Tax Information Exchange Litigation in Offshore Jurisdictions

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There have been a number of decisions published recently by the courts in various international financial centres such as Bermuda, the Cayman Islands, Jersey and Singapore, that have considered the meaning and effect of inter-governmental Tax Information Exchange Agreements (TIEAs) and their enabling legislation.

These court decisions are the direct result of an increasing number of judicial review challenges asserted by taxpayers and requested parties to the legality of tax information production notices and orders issued under TIEAs, in circumstances where TIEAs are still relatively novel legal instruments.

In some recent cases, tax information request notices have been held by the courts to be unlawful; and in other recent cases, the taxpayers have persuaded the courts to order disclosure of confidential documents relating to the circumstances of the requests which the requesting governments would have preferred to keep secret.

Although there have been a number of cases in which the taxpayers’ challenges have ultimately been rejected by the courts, the litigation process associated with those challenges (including efforts made by taxpayers to litigate the merits of the underlying tax claim by reference to expert evidence of foreign tax law) has resulted in considerable expense, delay, and inconvenience not only to the requesting and local governments, but also to the local corporate and professional service providers, and to the taxpaying clients.

The most dramatic recent case was one heard by Mr. Justice Quin sitting in the Grand Court of the Cayman Islands, relating to the legality of four TIEA requests from Australia. He gave a judgment dated 13 September 2013, in the case of MH Investments Ltd & JA Investments Ltd v Cayman Islands Tax Information Authority.

What makes the case interesting is 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 the legality of the requests.

By his judgment, Quin J quashed the decisions of the Cayman Islands Tax Information Authority (CITIA) to provide information to the Australian Tax Office (ATO) pursuant to four requests made under the TIEA between the Government of Australia and the Government of the Cayman Islands.

The court also gave directions that CITIA should write to the ATO formally revoking its consent to the divulging of the requested parties’ confidential documents in tax court proceedings in Australia, seeking the ATO’s undertaking that it would not disclose their documents in Australian court proceedings, and demanding the immediate return and destruction of copies of those of the requested parties’ documents as had been unlawfully provided by CITIA to the ATO.

Without the benefit of an enabling provision under the TIEA, the Grand Court 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. Quin J 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”.

Since the case was decided after disclosure had already been given, Quin J’s judgment was no more than a Pyrrhic victory for the taxpayers and requested parties. Indeed, in Hua Wang Bank Berhad v Commissioner of Taxation (No 7)1, the Federal Court of Australia gave a judgment that completely undermined the effectiveness of Quin J’s judgment. Perram J was asked to admit into evidence the very documents that Quin J ruled should not have been disclosed by CITIA to the ATO. Despite the fact that Quin J had ordered CITIA to write to the ATO seeking its undertaking not to divulge the documents in court proceedings in Australia and demanding the immediate destruction or return of the documents to CITIA, the ATO refused to give the suggested undertaking, did not propose to return the documents to CITIA, and, to the contrary, positively sought to rely on them in Australian court proceedings.

Perram J concluded, contrary to Quin J’s judgment, that the ATO’s request was in accordance with the TIEA, so that an obligation arose on the part of the Cayman Islands to respond to it, with the effect that CITIA’s response of 5 May 2011 was not only in accordance with the TIEA but required by it. The fact that the Grand Court of the Cayman Islands had subsequently quashed that decision was found to be a matter of domestic Cayman Islands law only and could have no effect, as a matter of Australian law, upon the lawfulness of the ATO’s receipt and use of that material. Perram J rejected all of the taxpayers’ arguments to the effect that the evidence was illegally or improperly obtained, and that the fact that the use of such evidence might be an offence under the laws of the Cayman Islands was irrelevant to their use in Australian proceedings.


The recent case law demonstrates that the legislative regime relating to TIEAs in each offshore jurisdiction can be something of a legal minefield, especially for those corporate and professional service providers that find themselves in the middle of a tax information exchange dispute, caught between a governmental request and a Court Order on the one hand, and an agitated taxpaying client on the other.

Corporate service providers and professional service providers are required not to “tip off” their clients that they may be under investigation or the subject of an imminent information request, and yet they must also take care to inform their clients, at the outset of any engagement, of the limits to their obligations of confidentiality. They are often caught between the proverbial rock and a hard place, which is not a comfortable place to be.  


1 [2013] FCA 1020


 

Topics:  Confidential Information, Foreign Jurisdictions, International Litigation, International Tax Issues, TIEA

Published In: Civil Procedure Updates, General Business Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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