed in the Jersey case of APEF Management Company 5 Ltd v Comptroller of Taxes.5
Following the case of Larsen, the Royal Court held that the Comptroller had to consider whether the request complied with the TIEA and whether the information requested was foreseeably relevant, i.e. there had to be a ‘reasonable possibility’ that the information would be relevant to a tax liability of the taxpayer under investigation. The Comptroller was entitled to rely on the accuracy of the primary information given, albeit after some probing for the purposes of clarification, if necessary. However, the Comptroller still had to evaluate it properly in deciding whether the foreseeable relevance test was satisfied.
APEF produced evidence that the request was seriously flawed and that it came nowhere near satisfying the foreseeable relevance test. The Royal Court therefore concluded that, although the notice had been properly issued on the basis of the information in the request, it could no longer remain in force.
In another case, the Grand Court of the Cayman Islands overturned a decision of the Cayman Islands Tax Information Authority (CTA) to provide documents in response to several requests from the Australian Taxation Office (ATO) pursuant to the TIEA between Australia and the Cayman Islands.6
The ATO made four requests between February 2011 and February 2013 in connection with an investigation into the Australian tax affairs relating to two Cayman Islands entities. The entities sought judicial review of the actions of the CTA and certain declarations. The Grand Court held that the CTA had breached the relevant TIEA law and the TIEA by failing to seek directions from the Grand Court on how to process the requests, by giving consent for the ATO to use the documents in court proceedings, and by providing information prior to 1 July 2010. The CTA also breached the entities’ rights to privacy and a fair hearing pursuant to the Cayman Islands Bill of Rights by failing to provide notice to the entities, and breached its duties by failing to request further information from the ATO.
The CTA was ordered to formally revoke its consent to use of the documents in court proceedings (although an Australian court has given the ATO the authority to continue to use the information); formally revoke its consent to share the information with HMRC; and demand that the ATO return all documents unlawfully provided by the CTA.
In Bermuda, the Court of Appeal has held that the subject of a request is entitled to require the Attorney General to produce the terms of the request in order to confirm that it is in accordance with the International Cooperation (Tax Information Exchange Agreements) Act 2005.7
Isle of Man position
In most cases, any queries or concerns regarding a request, its terms or scope, can be resolved at an early stage, and usually prior to receipt of formal notice, by liaison with the ITD. To date, there have been no formal challenges to a request in the Isle of Man.
STEP Isle of Man Conference
STEP Isle of Man’s 2014 Conference will take place on 8 October 2014 at the Mount Murray Hotel and Country Club, Santon.
Don’t miss Nicholas Le Poidevin QC TEP’s discussion of Crociani v Crociani – the landmark ruling on trust jurisdiction clauses – or Rupert Ticehurst’s presentation: ‘The relationship between trustee and protector’.
Visit www.step.org/events-calendar or email [email protected] for more information.
- 1Section 105D(2) Income Tax Act 1970 (ITA 1970)
- 2Section 105I ITA 1970
- 3This is by way of a petition of doleance in the Isle of Man
- 4Taxation (Exchange of Information with Third Countries)(Jersey) Regulations 2008; Volaw Trust & Corporate Services Ltd and Larsen v Comptroller of Taxes [2013] JRC 095
- 5[2013] JRC 262
- 6MH Investments Ltd and JA Investments Ltd v Cayman Islands Tax Information Authority 16 ITLR 274
- 7The Minister of Finance v Bunge Ltd [2013] CA (BDA) 4 CIV