Exchange of information on Request to Enhance Tax Transparency
Introduction:
The legal exchange of tax information between jurisdictions is key to tax transparency.
Tax officers can be overwhelmed with the many sources of information and developments in international tax transparency. This blog will hopefully provide some useful, more concise, information regarding the exchange of information.
Exchange of Information (EOI)
The three main types of EOI are:
- Exchange of Information on Request (EOIR),
- Automatic Exchange of Information (AEOI),
- Spontaneous Exchange of Information (SPONEX).
This blog will focus on EOIR and its importance for greater tax transparency.
EOIR
EOIR is required when a country’s tax administration is reviewing the tax affairs for one of their taxpayers and the administration has reason to believe that the taxpayer is not providing information regarding assets and/or income in/from another country.
The key components to effective EOIR are:
- Clarity and proper details within the request,
- Foreseeable relevance,
- Availability and access to the information requested,
- Timeliness of response.
We will discuss the most debated point (foreseeable relevance) by tax administrations and taxpayers. The standard for foreseeable relevance is intended to provide for exchange of information in tax matters to the widest possible extent and, at the same time, to clarify that Contracting States are not at liberty to engage in “fishing expeditions” or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer.
A simple example of foreseeable relevance is Mr. Smith is a resident of Country A. The tax administration of Country A has reason to believe that he has income and/or assets in Country B which he is not reporting and denies holding. Country A taxes all taxpayers based on their world income; therefore, the information held in Country B is foreseeably relevant to Country A’s tax assessment of Mr. Smith. Country A can therefore make an EOIR to Country B’s tax authority.
All EOI, including EOIR must be made to and from a country’s competent authority.
EOI Requirements
Countries that wish to exchange tax information must have a legal instrument in force. Countries may be parties to a bilateral agreement with another country, or a country can be signatory to a multilateral agreement.
The main agreements which allow for EOI are:
- Double Tax Agreement (DTA),
- The Convention on Mutual Administrative Assistance in Tax Matters,
- Tax Information Exchange Agreement (TIEA).
A Double Tax Agreement also can be referred to as a Double Tax Convention or Double Tax Treaty. This is a bilateral agreement between two countries who wish to have specific rules governing the taxation of economic transactions between the two countries. Issues such as withholding taxes on various types of income, business profits and permanent establishment rules are among the major articles in these DTAs. EOI also has an article specifically about how exchange of information should be conducted between the two countries.
The Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”) was developed by the OECD and the Council of Europe in 1988 and was amended by a protocol in 2010. The Convention is a multilateral instrument and is currently the most comprehensive instrument available for tax transparency. The Convention is also a very useful tool regarding Base Erosion and Profit Shifting (BEPS).
There are currently 151 countries signatory to the Convention which includes 34 CIAT members.
Note that some countries are signatory but have not yet enacted the proper domestic steps for entry into force of the agreement.
A TIEA is also a bilateral agreement whose sole purpose is to allow for the exchange of information between two countries.
Note that countries are rarely negotiating TIEAs now because of countries joining the Convention on Mutual Administrative Assistance in Tax Matters.
Model Agreements and Commentary
The United Nations (UN) and the Organisation for Economic Co-operation and Development (OECD) have model tax agreements/conventions which serve as templates for countries who wish to negotiate a new tax agreement or renegotiate an existing one. Note that countries do not need to follow a model convention, nor are they required to follow one verbatim.
https://financing.desa.un.org/sites/default/files/2023-05/UN%20Model_2021.pdf
These model conventions each have an article dedicated to EOI. Both model conventions have Article 26 as the EOI article. As opposed to other articles in the model conventions, which deal with taxation of income, there is very little variance in the EOI articles of each organisation.
Article 26, Paragraph 1 of the UN Model:
“The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws of the Contracting States concerning taxes…”
Article 26, Paragraph 1 of the OECD Model:
“The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States…”
Both the UN and the OECD models have an attached commentary that provides further explanation and examples for each article. The Article 26 commentary of each model convention are very good resources when reviewing EOI questions such as foreseeable relevance vis-à-vis a “Fishing Expedition”.
Note that both the UN and the OECD are currently revising their model conventions.
Jurisprudence
As mentioned earlier, taxpayers and their representatives will frequently challenge tax administrations regarding foreseeable relevance.
Triton Administration (Jersey) Limited v Comptroller of Revenue (2024) JRC282C
https://www.jerseylaw.je/judgments/unreported/Pages/[2024]JRC282.aspx
The taxpayer (Peder Prahl) being audited by the Swedish Tax Authority (STA) contended that the notices for tax information issued by the Jersey Competent Authority (JCA) to the Jersey company (Triton) were requesting information that was not foreseeably relevant to his tax affairs in Sweden because he contended that he was not a tax resident of Sweden.
The STA although not confirming the taxpayer’s residency, had reason to believe Mr. Prahl would be determined as resident of Sweden for the year being reviewed.
We must note that both UN and OECD Model Convention’s commentary states “In the context of information exchange upon request, the standard requires that at the time a request is made there is a reasonable possibility that the requested information will be relevant; whether the information, once provided, actually proves to be relevant is immaterial. A request may therefore not be declined in cases where a definite assessment of the pertinence of the information to an ongoing investigation can only be made following the receipt of the information.”
Commissioner Michael Birt of the Jersey Royal Court stated: “Secondly, it is contended that the JCA failed to have regard to the fact that Mr Prahl’s tax residence has not yet been determined. But that submission ignores the fact that the test is not whether Mr Prahl was tax resident in 2018; the test is simply foreseeable relevance, namely whether there is a reasonable possibility that he was tax resident for the relevant year.
For the reason given in relation to Ground 1, I find that there is such a reasonable possibility and accordingly the information sought is foreseeably relevant and amounts to tax information. In the circumstances where this Court is satisfied that this is tax information, the JCA’s decision to issue the notices requiring it pursuant to the Convention cannot be categorised as unreasonable or irrational.”
The Impact and Future of EOIR
From 2009 to 2023, the OECD reports that members have received nearly 510 000 EOIR requests for information, enabling the identification or collection of at least EUR 17 billion in additional tax. Due to the advances in EOI and taxpayers aware of potential assessments of taxes, penalties and interests, the OECD reports that Voluntary Disclosure program, offshore tax investigations and related measures have helped identify close to EUR 130 billion in additional revenues so far. Including 45 billion in developing countries.
https://web-archive.oecd.org/tax/transparency/index.htm.
Going forward, tax administrations are confronted with more sophisticated tax planners and in some cases, tax avoiders. It is vital that all administrations continue to develop their EOI procedures and technology to combat illicit financial flows and tax evasion.