Exchanging of tax information

[2014] Under pressure from the Organization for Economic Co-operation and Development (OECD), states known for their investors-friendly tax systems (so called ‘tax havens’) for some years have been concluding tax information exchange agreements enabling, in some circumstances, access to information of substantial significance for tax basis, assessment and collection. Poland for instance concluded such agreements with Andorra, Belize, Bahamas, Bermuda, British Virgin Islands, Dominica, Gibraltar, Grenada, Guernsey, Cayman Islands, Liberia, San Marino and Isle of Man.

Due to the fact that many of these agreements have not yet entered into force, or have just recently become enforceable, the question as to whether they will constitute an efficient tool for information exchange remains unanswered. An interesting forecast in this regard may be the precedent decision issued on September 13, 2013 by the Grand Court of the Cayman Islands. On the basis of this decision the court ordered the Tax Information Authority to delete any data and documentation forwarded to the Australian Taxation Office under the tax information exchange agreement. The Court also prohibited any use of the disclosed information.

The case concerned two companies with their seats in the Cayman Islands – M.H. Investments and J.A. Investments. The Australian Taxation Office (ATO) has for some years investigated the structural scheme and capital transfers between the Cayman companies and their subsidiaries, allegedly owned by accountants Vanda Gould and John Scott Leaver. The structure involved Cayman Islands companies – shareholders of four subsidiaries which received income primarily from share transactions. These profits were transferred to companies in the Cayman Islands. Australia claimed that the accountants were major beneficiaries of the Cayman companies. Therefore ATO submitted four requests for information and transfer of documents related to the operations and ownership structure of the two companies. These requests were based on the tax information exchange agreement concluded on March 30, 2010 between Australia and the Cayman Islands. The agreement came into force on February 14, 2011.

Australia in the two documents requested data and documentation concerning tax year completed on June 30, 2011 (in accordance with Australian tax provisions), as well as consent to use the received information in court proceedings and to forward them to the British tax authorities HMRC.

Both companies submitted complaints to the Cayman Grand Court, raising the following charges:

  • Subject of the request directed by ATO concerned specific period which may not be covered by the tax information exchange agreement. In accordance with the agreement, only information concerning tax periods after July 1, 2010 are subject to exchange,
  • Information obtained by tax authorities in the Cayman Islands was received illegally due to the fact that the necessary formalities with respect to the companies had not been fulfilled,
  • Consent awarded to ATO to use the information in court proceedings in Australia and to forward them to other tax authorities was granted illegally.

The court in the Cayman Islands maintained the companies’ standpoint. In its decision, issued on September 13, 2013, it pointed out that the tax information exchange agreement cannot infringe upon other legislative acts expressing fundamental legal principles. In accordance with the Confidential Relationships Preservation Law in force in the Cayman Islands, the use of information in court proceedings and by any other tax authorities shall take place upon consent of a Cayman court, whereas the company directors, whom the collected information concerned – shall be notified of the data of the tax authority and the scope of information concerning the company’s operations required by such authority. The companies should be questioned in relation to such request. Moreover, the court declared infringement of the Bill of Rights, in particular – of the right to privacy, confidentiality of correspondence and ownership.

In its decision, the Cayman court ordered immediate removal of all information collected by the tax authorities as well as immediate notification to ATO of the order to return or destroy such information and prohibition to use them in court proceedings and transfer them to foreign tax authorities.

As a result, ATO filed a case with the Australian Federal Court which claimed that the decision issued by a court in the Cayman Islands is not binding in Australia, therefore although is may constitute infringement of the law in the Cayman Islands, the information may be used in the intended manner. As a result Vanda Gould and John Leaver were indicted.

Significance of the decision of the Cayman court and the future of tax information exchange agreements

Certainly current circumstances do not signalize that the agreements will be no longer valid. However it is an important warning sign for tax authorities that they cannot ask for, transfer and receive information on taxpayers without limitations. Transfer of any information must have solid grounds in the provisions of tax information exchange agreements but also in other norms of value equal to the value of legal principles (such as the Constitution, the European Convention on Human Rights).

Therefore it is worth paying attention as to whether the information transferred upon request of tax offices of another state or information received by the Polish tax authorities have not infringed conditions provided in the agreement and whether they do not infringe upon human rights expressed for instance in the Constitution. The Cayman Islands case is precedential in terms of states from the common law system. This does not mean however that such situation could not take place in civil law countries such as Poland. It is worth then attempting to verify in court if the information transferred and, in particular, the information received by the Polish tax authorities conforms with the law. If illegality of such information is proved, any possibility to use them in any tax or court proceedings will be blocked.


Robert Nogacki, Adriana Panas

Robert Nogacki, legal advisor, is the owner of Skarbiec Law Firm whose major area of expertise is tax planning.

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