Tax Information Exchange Agreements: Part 1

1.      Since the G20 summit in April 2009, Tax Information Exchange Agreements have moved firmly up the offshore agenda. Countries that had signed 12 or more got on to the coveted “white list”. However they cannot rest on their laurels: in the current climate we can expect pressure to sign many more, and to apply them effectively.

2.      Jersey has now signed 14 TIEAs, the most recent last week with Australia. This follows hot on the heels of TIEAs signed earlier this year with the UK, France and Ireland.  TIEAs with the US, Germany, the Netherlands and seven Scandinavian countries were signed between 2002 and 2008. TIEAs take some months to come into effect after signature, because of the need to be ratified by both countries’ legislatures.

3.      Some have expressed concern that sharing tax information with such countries will scare clients away from doing business with the offshore finance industry. The UK government has predicted this potential effect with relish: those are not the kind of clients it wants Jersey and the other “British” offshore finance centres to have.

4.      Others have said TIEAs are just window dressing: cumbersome and ineffective documents, useful to deter criticism of offshore, but unlikely to mark a real change in the way offshore finance centres are used by tax evaders and aggressive tax avoiders.

5.      There is something in both positions. TIEAs should scare some clients off, because they are potentially an effective way for countries to obtain information from offshore jurisdictions to help them in investigating the tax affairs of their citizens. (Although, as financial service providers are expected to retain documents relating to exiting clients for some years, they could still be obliged to hand over information even after a client has left.)

6.      On the other hand experience so far does not suggest that they open the floodgates. Only the USA and the Netherlands have made requests of Jersey so far under the TIEAs currently in force, and by April this year they totalled a mere seven. Some of those requests have led to information being passed to the requesting country, and some are stuck in discussions.

7.      I will not here go into the detail of TIEAs and the regulations which give effect to them in Jersey. Suffice it to say that the requesting country must jump through a large number of hurdles before Jersey is obliged to obtain and hand over the information sought. There must be an ongoing investigation, into a known person or entity, for either criminal tax evasion or civil tax avoidance (if the latter, it must be avoidance occurring after the TIEA came into force). A good deal of detail must be provided about the nature of the investigation and the need for the information, and it must be shown that the requesting country has exhausted the avenues available to it domestically and that there is reason to believe that Jersey has information it needs. “Fishing expeditions” are not allowed: these requests must be targeted and precise.

8.      Yet there is good reason to expect use of TIEAS to be ratcheted up in the years to come. The USA is rather more interested in Caribbean OFCs vis a vis tax. By contrast the tax authorities in the UK, France and Australia all have substantial experience of and concerns about the use of Jersey as a tax shelter, and will be keen to bolster ongoing investigations by obtaining information from Jersey. They scent big money.

9.      The UK tax authority, HMRC, has recently used its domestic powers to obtain information on 400,000 UK residents with offshore bank accounts in Jersey, in banks that have a UK presence. It believes that some 20% of them are tax evaders. It may well seek more information from Jersey on those taxpayers by means of a TIEA request. It is clear that HMRC is serious about clamping down on the use of Jersey to conceal assets and income from the taxman. The recoveries it expects to make dwarf the cost of its investigations.

10.  What should financial services providers in offshore finance centres do to prepare for a possible avalanche of TIEA requests? Jersey’s experience is slender, and guidance from industry, regulator or court decisions is non-existent.

11.  In the next part of this article I will look at the way in which TIEA requests can impact on FSPs, and how they can respond.

OECD Tax Information Exchange Agreement page: http://www.oecd.org/document/7/0,3343,en_2649_33745_38312839_1_1_1_1,00.html

Jersey Tax Information Exchange Agreement page: http://www.gov.je/TreasuryResources/IncomeTax/TIEA/default.htm

United Kingdom Tax Information Exchange Agreement page: http://www.hmrc.gov.uk/international/tiea.htm

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