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IFA Congress: Exchange of Information – Recent Developments and Protection of Taxpayers’ Rights

22.09.2015 Author: Iryna Kalnytska
Source: CEE Legal Matters

One of the main duties of tax authorities is collection of taxes and control over the tax obligations of taxpayers and individuals. Furthermore, the tax authorities are responsible for investigation of tax evasion and avoidance schemes. With no doubt cooperation between countries through international exchange of information about taxpayers’ data plays a crucial role in dealing with this phenomenon.

Thus, one of the main topics under consideration during the IFA 2015 congress in Basel was the process of information exchange and its impact on taxpayers’ rights. As Philip Baker - an expert in international taxation and the representative of the Field Court Tax Chambers – said: the only thing that BEPS is missing - is taxpayers’ rights and their protection in view of global trends of transparency and combating tax avoidance.

Due to the mentioned trends in the international environment, the standards of information exchange have changed dramatically over the last several years.

Overview of the international instruments in the process of information exchange

  • At international scale the process of information exchange is governed, inter alia, by the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention on Mutual Assistance) that provides for exchange of information on request, automatic and spontaneous request of information. The Convention was developed jointly by the OECD and the Council of Europe in 1988 and amended by the Protocol in 2010. Currently the Convention is signed by more than 80 countries including all G20 countries, all BRIICS countries, almost all OECD countries and a growing number of developing countries.

It should be noted that the Convention on Mutual Assistance is the most comprehensive multilateral instrument available for all forms of tax cooperation in order to combat tax evasion. The Article 6 of the Convention on Mutual Assistance provides for automatic exchange of information, and Competent Authorities from 61 jurisdictions have signed the respective multilateral agreement (hereinafter - the Multilateral Agreement).

Such multinational agreement is a framework agreement, specifying the details of what information will be exchanged and when. However, as the agreement is multinational the actual information exchange between states will be possible after subsequent bilateral exchanges between particular signatories that file the notifications under Section 7 of the agreement (that still has not been done).

In line with the international movement towards transparency and exchange of information, lots of jurisdictions, generally considered as tax heavens, have joined the Convention on Mutual Assistance in 2014 – 2015 (Mauritius, Seychelles, Philippines, Cyprus, Belize). Of course, this does not mean that those states will start transmitting taxpayers’ data to other jurisdictions immediately. Signing of the respective bilateral agreements is still required. However, such trend undoubtedly shows the willingness of countries all over the world to be compliant with the international standards of transparency and exchange of information.

  • Furthermore, most double tax treaties (DTT) between countries include the provisions related to the exchange of information based on the OECD Model Tax Convention on Income and Capital (Model Convention). According to the article 26 of the said Model Convention the information may be exchanged when it is considered as relevant for carrying out the provisions of the convention and the domestic laws of the contracting states. The considered relevance means that the requested information relates to the administrative or court trial in the requested state and the request is made under the international convention and does not contradict to the national legislation of the requested state.

Under the Model Convention a country is allowed not to provide the requested information, if the respective request does not seem pertinent to the income details of the particular taxpayer. Thus, the request on exchange of information may be rejected, especially if it is construed as a “fishing expedition” by the requested state.

Actually the Article 26 of the Model Convention considers three main restrictions on use of taxpayers’ data: (i) first, such information may not be used for carrying out administrative measures that do not comply with the laws of the contracting states; (ii) second, it is not allowed to collect information, which is not obtainable under the laws or in a normal course of the administration of the contracting states; (iii) third, it is forbidden to collect information, which may disclose any trade, business, industrial, commercial or professional secret or disclosure of which would be contrary to public policy.

The third restriction is the most controversial, since in some countries even the name of a taxpayer, in case if he/she is a holder of a bank account, may constitute a professional secret. As a result the requesting country may reject the respective request of information.

  • Moreover, the OECD in response to the G20 call to strengthen fighting tax evasion and ensure tax compliance has developed the Standard for automatic exchange of information at their meeting in St. Petersburg, Russia in September 2013.

Further, a new global standard was endorsed by the G20 Finance Ministers and Central Bank Governors in February 2014. This new standard for Automatic Exchange of Financial Account Information for Tax Purposes (“the Standard”) includes the Common Reporting Standard (CRS) containing the due diligence rules for financial institutions to follow, the Model Competent Authority Agreement (MCCA) and commentaries that illustrate and interpret the above-mentioned documents. In order to restrain multinational tax avoidance and offshore tax evasion in developing countries, the Global Forum on Transparency and Exchange of Information for Tax Purposes delivered a Roadmap to the G20 Development Working Group in assistance to developing countries for meeting the Standard’s requirements and overcoming the obstacles in this way.

In August 2015 the CRS Implementation Handbook was published, providing assistance to the government officials in the implementation of the Standard and setting out the necessary steps to be taken. In broad terms under the Standard, the financial institutions report information on details of financial assets they hold on behalf of a taxpayer to the tax administration in the jurisdiction, in which they are located. However, in order to implement the Standard, each country shall meet the four major requirements:

  • Translate the reporting and due diligence rules into domestic law;
  • Select a legal basis for the automatic exchange of information;
  • Put in place the IT and administrative infrastructure and resources;
  • Ensure protection of taxpayers’ personal data;

Currently more than 90 jurisdictions have committed to implement the above mentioned requirements and start the automatic information exchange by 2017 or 2018.

Also, within the BEPS’s project the OECD has developed the Action 5 that is aimed at combating harmful preferential regimes and enhancing transparency by governments and MNEs by means of achieving the standard of automatic exchange of information between tax authorities.

In particular, as a part of the BEPS’s Action 5, the compulsory spontaneous exchange of rulings related to the preferential regimes is required. Upon analysis of the initiatives provided by the Action 5, it may be concluded that if certain information about a taxpayer pursuant to the Article 7 of the Convention on Mutual Assistance has to be disclosed without a request, noncompliance with this spontaneous exchange of rulings would lead to a regime being clarified as preferential that is harmful.

  • Other international trends aimed at transparency in the tax sphere

On 20 of May 2015 the European Commission approved the forth EU anti-money laundering Directive 2015/849. The Directive is applicable to all obliged entities as defined therein (financial institutions; auditors, external accountants and tax advisors; other independent legal professionals, trusts or company service providers and others).

Under the Directive the member states will be required to hold information on the beneficial owners of all corporate and other legal entities (including trusts) incorporated within their territory in a national central register. Competent authorities and entities subject to the Directive will have access to the register, as well as any person demonstrating "legitimate interest".

The member states are obliged to implement its provisions into their national legislation within two years after the official publication of the Directive (June 2015). The Directive and implementation of its provision is another step forward to development of new tax transparent and cooperative environment at international scale.

Taxpayers’ rights in course of the BEPS’s Action 5 and the process of information exchange

Needless to say that tax administrations of different countries highly supported the trends on automatic exchange of taxpayers’ data since they facilitate the fighting with tax evasion and avoidance.

However, the recent promoting in international cooperation in tax matters through exchange of information may significantly affect the fundamental taxpayers’ rights for confidentiality, protection of personal data, the right to raise defense and to be informed.

Each country in view of its national jurisdiction applies differently the rules of information exchange.

In most cases the exchange of information is not a public procedure that occurs between tax administrations of two countries. Thus, certain unbalance may occur between this process and the right of privacy of the taxpayer who may be even unaware of such a process.

Therefore, at one of the Seminars at the IFA Basel congress the following rights of a taxpayer in the process of information exchange were discussed:

  • rights to be informed on gathering data;
  • rights to raise defense and to challenge such gathering;

Furthermore, such questions as which state shall inform the taxpayer (the requesting or the requested one) and when (prior the provision of the information or afterword), should there be any exceptions to the general rule, also arose.

The international standard of the Global Forum recognizes protection of taxpayer’s rights (“Notification requirements and rights and safeguards”). However, such rights are not absolute since they should be compatible with the effective exchange of information:

  • It should not prevent or unduly delay the effective exchange of information; and
  • It should consider exceptions from the prior notification (e.g. in cases, in which the information request is of a very urgent nature or the notification may frustrate the effective exchange of information).

It seems that it is quite difficult to find the right balance between the protection of the taxpayers’ rights, insurance of confidentiality of personal data, and meet the requirements of the Standard.

During the IFA Basel congress the following best practices were proposed by the specialists in international taxation:

  • A taxpayer should be informed that a cross-border request for information is to be made.
  • Where a cross-border request for information is made, the requested state should also be asked to supply information that assists the taxpayer.
  • Provisions should be included in tax treaties setting specific conditions for the exchange of information.
  • The taxpayer should be given access to the information received by the requesting state.
  • The information should not be supplied in response to a request where the originating cause was the acquisition of the stolen or illegally obtained information.
  • The requesting state should provide confirmation of confidentiality to the requested state.

At the same time the implementation of the above-mentioned best practices absolutely depends on the national policy of the country and may vary from country to country.

Example of standards of information exchange in specific countries

As it was mentioned in part I in this publication, the process of information exchange is governed inter alia by the Convention on Mutual Assistance. Article 4, para 3 of the said Convention provides for the possibility to each signatory to declare that according to its national legislation its authorities may inform its residents about exchange of information requests before the information is transmitted to the other state.

As of February 2015 the following states have endorsed such declaration: Japan, Latvia, Netherlands, Poland and USA. Switzerland is also going to make such declaration with certain exceptions.

As to the Multilateral Agreement such document does not address the right of the individual to be informed, to take part in the investigation process or to challenge the result of the process in court. The contracting states, however, may govern these issues in the respective DDT, as Switzerland and Spain did, for instance. The protocol to DDT between Switzerland and Spain consists of the mutual consent of both states that the taxpayers’ participation rights in the requested state remain applicable before the information is transmitted to the requested state.

In Germany, for example, there are provisions in the Fiscal Code (para 117 par.4. and para 91 par.1) entitling the concerned person to be informed and heard before the information is handed over to the requested state. Some expectations, however, are available in cases when the request is based on the EU Mutual Assistance directive and when an immediate decision seems to be necessary due to the public interest or imminent danger (para 91 par.2 of the Fiscal Code). Also, it should be noted that no right to be heard is granted if no domestic party is involved in the exchange of information process.

In Luxemburg, a concerned person is not notified of the request for exchange of information at all. However, the information holder tends to inform the taxpayer about the request until 2014. Moreover, resident and nonresident taxpayers are entitled to raise objections to the request and further delivery of the information with the administrative courts. The situation has changed in November 2014, when the Luxemburg parliament approved the revision to the Tax code, according to which the tax authority may forbid the information holder to inform the person concerned of the request of information, if the requesting state asked to do so.

As of 1 January 2014 the Netherlands do not notify taxpayers of the respective request. Although, before this date the Netherlands tax authority usually provided for a notification procedure as well as for the right to appeal against the delivery of the collected information on the local taxpayers. Such practice was criticized by the Global Forum in 2013 since the appeal process is very time consuming and may be used as a delaying tactic.

The Ukrainian legislation does not provide for the notification procedure or the right of a taxpayer to appeal against the transmission of the information.

Ukraine has ratified the Convention on Mutual Assistance in 2008 and the Protocol thereto in 2013 that facilitates the process of information exchange between Ukraine and other signatories’ countries.

Also, Ukraine has signed a number of DTT (based on the OECD Model) containing the respective provision regarding the exchange of information in the Article 26. According to the said Article the requested information about a taxpayer shall be treated as confidential and the requested country has the right to disclose such information only to the competent authority (court of law or other authority responsible for the administration of taxes).

According to the national legislation the exchange of taxpayers’ data is governed by the Order of the Ministry of Finance of Ukraine no. 1247. According to the said Order, the information under the request may be provided only if (i) there is the respective international agreement between the states and (ii) if there are reasonable grounds to believe that the taxpayer’s activity allows to hide certain income from taxation.

In general, the procedure for satisfaction of the foreign authority’s request for information is rather vague and the decision is taken in every particular case at the discretion of the tax authority. For instance, according to the Order the request may be rejected if:

  • there is no DTT or other international agreement between Ukraine and the requesting state;
  • the request is sent by an incompetent authority;
  • the requested information is not considered by the Convention on Mutual Assistance or collection if such information goes beyond the competence of the tax authority.

As to the automatic exchange of information, Ukraine has not signed the Model competent authority agreement yet and is still at the stage of implementation of the AEOI standard. Hence, as for now, the exchange of information on request is the most widespread instrument of receipt of the information about the taxpayers for the Ukrainian tax authorities.

Following the global trend of transparency and combating tax evasion from 2013 Ukraine is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. The membership in the Global Forum provides Ukraine with the opportunity to have access to the analytic and theoretical base of the Forum in order to use the instruments on combating tax evasion more effectively.

Also in April 2015 the Cabinet of Ministers of Ukraine approved the draft agreement with the US government aimed at fulfillment of the provisions of the FACTA and authorized the Ministry of Finance of Ukraine to sign the respective agreement. By signature of the said agreement Ukraine undertakes to inform the IRS on every bank account in Ukrainian banks opened by American taxpayers and their affiliates. After the official signature of the agreement it will be ratified according to the national legislation of Ukraine.


Sharing the information about taxpayers’ activities in other jurisdictions is crucial in the global trend of combating tax avoidance schemes. The OECD initiatives resulting on Global Standard for automatic exchange of information and the BEPS action plans will finally and inevitably eliminate the last obstacle in this way - the lack of transparency.

However, incensement of transparency, cooperation, and accountability among financial institutions and tax administrations raises substantial concerns regarding the protection of taxpayers’ rights for confidentiality of personal data and for challenging the collection of the information.

Thus, it is highly important that at least minimal standards related to the taxpayers’ rights are being introduced in the national legislation of the countries in the process of implementation of the global standards on automatic exchange of information.

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