Tax Information Exchange Agreements (TIEAs) - Part1

Are tax havens losing their charm?

Offshore jurisdictions, which are normally considered tax havens, play a very important role in international business transactions. Recent developments with respect to international tax matters, initiated by the Organisation for Economic Cooperation and Development (OECD) are seen to significantly affect the way these jurisdictions are expected to be managed in the future. We discuss here, in the first part of this article, the broad initiatives undertaken and their significance. In the sequel to this topic which will appear in our next newsletter, we shall discuss the recent developments and what is in store for the future.

In 2009 many offshore jurisdictions, better known as tax havens, suddenly began giving more commitments to exchange information for tax purposes. Many countries around the world, including offshore jurisdictions, have accepted the principles of transparency and exchange of information with respect to international tax matters developed by the Organisation for Economic Cooperation and Development (OECD). On 2nd April 2009, OECD issued a progress report on the implementation of internationally agreed tax standards for 84 jurisdictions that participate in the Global Forum on Transparency and Exchange of Information. The report shows there are commendable leads, both on how widely the standards are accepted and the extent to which they have been implemented by these jurisdictions. In July 2008, the G8 Heads of State and Governments urged all countries that have not yet fully implemented the OECD standards of transparency and effective exchange of information in tax matters to do so without further delay, and encourage the OECD to strengthen its work on tax evasion. Similarly, the action plan issued by the G20 following its meeting in November 2008 recognised the importance of the OECD work in this area and urged that failures to implement the standards should be vigorously addressed.

Global Forum on Transparency and Exchange of Information
The jurisdictions that have made commitments to transparency and effective exchange of information, both OECD and non‐OECD jurisdictions, have worked together in the Global Forum on Taxation to develop the international standards for transparency and effective exchange of information in tax matters. A major achievement of this collaboration is the development of the 2002 Model Agreement on Exchange of Information on Tax Matters. This model has been used as the basis for negotiations of more than 70 Tax Information Exchange Agreements (TIEAs).

To help achieve a level playing field, jurisdictions were encouraged to fully implement the principles of transparency and exchange of information for tax purposes. Further, they were asked to review their policies in relation to specific areas and report the outcome of their reviews at the next meeting of the Global Forum. Jurisdictions were also encouraged to negotiate agreements allowing for the exchange of information on tax matters.

Standards of Transparency and Exchange of Information
The OECD’s Global Forum on Transparency and Exchange of Information has developed standards of transparency and exchange of information that were adopted by the G20 Ministers of Finance at the meeting in Berlin in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters in October 2008. They serve as a model for the vast majority of the 3600 bilateral tax conventions entered into by OECD and non OECD countries and may now be considered as the international norm for tax cooperation.

The standards require:
• Exchange of information on request where it is “foreseeable relevant” to the administration and enforcement of the domestic laws of the treaty partner
• No restrictions on exchange caused by bank secrecy or domestic tax interest requirements
• Availability of reliable information and powers to obtain it
• Respect for taxpayers’ rights
• Strict confidentiality of information exchanged

Tax Havens.....
In a report issued in 2000, the OECD identified a number of jurisdictions which it categorised as tax havens according to criteria it had established. 6 of them (Bermuda, Cayman Islands, Cyprus, Malta, San Marino, The Bahamas) made pre‐commitments to the standard and so were not included in the list. Between 2000 and 2002 the OECD worked with these jurisdictions to secure their commitment to implement the OECD’s standards of transparency and exchange of information. In all, 38 jurisdictions made formal commitments to implement these principles, including a number of jurisdictions that had already committed to these standards prior to the issuance of the report.

Access to Bank Information for Tax Purposes
In parallel with the work on harmful tax practices, the OECD is examining the extent to which OECD member countries and observer countries have access to bank information for tax purposes. In 2000, Improving Access to Bank Information for Tax Purposes was published. The report set out an ideal standard of access to bank information, namely, that “all Member countries should permit access to bank information, directly or indirectly, for all tax purposes so that tax authorities can fully discharge their revenue raising responsibilities and engage in effective exchange of information with their treaty partners”. The OECD has been closely monitoring the progress made in implementing this standard and has issued two progress reports, in 2003 and 2007. With the recent announcements by Austria, Belgium, Luxembourg and Switzerland, all OECD countries now endorse this standard.

Pushpakaran K. Parambath
 Partner, Incorporations.