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Information exchange- The Real Story Diane Hay Kay Kimkana October 2012

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Title: Information exchange- The Real Story Diane Hay Kay Kimkana October 2012

Information exchange- The Real Story Diane
Hay Kay Kimkana October 2012

Quiz what links the following?
  • Gordon Brown?
  • Osama bin Laden?
  • Nicolas Sarkozy?
  • Senator Obama?
  • The man who was Heinrich Kieber?
  • Bradley Birkenfeld?

  • What is it about exchange of information?
  • Introduction to exchange of information
  • Recent developments
  • The UK picture
  • What happens in practicethe real story

  • What is it about exchange of information?

What is it about exchange of information?
  • tax havens, banking secrecy, thats all over
  • we agree to take action against non-co-operative
    jurisdictions, including tax havens. We stand
    ready to deploy sanctions to protect our public
    finances and financial systems. The era of bank
    secrecy is over.

What is it about exchange of information?
  • what we are witnessing is nothing short of a
    revolution. By addressing the challenges posed by
    the dark side of the tax world, the campaign of
    global tax transparency is in full flow. With
    the crisis, global public opinions expectations
    are high, their tolerance of non-compliance is
    zero and we must deliver

  • Introduction to exchange of information

Exchanges of information
  • Three main types of information exchanges
  • Information on request request for specific
  • Spontaneous exchanges where one fisc believes
    the information it has obtained may be of
    interest to one of its treaty partners.
  • Routine/electronic exchanges typically
    information comprising many individual cases of
    the same type eg interest, royalties. Usually a
    prior agreement between the fiscs as to what
    information they want and the format to send it.
    OECD has designed standard paper and electronic

Legal bases for exchanging information
  • Bilateral tax treaties usually based on Article
    26 of OECD Model Convention (basis of exchanges
    under JITSIC as well)
  • Tax Information Exchange Agreements (TIEA)
    usually based on the 2002 OECD Model Agreement on
    Exchange of Information on Tax Matters .
  • Multilateral instruments such as the Council of
    Europe/OECD Convention (signed by only 21
    countries prior to 2011 G20 meeting) Nordic
    Assistance Convention etc.
  • EC Directive on Mutual Assistance 1977 now
    repealed and replaced by EU Directive 16/2011 on
    Administrative Cooperation in the field of

OECD Exchange of Information models
  • Article 26
  • Most widely accepted legal basis for bilateral
    exchange of information for tax purposes. More
    than 3,600 bilateral treaties are based on the
    Model Convention.
  • Updated in 2005 when paragraphs 4 and 5 added to
    cover bank secrecy.
  • Commentary last updated July 2012.
  • TIEAs
  • Introduced in 2002 as a stand-alone agreement
    following work of OECDs Global Forum.
  • By 2008, only 23 TIEAs signed!
  • Numbers have rocketed since then.

TIEAs signed annually
TIEAs signed between G20 Summits (cumulative)
TIEAs/DTCs signed with OECD/G20 countries
Article 26 and TIEAs Similar features
foreseeable relevance
  • In both instances shall means it is mandatory
    to exchange information.
  • Both envisage information exchange to the
    widest possible extent but do not allow fishing
  • Balance between these two is captured in the
    standard of foreseeable relevance.
  • Foreseeable relevance replaces previous Art 26
    wording of necessary. Not intended to be very
    different but it is! A lower standard and moves
    the burden of proof from the tax authority to
    show that the information is necessary.
  • July 2012 guidance reasonable to suppose that
    the information requested will be relevant.
    Requesting authority best-placed to determine

Article 26 and TIEAs Similar features -
  • Another key concept is the principle of
  • A tax authority is obliged only to obtain and
    provide such information that the requesting tax
    authority could obtain under its own laws under
    similar circumstances.
  • Art 26 extends this to information that the
    requesting authority could obtain in the normal
    course of administration i.e. the requesting
    authority should not be able to take advantage of
    an information system that is wider than its own.
  • Could even lead to a refusal to provide
    information where the requesting authoritys lack
    of resources effectively results in a lack of
  • July 2012 update - to be interpreted in a broad
    and pragmatic way.

Article 26 and TIEAs Similar features use of
  • The requested tax authority must use its
    information gathering powers if information not
    already available (subject to other conditions).
  • A tax authority cannot refuse information
    exchange solely because it has no domestic tax
    interest in the information (Art 26(4) and TIEA
    Art5 (2)).
  • TIEA sets out the type of information that a
    requesting fisc should provide (Article 5 (5)),
    Art 26 more vague OECD manual (2006) gives list
    of items that should be included in an
    information request.
  • May be able to exchange information on third
    country residents, but only if already have it or
    there is power or possession.

Article 26 and TIEAs Limitations
  • Limitations on exchange - Art 26(3) and TIEA
    (but not a prohibition)
  • If not in accordance with domestic laws or
    administrative practice.
  • If not obtainable under the laws in normal course
    of administration.
  • Trade or business secrets or (in extreme
    cases)contrary to public policy (ordre public).
  • Time limits for making exchanges? July 2012
    commentary update suggests default of two months
    from receipt of request (!)

Tackling bank secrecy
  • Article 26 (5) changes and TIEAs
  • State cannot refuse a request for information
    solely because it is held by a bank or other
    financial institution (Art 26 (5) and TIEA Art
  • Bank secrecy is not incompatible with the
    requirements of Article 26 or TIEA.
  • Austria, Belgium, Luxembourg and Switzerland
    entered reservations to Article 26 in 2008,
    subsequently withdrawn in 2009.
  • But limitations in both Art 26 and TIEA have
    contributed no doubt to introduction of FATCA
    rules by US.

Article 26 and TIEAs Important differences
  • Taxes covered
  • TIEA applies to the administration and
    enforcement of taxes covered by the TIEA.
  • Art 26 applies to all taxes of every kind and
    description and not limited by Art 2.
  • Scope - TIEA only covers information on request!
    But could be expanded to other types.
  • Confidentiality - no obligation under TIEA to
    exchange information that would reveal
    client/lawyer communications.

  • Recent developments

Foreign Account Tax Compliance Act
  • U.S. persons are using foreign entities to invest
    and avoid U.S. reporting and back-up withholding.
  • Certifying to be foreign persons
  • Availing themselves of treaty benefits
  • U.S. loses an estimated 100 billion in tax
    revenues annually due to offshore tax abuses.
  • Financial institutions may be facilitating
    international tax evasion
  • The provisions are intended to provide the
    Internal Revenue Service (IRS) with an
    increased ability to detect U.S. tax evaders
    hiding their money in foreign accounts and

Joint International Tax Shelter Information
  • Formed by the Tax Commissioners of Australia,
    Canada, the United Kingdom and the United States
    in April 2004.
  • Now includes Japan, Korea and China and observers
    from France and Germany
  • A joint task force to identify and curb abusive
    tax transactions
  • Share expertise, best practices and experiences
    to combat abusive tax schemes
  • Exchange information on abusive tax schemes, in
    general, and on specific schemes, their
    promoters, and investors within vires of Art 26
  • Successful because of physically co-located,
    develop relationships and understandings

  • The UK picture

The UK signed 6 new agreements in the year ended
31 March 2012. 145 agreements in total which
provides for the exchange of information (121
double tax agreements and 24 TIEAs ).
Article 26 (4) and (5)
  • UK treaties have a version of Article 26, which
    provides for the exchange of information.
  • Paragraphs 4 and 5 of the OECD model were updated
    in July 2005 which set out the following
  • Paragraph 4 state cannot refuse information
    request because it has no domestic tax interest.
  • Paragraph 5 information held by a bank or other
    financial institution.
  • Updated paragraphs 4 and 5 reflected in the
    double taxation agreement between the UK and the
    following states
  • the Netherlands (in force 2010)
  • Switzerland (in force 1978, updated)
  • Mauritius (in force 1981, updated)
  • Luxembourg (in force 1968, updated)

Article 26 (4) and (5)
  • The following agreements do not reflect the
    updated paragraphs 4 and 5 (and these tend to be
    the older agreements)
  • Cyprus (in force 1974)
  • Austria (in force 1970)
  • Belgium (in force 1989)
  • Can HMRC get around the issue by using the
    Multilateral Convention on Mutual Assistance in
    Tax Matters or for EU Member States, the Council
    Directive (2011/16/EU)?

TIEAs signed by the UK
  • Anguilla
  • Turks and Caicos Islands
  • Belize
  • Dominica
  • Aruba
  • Grenada
  • St Kitts and Nevis
  • Grenada
  • Liberia
  • Netherlands Antilles
  • Liberia
  • Liechtenstein
  • San Marino
  • Antigua and Barbuda
  • St Christopher and Nevis
  • St Lucia
  • St Vincent and the Grenadines
  • Bermuda
  • Isle of Man
  • Jersey
  • Guernsey
  • British Virgin Islands
  • Gibraltar
  • The Bahamas
  • not entered into force

  • On the day the FATCA regulations were released
    (Feb 2010), the US Treasury released a joint
    statement with the governments of the UK, France,
    Germany, Italy, and Spain announcing an
    intergovernmental framework for FATCA
    implementation and international tax compliance.

  • Under this approach, "FATCA Partner" countries
    will enter into agreements with the US to collect
    information from financial institutions and
    automatically forward this to the IRS.
  • Bilateral automatic exchange of information
  • US commits to reciprocity with the 5 FATCA
    partners with respect to collecting on an
    automatic basis to the authorities of the 5 FATCA
    partners on US accounts of resident FATCA partner.

  • First agreement signed 18 September 2012 between
    the US and UK.
  • Financial institutions in the UK will comply with
    FATCA by reporting to HMRC, who will send the
    details on to the IRS.
  • Provides for
  • Annual exchange on an automatic basis and
  • Aims for reciprocity equivalent levels of
    information exchange between FATCA partners.
  • Isle of Man, Jersey and Guernsey to negotiate
    FATCA agreement with the US based on the UK

  • What happens in practice ....
  • the real story

The real picture?
  • Information exchange under the standard
    agreement is sporadic, difficult, and unwieldy
    for tax administrators even under the best of
  • It is common knowledge that the OECD TIEA has
    been ineffective in limiting international tax
    evasion and aggressive tax avoidance

Peer Reviews - Putting the teeth into information
  • Phase 1 examines the legal and regulatory
    framework of member jurisdictions
  • Phase 2 looks at the actual implementation of the
    international standard of transparency and
    exchange of information in practice
  • Key areas
  • availability of any relevant information in tax
  • the power of the administration to access the
  • the administrations capacity to deliver this
    information to any partner which requests it.
  • Phase 1 nearly completed 96 reviews. Phase 2
    just beginning
  • Nearly all peer reviews show improvement needed
    and 32 countries lack one or more essential
    element. 13 held back from phase 2

Some real life observations
  • Volumes of requests more than you think, the
    angry Belgians
  • Rubbish in, nothing out requests need to be
    well formulated
  • Tax authorities need for effective electronic
    interfaces to make routine exchanges work, the
    stolen bank discs
  • Also need universal identification not NINOs!
  • Good responses from Crown Dependencies unless
    one of their residents in their interests to be
    above board
  • One can always find a reason and a way to answer
    a request if one wants to enthusiasm and
  • What is the best information an investigator can
    have-that which a taxpayer in his worst nightmare
    could never imagine the tax authority could get
    hold of. And that happens more often than people

Final Thoughts
  • but being as this is a .44 Magnum, the most
    powerful handgun in the world, and would blow
    your head clean off, you've got to ask yourself
    one question Do I feel lucky? Well, do ya,