There have been a number of court judgments over the past 18 months from international financial centers such as Bermuda, the Cayman Islands, Jersey and Singapore, that have considered the meaning and effect of inter-governmental Tax Information Exchange Agreements (TIEAs), their enabling legislation, and the legal validity of specific TIEA requests.
What started as a trickle has burst into a flood, given the exponential increase in the number of TIEAs implemented internationally (estimated to be in excess of 1,500 as at October 2013), and the number of TIEA requests being made and processed internationally.
According to the OECD’s Global Forum Tax Transparency 2013 Report on Progress, there was a 267 percent increase in the number of TIEA requests received and processed by 16 smaller jurisdictions that were the subject of their study between 2009 and 2012, and that is a number that is likely to have grown substantially in 2013 and 2014.
The fact that TIEAs are still relatively novel legal instruments in some jurisdictions means that there is considerable scope for legal argument as to their proper interpretation and application. The judicial trend, however, has been firmly in favor of enforcing compliance with TIEA requests, save in those unusual cases where there has been an “impermissible fishing expedition,” or some other abuse of the procedure by the requesting tax authority. Whether such abuse is deliberate or inadvertent is not always easy to prove.1
Although there have now been a majority of decided cases in which the requested parties’ and taxpayers’ challenges have been rejected by the courts2, the litigation process associated with those challenges (which in some cases has involved the use of expert evidence addressing the merits of the underlying foreign tax claim) has resulted in considerable expense, delay, and inconvenience not only to the requesting and local governments, but also to the local banks and corporate and professional service providers that are requested to produce documents, as well as to the taxpaying parties themselves.
As a result, some jurisdictions such as Jersey and Bermuda have significantly revised the procedural rules associated with the case management of such cases, with a view to achieving a quicker and more cost-effective determination of any such challenges, while still protecting the parties’ rights to a fair hearing.
There have also been some recent cases that have sought to clarify which party should bear the costs of any legal challenge (depending on its outcome), as well as the costs of compliance with the document production exercise.
The Cayman experience
One dramatic case in the Cayman Islands, which has already been well publicized, is MH Investments Ltd & JA Investments Ltd v Cayman Islands Tax Information Authority. This concerned a challenge to the legality of four TIEA requests from Australia. What made that case interesting, and somewhat unusual, was that the requests had already been complied with and the relevant information sent from the Cayman Islands to Australia, before the court had the opportunity to consider a challenge to the legality of the requests.
By his judgment dated September 13, 2013 Justice Quin quashed the decisions of the Cayman Islands Tax Information Authority (CITIA) to provide information to the Australian Tax Office (ATO). The court also gave directions that CITIA should write to the ATO revoking its consent to the use of confidential documents in tax court proceedings in Australia, seeking the ATO’s undertaking that it would not disclose the documents in Australian court proceedings, and demanding the immediate return and destruction of copies of such documents.
The Grand Court also concluded that the provisions of the Cayman Islands’ Confidential Relationships (Preservation) Law continued to apply to protect confidential information from improper disclosure without a prior court order, and the court gave firm guidance that CITIA should change its approach to such matters in the future. Justice Quin also concluded that the Cayman Islands Bill of Rights required the court to apply “a more anxious level of scrutiny and standard of review, just as the Human Rights Act influenced the approach adopted by the courts in England and Wales.”
The judgment was, in practice, a limited victory for the requested parties and the taxpayers, because in Hua Wang Bank Berhad v Commissioner of Taxation (No 7),3 the Federal Court of Australia gave a judgment that undermined its effectiveness. In that case, Justice Perram was asked to admit into evidence the very documents that Justice Quin ruled should not have been disclosed by CITIA to the ATO. Despite the fact that the Cayman Islands Grand Court had ordered CITIA to write to the ATO seeking its undertaking not to use those documents, the ATO refused to do so, and Justice Perram supported their position. Judgment in the substantive civil tax proceedings is still awaited, although a criminal prosecution has now been abandoned by the Australian government.
Although it is understood that CITIA has an appeal pending against Justice Quin’s judgment, CITIA has since been ordered to pay more than US$143,000 in legal costs to the two Cayman companies whose documents were produced and disclosed.
The Bermuda experience
There have been two recent cases of interest in Bermuda.
The first was the judgment of Justice Hellman in the case of Bunge Ltd v Minister of Finance4, which was reviewed on appeal by the Court of Appeal for Bermuda in Minister of Finance v Bunge Ltd5. The issue in that case was whether the court should order disclosure to the taxpayer/requested party of the government of Argentina’s underlying TIEA request, in the interests of fairness. Justice Hellman and the Court of Appeal for Bermuda both concluded that, while requests from foreign governments were generally confidential, the right of confidentiality was not absolute, but was subject to the court’s discretion to order disclosure to the taxpayer or the requested party in court proceedings. The courts therefore ordered the ministry of finance to disclose to Bunge so much of the TIEA request as was necessary to show that the request actually satisfied the requirements of the TIEA and the Bermuda legislation.
The second case has resulted in two recent judgments of Justice Hellman: Ministry of Finance v E, F, H, and O6, followed by Ministry of Finance v O7. In his judgments, Justice Hellman ruled, once again, that the ministry of finance was obliged to disclose so much of the TIEA requests as was necessary to show that the requests actually satisfied the requirements of the TIEA and the Bermuda legislation. Although the judge went on to reject the substantive challenges asserted by the requested parties on their merits, he also addressed two important issues of law and practice.
The first issue arose out of a provision in Bermuda’s recently amended legislation, which suggested that a TIEA request could be complied with, even if it was technically non-compliant, provided that the minister of finance concluded that compliance would be “in the interest of Bermuda.” The judge gave a clear indication that, in his view, compliance with a non-compliant TIEA request for purely political reasons would be unlawful and subject to judicial review.
The second issue related to the compliance costs of the document production exercise. The requested party maintained that the costs of compliance should be borne by the ministry of finance and the foreign tax authority. The judge concluded, however, that the requested party should generally bear the costs of the compliance exercise (which is to be treated, therefore, as just another cost of doing business in Bermuda).
It remains to be seen whether there will be any further appeals in these cases.
There is likely to be a steady stream of TIEA-related litigation in the coming months and years, notwithstanding the clarification that has already been provided by the various recent judgments. The areas that are most likely to generate further debate relate to the true scope of the court’s power of judicial review; the tension that arises between the right to a fair hearing and the need for an appropriate level of confidentiality for sensitive tax investigations; and the circumstances in which a ‘tipping off’ offense might be committed by a requested party.
If nothing else, the recent case law demonstrates that the legislative regime relating to TIEAs in each jurisdiction can be something of a legal and commercial minefield, especially for those banks and corporate and professional service providers that find themselves in the middle of a TIEA dispute, caught between a governmental request and a court order on the one hand, and an agitated taxpaying client on the other.
- See, for example, the Singaporean case of Comptroller of Income Tax v AZP  SGHC 112, and the Jersey case of APEF Management Company 5 Ltd v Comptroller of Taxes  JRC 205A,  JRC 262.
- See, for example, the Singaporean cases of Comptroller of Income Tax v BJX  SGHC 145, Comptroller of Income Tax v BJY  SGHC 173, and Comptroller of Income Tax v BLM  SGHC 212, and the Jersey cases of Volaw Trust & Corporate Services Limited and Larsen v Comptroller of Taxes  JRC 095,  JCA 239; Taylor Fladgate & Yeatman Limited v Comptroller of Taxes  JRC 064.
-  FCA 1020.
-  SC (Bda) 19 Civ.
-  CA (Bda) 4 Civ.
-  SC (Bda) 43 Civ.
-  SC (Bda) 60 Civ.