Australia's tax information and exchange agreement

Articles Written by Prashanth Kainthaje (Partner)

Australia, together with other members of the Organisation for Economic Cooperation and Development (OECD), has entered into Tax Information and Exchange Agreements (TIEAs) with a number of jurisdictions often referred to as tax havens or offshore financial centres. This article highlights some of the key features of Australia's TIEAs.

Background

Australia's TIEAs are modelled on the OECD's Agreement on Exchange of Information on Tax Matters (Model Agreement). The Model Agreement was developed as a consequence of the 1998 OECD Report, Harmful Tax Competition: An Emerging Global Issue (the 1998 Report). The 1998 Report identified 'the lack of effective exchange of information' as one of the key criteria in determining harmful tax practices. These concerns are not new. The Review of Business Taxation: A Tax System Redesigned (Ralph Report) also expressed a similar concern: see Recommendation 23.2(b) of the Ralph Report.

A mandate was given to a working group within the OECD to develop a legal instrument that could be used to establish effective exchange of information and the Model Agreement represents the standard of effective exchange of information for the purposes of the OECD's initiative on harmful tax practices.

The Model Agreement has two versions: a multilateral version and bilateral version. Australia has not entered into any multilateral TIEAs to date. As such, discussion of the multilateral version of the Model Agreement is beyond the scope of this article.

Which jurisdictions have entered into TIEAs with Australia?

To date, Australia has entered into TIEAs with Anguilla, Antigua & Barbuda, Aruba, Belize, Bermuda, British Virgin Islands, Cook Islands, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Monaco, Netherlands Antilles, St Kitts and Nevis, St Lucia, St Vincent & The Grenadines, Samoa, San Marino, The Bahamas, The Cayman Islands, Turks and Caicos Islands and Vanuatu. Not all of Australia's TIEAs are identical, although they are in substantially the same form.

Australia's TIEAs should not be confused with other agreements entered into with some of the above mentioned jurisdictions. The other agreements - sometimes referred to as 'mini-tax treaties' - generally allocate taxing rights between the relevant jurisdictions and Australia with respect to certain categories of income and sometimes also provide for transfer pricing adjustments. To date, Australia has entered into these agreements with Aruba, British Virgin Islands, Cook Islands, Guernsey, Isle of Man, Jersey and Samoa.

In addition, it should be noted that Australia's comprehensive double tax treaties contain exchange of information provisions.

Do residents of TIEA jurisdictions obtain any benefits?

Yes. Upon the relevant TIEA entering into force, residents of the of the relevant TIEA jurisdiction are subject to a lower rate of withholding tax on 'fund payments' made by trustees of managed investment trusts. In general terms, a 'fund payment' is so much of a payment from a managed investment trust that represents net income of that trust excluding dividends, interest, royalties, capital gains and capital losses in relation to CGT assets that are not taxable Australian property and amounts that are not from an Australian source. Typically, this would be payments representing Australian sourced rental income.

Assuming a managed investment trust does not have a substituted accounting period, the current rate of withholding on a 'fund payment' for the year of income ending 30 June 2010 is 22.5%. The rate of withholding will reduce to 15% for the year of income ending 30 June 2011 and 7.5% for the years of income ending 30 June 2012 and thereafter. The rate for residents of a non-TIEA jurisdictions and non-treaty countries is 30%.

What's in a TIEA?

The core provisions of Australia's TIEAs deal with the objects and scope of the TIEA, the type of taxes covered, the obligation to provide information upon request, tax examinations, the circumstances in which a request for information can be declined and the obligation on Australia and the other jurisdiction not to impose prejudicial or restrictive measures.

Objects and scope

The Object and Scope of the Agreement Article provides that the competent authorities of both jurisdictions shall provide assistance through exchanging information that is 'foreseeably relevant' to the domestic tax laws of the jurisdictions in question. Such information includes information that is foreseeably relevant for determination, assessment and collection of taxes, their recovery and the enforcement of tax claims or the investigation or prosecution of tax matters.

The Commentary to the Model Agreement states the following in relation to the 'foreseeably relevant' standard: The Agreement is limited to exchange of information that is foreseeably relevant to the administration and enforcement of the laws of the applicant Party concerning the taxes covered by the Agreement. The standard of foreseeable relevance is intended to provide for exchange of information in tax matters to the widest possible extent and, at the same time, to clarify that Contracting Parties are not at liberty to engage in fishing expeditions or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer. …

The Agreement uses the standard of foreseeable relevance in order to ensure that information requests may not be declined in cases where a definitive assessment of the pertinence of the information to an on-going investigation can only be made following the receipt of the information.

Australian taxes covered

In most cases, Australia's TIEAs apply to all taxes imposed under 'federal laws administered by the Commissioner of Taxation'. This not only extends to income tax, but also to a range of other taxes including, among other taxes, the goods and services tax, petroleum rent resources tax and excise duty. The one exception to this is the TIEA with the Netherlands Antilles, which only covers Australia's income tax.

Exchange of information upon request

The core provision in Australia's TIEAs is the Exchange of Information Upon Request Article. This article:

  • obliges the competent authority of the Requested Party to provide information for the purposes specified in the Object and Scope of the Agreement Article;
  • obliges the competent authority of the Requested Party to use all relevant information gathering powers to provide the Applicant Party with the information requested if the competent authority of the Requested Party does not have that information in its possession (even if the Requested Party does not need the information);
  • obliges the competent authority of the Requested Party to provide information in the form of depositions of witnesses and authenticated copies of original records if specifically requested by the Applicant Party, to the extent allowable under the Requested Party's domestic laws;
  • obliges each jurisdiction to have the authority to obtain and provide upon request, information held by banks (and other financial institutions) and any person acting in any agency or fiduciary capacity (including nominees and trustees); and
  • obliges each jurisdiction to obtain and provide upon request information regarding the ownership of companies, partnerships, trusts, foundations, Anstalten and other persons. In the case of trusts, the obligation to provide information includes information on settlors, trustees, beneficiaries and appointors/protectors. In the case of a foundation, the obligation to provide information includes information on founders, members of the foundation council and beneficiaries.

Australia's Federal Commissioner of Taxation (Commissioner), as the Australian competent authority, is required to provide to the competent authority of the Requested Party the following information to demonstrate the foreseeable relevance of the information when making a request for information:

  • the identity of the person under examination or investigation;
  • a statement describing the information sought, including its nature and the form in which the Commissioner wishes to receive the information from the Requested Party;
  • the tax purpose for which the information is sought;
  • the grounds for believing that the information requested is held in the Requested Party or in the possession or control of a person within the jurisdiction of the Requested Party;
  • the name and address of any person believed to be in possession of the requested information;
  • a statement that:
    • the request is in conformity with Australian law and administrative practice;
    • the Commissioner would be able to obtain the information under Australian law or in the normal course of administrative practice if the requested information was within Australia's jurisdiction; and
    • the information request is in conformity with the relevant TIEA; and
  • a statement that the Commissioner has pursued all means available in Australia to obtain the information, except those that would give rise to disproportionate difficulties.

Under Australia's TIEAs, as with the Model Agreement, the competent authority of the Requested Party is required to confirm receipt of the request and notify the Commissioner of any deficiencies in the request within 60 days of any request made by the Commissioner.

Tax examinations outside Australia

Australia's TIEAs provide the other jurisdiction with discretion to allow for representatives of the Commissioner to enter the territory of the other jurisdiction to interview individuals and examine records with the written consent of the persons concerned. The Commissioner is required to notify the competent authority of the other jurisdiction of the time and place of the meeting with the individuals concerned. In certain circumstances, the representatives from the competent authority of the other jurisdiction may be allowed to be present at the appropriate part of a tax examination.

Possibility of declining the request

Australia's TIEAs, like the Model Agreement, provide that:

  • a Requested Party is not required to obtain or provide information that the Applicant Party would not be able to obtain under its own tax laws for the purposes of the administration or enforcement of those tax laws; and
  • the competent authority of the Requested Party may decline to assist where the request is not made in conformity with the TIEA.

Importantly, there are some exceptions to the provision of information in Australia's TIEAs (which are generally the same as that in the Model Agreement). Australia's TIEAs do not impose on either jurisdiction an obligation to:

  • provide information which would disclose any trade, business, industrial, commercial or professional secret or trade process; or
  • obtain or provide information, which would reveal confidential communications between a client and an attorney, solicitor or other admitted legal representative where such communications are produced for the purpose of seeking or providing legal advice or for the purpose of use in existing or contemplated legal proceedings.

Discretion is also provided to the Requested Party to decline a request for information if:

  • the information is requested by the Applicant Party to administer or enforce a provision of the tax law of the Applicant Party, or any requirement connected therewith, which discriminates against a national of the Requested Party as compared with a national of the Applicant Party in the same circumstances; or
  • the disclosure of the information would be contrary to public policy.

The Commentary to the Model Agreement states as follows in relation to the public policy exception:

'Public policy' and its French equivalent 'order public' refer to information which concerns the vital interests of the Party itself. This exception can only be invoked in extreme cases. For instance, a case of public policy would arise if a tax investigation in the applicant Party were motivated by political or racial persecution. Reasons of public policy might also be invoked where the information constitutes a state secret, for instance sensitive information held by secret services the disclosure of which would be contrary to the vital interests of the requested Party. Thus, issues of public policy should rarely arise in the context of requests for information that otherwise fall within the scope of this Agreement.

As a final point, Australia's TIEAs, like the Model Agreement, provide that a Requested Party cannot decline to provide information on the basis that the tax claim giving rise to the request for information is disputed by the taxpayer.

No prejudicial or restrictive measures

Some, but not all, of Australia's TIEAs oblige both Australia and the other jurisdiction not to apply prejudicial restrictive measures based on harmful tax practices to residents or nationals of either Australia or the other jurisdiction.

For the purposes of this obligation, 'prejudicial or restrictive measures based on harmful tax practices' is defined as a measure applied by one jurisdiction to residents or nationals of either jurisdiction on the basis that the other jurisdiction does not engage in effective exchange of information or because it lacks transparency in the operation of its laws, regulations or administrative practices (or both) or on the basis that there are no or nominal taxes or one of the preceding criteria.

The term 'prejudicial or restrictive measure' is defined to include the denial of a deduction, credit or exemption, the imposition of a tax, charge or levy, or special reporting requirements. However, it does not include generally applicable measures such as controlled foreign corporation provisions, foreign investment fund provisions, transferor trust provisions, transfer pricing, thin capitalisation, operation of dual exempt or foreign tax credit systems and general information recording rules that relate to the disclosure of information from other countries or jurisdictions, or transactions with such countries or jurisdictions, such as record keeping requirements imposed on foreign owned subsidiaries to ensure access to information concerning parent companies.

Mutual Agreement Procedure

Like most tax treaties, Australia's TIEAs contain a mutual agreement procedure whereby the competent authorities are obliged to endeavour to resolve any matter by mutual agreement.

Concluding comments

In summary, the overall effect of Australia's TIEAs has been to expand the Commissioner's ability to acquire information from tax havens. As such, it is fair to say that taxpayers can run - but they can't hide. Professional advice should be obtained in relation to the application of Australia's TIEAs in both Australia and the relevant foreign jurisdiction.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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