Cayman ‘largely compliant’ on tax information exchange

While tax information exchange agreements work for the most part, according to the peer reviews of the Global Forum on Transparency and Exchange of Information for Tax Purposes, France is not satisfied with the current regime in Jersey, Bermuda and the BVI. France blacklisted the three jurisdictions as “uncooperative” to force a change. The OECD, meanwhile has already set its sights on a new system of automatic exchange of tax information.  


All is well in the world of tax information exchange, at least according to the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. The Forum published a ranking of 50 jurisdictions that have gone through two phases of peer reviews of the state of implementation of the OECD’s tax information exchange regime.  

Phase one looked at the laws and regulations that are in place to support tax information exchange agreements, and phase two focused on tax information exchange in practice. 

On the face of it, the results are positive. Of 50 jurisdictions, 44 were deemed compliant or largely compliant. While Austria and Turkey are regarded as partially compliant, only four jurisdictions – Cyprus, Luxembourg, the Seychelles and the British Virgin Islands – are not compliant with the existing tax information exchange regime. 


Minor shortcomings  

The Cayman Islands was ranked ‘largely compliant’ with only a few minor shortcomings in relation to the availability of ownership and accounting information highlighted in its phase two review. In detail the criticism noted that in cases where bearer shares are held by recognized custodians outside of the Cayman Islands, ownership information on the bearer shares may not always be available in Cayman and it may not be possible to enforce penalties for noncompliance on overseas custodians.  

The report highlighted that the registrar of companies does not have a system of monitoring compliance with ownership and identity information keeping requirements in respect of companies and partnerships. While legislative amendments have increased penalties for noncompliance, these are untested in practice, the report said. 

The peer review also criticized the fact that for entities not licensed with the Monetary Authority, no system exists to monitor compliance with accounting record-keeping requirements. This would make the legal obligation to keep accounting records difficult to enforce. 

As a result, Cayman was ranked compliant in eight of the 10 examined areas around tax information exchange and largely compliant in the remaining two. 

During the 2009 to 2011 period examined in the report, the Cayman Islands Tax Information Authority received a total 65 information requests, of which 64 were processed.  

Only one request could not be complied with due to legal issues. In that case, information could not be made available because the information requested predated the Tax Information Authority Law, which came into force in 2005. The law is the basis upon which tax information exchange arrangements can legally take effect in Cayman.  

The review stated that in cases where an inconsistency arises between the domestic legislation and an international agreement, which is scheduled as part of the TIA Law, the objective of the international agreement should be followed. This was confirmed by the Cayman Islands attorney general. 

The report noted that in the case, the Cayman Islands “recognized this inconsistency, and following the request has amended the TIA Law, which now allows for exchanging information relating to taxation matters that arose prior to 1 September 2005 where the TIEA so requires (s3(2) TIA Law). The [Cayman Islands Tax Information Authority] has informed the information exchange partner of the legislative amendment, and is now in the process of obtaining the information.”  


Bermuda and Jersey  

The French government does not seem to rate the OECD ranking too highly, and in September named Bermuda, Jersey and the British Virgin Islands in its official list of “uncooperative tax havens. 

All three jurisdictions have signed tax information exchange agreements with the European country. Since 2007, Jersey has received 36 exchange of information requests from seven different partners, and Bermuda received a total of 15 requests from 2009 to 2011. 

While the most recent rankings appear to confirm France’s assessment of the BVI as not compliant, Jersey and Bermuda quickly pointed to their Global Forum peer reviews, which attest them to be, just like Cayman, largely compliant. 

The French government, however, is unhappy with their compliance record, in particular an ongoing appeal to Jersey courts against the information disclosure in response to a French tax information request. 

In Bermuda the courts have also seen a wave of TIEA-related litigation challenging the legality of information requests. Alex Potts, special counsel, and Amy Murray, associate with Sedgwick Chudleigh in Bermuda, note in an article on recent TIEA litigation that even though the Bermuda and French government have not said it expressly, “it can be inferred” that the blacklisting is a direct consequence of an appeal in the Bermuda courts.  

“From the French perspective, Bermuda’s TIEA requests are not guaranteed to be enforced by the Ministry of Finance and the Bermuda courts in the way in which France would like, i.e., secretly and without the level of disclosure and delay associated with judicial review proceedings,” they note. 

The same could be said about the Cayman Islands, where the Grand Court quashed the decision of the Cayman Islands Tax Information Authority to pass information to the Australian Tax Office, because the documents sought concerned a period that predated the period covered by Cayman’s TIEA with Australia.  

According to the judgment, the Tax Information Authority had also failed to notify the companies subject to the tax information exchange request of “the jurisdiction making the request and the general nature of the information sought.” This is required by section 17 of the Tax Information Authority Law for cases that are not criminal or alleged criminal matters, provided the authority knows the whereabouts of the taxpayers concerned. 

In the circumstances, producing the information infringed the rights of those subject to the information requests to “a fair and public hearing” and their “rights to privacy” under the articles 7 and 9 of the Cayman Islands Bill of Rights. 


The future of tax information exchange  

In short, the Grand Court is calling for a process similar to Jersey and Bermuda’s, including the delays and possible hold-ups that have apparently vexed the French government. 

The decision also illustrates that overseas tax authorities have to carefully negotiate tax information exchange agreements and follow strict procedures to obtain the information they are looking for.  

But this is exactly what was intended by the OECD information exchange regime, note Appleby partner Andrew Bolton and associate Gillian Duffy, who wrote in an article that tax information exchange was never meant to be a free-for-all that would allow overseas tax authorities to ask for and do with the information they receive whatever they want, including passing it on to anyone who might claim to have an interest in it.  

While some tax campaigners may want to see this type of information exchange, it is not the TIEA system that was put in place by the OECD, they state. “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,” Bolton and Duffy write. 

Solomon Harris, the law firm that represented the Cayman companies that had filed for judicial review in the Australian case, said in a note, “It is important to emphasize that the Cayman court wholly supported the [Tax Information Authority]’s object of assisting foreign tax authorities by providing information in appropriate circumstances. However, it confirmed that the [Tax Information Authority] was not immune, when pursuing that object, from a duty to the subject of the request to ensure the information being requested should properly be given to the foreign tax authority.” 

“In this particular case, it turned out that the ATO had not properly informed the [Tax Information Authority] of the reasons it requested the information and the intended use of the information and, once those matters were considered, it was apparent that the information had not been provided in accordance with the TIA Law,” the law firm said. 

Given that it was the first case concerning the operation of the TIA Law, Solomon Harris noted, the decision gives “welcome guidance” to the Tax Information Authority, foreign tax authorities and the subjects of information requests on how information should be provided under law. 

In Jersey the French threat of imposing a withholding tax rate of 75 percent on all capital flows from France to the blacklisted jurisdiction seems to be working.  

In November amendments to the tax information exchange legislation came into force to address a number of perceived shortcomings of Jersey’s regime and to ensure the removal from the French blacklist.  

The changes are designed to limit the statutory scope for appeal to judicial review grounds only and to carve certain elements out of the scope of the judicial review. It also shortens the period for lodging an appeal to 14 days and forces appellants to go directly to the Privy Council, bypassing the Jersey Court of Appeal.  

In Bermuda the passing of similar legislative amendments was delayed in November. 

The episode highlights that the existing TIEA system can only be maintained if it is actually working for countries like France.  


Automatic exchange  

The OECD meanwhile has already stated its objectives for the future. At the Group of 20 Nations summit in St. Petersburgh, Russia, in September, OECD Secretary General Angel Gurria announced the organization would develop a new single global standard for automatic exchange of tax information and present it to the G20 by February 2014. The technical modalities of effective automatic exchange would be finalized by mid-2014. 

In November, members of the OECD Global Forum established a group to prepare the move to automatic exchange of tax information at the organization’s meetings in Jakarta, Indonesia. 

The main responsibilities of the group, of which Cayman is a member, will be to propose terms of reference and a methodology for monitoring automatic exchange of information.  

The group will also establish a set of criteria to determine when it would be appropriate for jurisdictions to implement automatic exchange considering in particular capacity constraints, resource limitations, the need to ensure confidentiality and the proper use of information exchanged, and helping developing countries identify their needs for technical assistance and capacity.