Cayman decision on tax information exchange:

Transparency undermined or rule of law upheld?

British Prime Minister David Cameron, speaking in the House of Commons on September 9, 2013, finally went on record to say what the British Overseas Territories and Crown Dependencies with international financial centers have long been saying. He told the House: “I do not think it is fair any longer to refer to any of the overseas territories or Crown dependencies as tax havens. They have taken action to ensure they have fair and open tax systems. 

It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown dependencies and overseas territories, which matter so much – quite rightly – to the British people and members have taken the necessary action and should get the backing for it.”

Part of this ‘necessary action’ was the introduction of arrangements to permit disclosure of financial information to overseas tax authorities for criminal or civil tax investigations. In the Cayman Islands, successive governments have negotiated tax information exchange agreements, known as TIEAs, with 33 countries since 2001, 26 of which have already come into force. These include (as well as several major non-OECD countries such as Brazil, China, India and South Africa) almost all the major OECD member states. Among those is Australia, the country which had made the request for information that was at issue in a case decided on September 13, 2013, by the Grand Court of the Cayman Islands. Since TIEAs tend to follow a fairly standard pattern, the court’s findings and guidance will be relevant in many other jurisdictions as well as Cayman.

The case, M.H. Investments and J.A. Investments v The Cayman Islands Tax Information Authority, involved requests from the Australian Tax Office, by which the ATO was seeking information about the financial affairs of two Cayman companies. The court held that the Cayman Islands Tax Information Authority (CITIA), the statutory authority charged in Cayman with obtaining and transmitting tax information, had acted unlawfully.

It accordingly quashed CITIA’s decision to accede to the requests and also directed it to withdraw certain consents it had given to the ATO relating to the use of the information and to request its return. In the event, the ATO declined, with the blessing of the Australian court, which stated: “That the Grand Court has quashed that decision is a matter of domestic law and can have no effect upon the lawfulness of the ATO’s receipt of that material.” According to recent press reports the information has now been used, and arrests have been made.

Predictably, the Grand Court’s decision has been received in some quarters as a case of Cayman helping suspected tax-dodgers and putting roadblocks in the way of the newly-introduced standards of transparency.
In fact, it is nothing of the kind. 

The TIEA framework

The TIEA between Cayman and Australia was signed on March 30, 2010, and came into force on September 4, 2010. In common with most such agreements it applies only to taxable periods beginning after a set date, in this case July 1, 2010. 

The legislation governing the implementation of TIEAs, the Tax Information Authority Law, confers extensive information-gathering powers on CITIA, requires CITIA to apply to court in cases where the overseas tax authority wishes to use the information in proceedings or further transmit it to another authority, and gives the taxpayer a right in certain situations to be heard on a decision to accede to a request before it is implemented. Importantly for this particular case, it also grants a blanket exemption from any applicable duties of confidence and from the operation of Cayman’s Confidential Relationships (Preservation) Law in relation to any information obtained under the Law.

In common with other statutes, the TIA Law now has to be interpreted and applied in light of the terms of the Bill of Rights which came into force under the Cayman Islands Constitution on November 6, 2012. These include rights relating to private and family life and correspondence, property and the like, in similar terms to the various articles of the ECHR and the U.K.’s Human Rights Act – and with similar limits and qualifications relating to what is necessary in a democratic society.

The decision

Justice Quin of the Grand Court of the Cayman Islands was faced with a challenge to four separate acts of the CITIA: acceding to two separate requests from the ATO to obtain and transmit documents, permitting onward disclosure by the ATO to the U.K. tax authorities and permitting use of the materials in proceedings in Australia. His starting point, rather than going back to historical objections to assistance with ‘tax-gathering,’ was the position on assisting foreign courts with evidence in civil cases.

He referred to the longstanding willingness of Cayman Courts in those situations: “On frequent occasions our Courts have adopted the classic approach from Lord Denning in Rio Tinto Zinc Corporation v Westinghouse Electric Corporation … where he said, ‘It is the duty and the pleasure of the English [Cayman] Court to do all it can to assist the foreign court, just as the English [Cayman] Court would expect the foreign court to help it in like circumstances’.” However, he recognized that the question needed to be addressed with a view not only to the CITIA’s duty to assist the ATO but also its duty to protect the rights of the taxpayer, and that the Bill of Rights “must lead the Court to apply a more anxious level of scrutiny and standard of review,” just as the Human Rights Act had done in the U.K.

The most obvious and fundamental objection to the CITIA’s actions was that the requests related to tax years that were outside the scope of the TIEA between Cayman and Australia. Indeed, this was openly accepted in the letter from the ATO requesting authority to use the materials. It was also alleged that the CITIA failed to properly assess whether it had the powers pursuant to the TIEA and the TIA Law to comply with each of the requests; made a fundamental error as to the ATO’s rights under the TIA law or the TIEA to request the information sought; failed to ensure that the applicants were served with a notice pursuant to Section 17 of the TIA Law; and failed to make applications that it should have made to the court as to the execution of the requests.

The result, the applicants argued, was first that the CITIA’s numerous failings had rendered its acts unlawful and liable to be set aside, and secondly that by acting outside the scope of the TIA Law the CITIA had lost the protection of the provisions of the TIA Law that override the taxpayer’s other rights, which therefore continued to operate and had been infringed.

The court found in favor of the applicants, holding the CITIA’s decisions unlawful and ultra vires. Given the complete disregard for the limits of its powers apparently shown by the CITIA, it is hard to see how it could have done otherwise.

What does the decision mean for the future of tax information exchange?

Tax information exchange was never intended to be a free-for-all in which overseas tax authorities could ask for whatever they want, have the Cayman authorities exercise, without control or restraint, wide coercive powers to obtain it and hand it over, and then be free to do whatever they want with it, including passing it on without limit to anyone who might claim to have an interest in seeing it.

That may be the world that the most strident high-tax campaigners would like to see in Cayman, even though it does not exist in the U.K., the U.S. or any other developed country. But it is emphatically not the system that was actually put in place – with the approval of the OECD, on whose model the numerous TIEAs are based. That system is – we would argue quite rightly – subject to the rule of law. It is designed to ensure that Cayman cannot be used for tax evasion or otherwise to facilitate breaches of the tax rules of other countries, but to override the rights of the taxpayer only within defined, if very broad, limits.

Justice Quin’s decision is, on proper analysis, nothing other than a timely reminder. It is a reminder that when processing a request made by a foreign jurisdiction pursuant to a TIEA, the responsible authority must be mindful of the statutory procedures and restrictions, and the scope of its powers, set out in the TIEAs and the implementing legislation. And it is a reminder that if the authority acts outside the limits of those powers, it also acts outside the protections that go with them. These principles will be of wider application and will serve as useful guidance for authorities in any common-law jurisdiction that has entered into TIEAs with other countries.

What this decision certainly does not do is in any way to undermine Cayman’s commitment to its duties and obligations set out in the various TIEAs it has entered into. It simply demonstrates that in Cayman the courts can, and do, uphold the rule of law.

 

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Andrew Bolton

Andrew Bolton is a partner and Practice Group Head of Appleby’s Litigation & Insolvency department. Andrew specialises in contentious insolvency matters and commercial litigation, including fraud, asset recovery and professional negligence. Prior to joining Appleby in 1997, Andrew worked for Freshfields (now Freshfields Bruckhaus Deringer) in London and Brussels for ten years, including a year on secondment to the Bank of England. He became a partner at Appleby in 1999 and now has overall responsibility for the firm’s Litigation and Insolvency practice in its various offices.

 

Andrew Bolton
Partner; Group Head, Litigation & Insolvency
Appleby (Cayman) Ltd.
Cayman Islands  

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Gillian Duffy

Gillian Duffy is an associate in the Litigation & Insolvency practice group in Appleby’s Isle of Man office. She has a broad range of experience in commercial litigation matters. In particular, she advises on a number of complex company disputes, cross border mutual legal assistance actions and insolvency matters. Since qualifying in May 2008, Gillian has appeared before the Isle of Man High Court on a variety of contentious litigation matters. Gillian has recently completed a secondment from the Isle of Man to the Cayman Islands with Appleby.  Gillian joined the firm in January 2006, having passed the Legal Practice Course at the College of Law Chester. She was called to the Manx Bar in May 2008.

Gillian Duffy
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Appleby

The Cayman office of Appleby, Appleby (Cayman) Ltd., traces its origins back to 1945 and as such is the oldest legal practice in Cayman. The office now has over 150 partners and staff and is widely recognised for providing first class litigation and insolvency legal services as well as corporate and commercial advice.

The Cayman Islands have branches of 40 of the world’s 50 largest banks. It is the leading offshore jurisdiction for the registration of investment funds and is the second largest captive domicile in the world with more than 700 captives. The jurisdiction is also recognised in providing trusts, structured finance, company and partnership formation and vessel and aircraft registry services.

The availability of expert professional advice and the reputation for being a respectable and well-regulated financial centre with a stable and business-friendly government, have contributed to the success of the islands’ financial services industry. Listed on the OECD’s white list, service providers adhere to all relevant international compliance standards and are committed to supporting global efforts to fight financial crime. 

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