Bermuda

Blood, Sweat & TIEAs: Tax Information Exchange Litigation in Bermuda


By Alex Potts, Special Counsel and Amy Murray, Associate, Sedgwick Chudleigh, Bermuda (01/12/2013)

Bermuda’s government has made considerable efforts to implement Tax Information Exchange Agreements (TIEAs) with numerous foreign governments, having signed 39 TIEAs to date, with more under negotiation. 

As a result, the Organisation for Economic Co-Operation and Development (the OECD) has called Bermuda a “key player” in the area of international tax co-operation; David Cameron, the UK Prime Minister, has confirmed that it is not “fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens... they have fair and open tax systems”; and United States Treasury official, Robert Stack, has acknowledged Bermuda’s role “as a leader in global tax transparency”.  

Although the French government has just added Bermuda to its ‘blacklist’ of Non-Cooperative States and Territories (along with Jersey and the British Virgin Islands), it is hard to understand why the French have suddenly taken a view of Bermuda dramatically at odds with the views expressed by the OECD, the UK, and the USA, since Bermuda has never had statutory bank secrecy laws, and the Bermuda government has assisted France with a number of tax information requests since the TIEA between Bermuda and France was signed in 2009, nearly four years ago. 

Contrary to the French view, Bermuda is a leading offshore financial centre with a history of, and commitment to, international tax information exchange, as demonstrated by Bermuda’s role as a Vice-Chair on the Steering Group of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes. 

An exponential increase in TIEAs and TIEA requests

Since Bermuda’s inclusion on the OECD’s ‘white list’ in 2009, the number of foreign tax information requests received and processed by Bermuda’s Ministry of Finance has increased very considerably. 

On 31 July 2013, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes released its Phase 2 peer review report for Bermuda, which confirmed that between 2009 and 2011, Bermuda received 15 TIEA requests from five foreign governments, all of which were answered. The number of requests received in 2012 nearly doubled that number, meaning that Bermuda received a total of about 45 TIEA requests in four years. The 2013 figures have not yet been reported, but a substantial, if not exponential, increase is expected.   

A Wave of TIEA-related Litigation

Consistent with the increase in TIEA requests, the Bermuda courts have started to see a wave of judicial review challenges seeking to challenge the legality of TIEA requests under the International Co-operation (Tax Information Exchange Agreements) Act 2005 (the 2005 Act). This is an area in which there is already a significant body of case law, since an earlier wave of litigation had taken place regarding US requests under the USA-Bermuda Tax Convention Act 1986 (the 1986 Act)[1].   

The most recent decision of interest is the judgment of Mr Justice Hellman in the case of Bunge Limited v The Minister of Finance [2013] SC (Bda) 19 Civ, 13 March 2013.

Bunge Limited v The Minister of Finance

Bunge Limited (Bunge) is an exempt Bermuda company that specialises in agribusiness, soybean production and grain trading, with substantial business interests in Argentina and Brazil. 

On 29 November 2012, Bunge received a notice from Bermuda’s Ministry of Finance requiring it to deliver up certain tax information pursuant to a request from the Government of Argentina, made under the TIEA between Bermuda and Argentina entered into in August 2011.

Bunge applied to the Supreme Court of Bermuda to challenge the Ministry of Finance’s decision to issue the notice, by way of judicial review. Bunge contended that the notice was legally invalid, and sought to have the notice set aside on the basis that the underlying request did not satisfy the statutory requirements of the TIEA and the 2005 Act.

Since Bunge had never seen Argentina’s underlying request, Bunge made an application to the Court for an order for disclosure by the Ministry of Finance of the underlying Request.

It was this disclosure application that the Court ruled upon in its judgment of 13 March 2013, having deferred determination of the substantive judicial review challenge until after the disclosure issue had been resolved.

The Ministry of Finance opposed the disclosure application. It argued that the confidentiality provisions of the 2005 Act and the TIEA, as read against the background of the OECDs various publications and guidance notes in this area, prevented it from giving disclosure of Argentina’s confidential Request.

Intra-governmental confidentiality or disclosure to the taxpayer in the interests of basic fairness?

Bunge relied on Lewis & Ness v Minister of Finance [2004] Bda LR 66, a case decided by the Court of Appeal for Bermuda under the 1986 Act, as authority for the proposition that a taxpayer or requested party should be entitled to see the foreign government’s request upon which the local notice is based, in the interests of basic fairness. Hellman J accepted Bunge’s argument, and confirmed that both fairness and justice require that the recipient should be entitled to see the inter-governmental request, to the extent that its contents are relevant to the question whether the requirements of section 4 were satisfied and, in particular, whether the information required by the notice was identified as such in the request”.

Hellman J concluded that, while requests from foreign governments were generally confidential, the right of confidentiality was not absolute, but was subject to the Court’s discretion to order disclosure to the taxpayer or the requested party in court proceedings. He ordered the Ministry of Finance to disclose to Bunge so much of the Request as was necessary to show that the Request actually satisfied the requirements of the TIEA and the 2005 Act. Hellman J also held that the Ministry of Finance could redact Argentina’s Request, prior to disclosure, to exclude reference to any additional information that was not only confidential but also highly sensitive, or whose disclosure could substantially prejudice the foreign tax investigation or tax assessment.

Hellman J acknowledged that the Argentine Government and the Ministry of Finance had expressed serious concerns as to the confidential and sensitive nature of the request. He therefore directed that, if the Argentine Government and the Ministry of Finance were unwilling to give disclosure of the request even on a redacted basis, they could appear before the Judge on an ex parte basis, in the absence of Bunge, to express the detail of their concerns. The Judge would then examine and consider the request in full, and rule further on his requirement that some or all of it be disclosed, whether in redacted or unredacted form. The Judge recognised, however, the unprecedented nature of this procedure, and he invited the parties to address him further in this respect (although they have not done so, and Hellman J has not yet issued a further ruling in this respect). 

Although Hellman J’s decision to order disclosure of Argentina’s TIEA request does not yet resolve the substantive judicial review challenge brought by Bunge, it represents a significant victory for the taxpayer and requested party (if upheld on appeal), since it allows them to pursue a legal challenge after disclosure of the underlying request. It might also lead, in practice, to the withdrawal of the request altogether.

The Unintended Consequences of TIEA Litigation, Pending Appeal?

The Ministry of Finance is pursuing an appeal in the Bunge case (due to be heard by the Court of Appeal for Bermuda in November 2013, with any further appeal to be heard by the Privy Council). This is understood to be due to concerns that Bermuda’s TIEA legislation, as interpreted by Hellman J, might be said by the OECD and some of Bermuda’s TIEA partners to fall below acceptable standards with respect to the protection of inter-governmental confidentiality.

Indeed, one of the OECD’s Global Forum’s recommendations in its recent Phase 2 peer review report on Bermuda is that the Bermuda government should follow a policy not to disclose even the identity of the foreign tax authority to the requested party. Such a policy would be incompatible with Bermuda law, given Hellman J’s judgment in this particular case.

Although the Bermuda government and the French government have not said so in express terms, it can be inferred that it is a direct consequence of the Bunge case (pending appeal) that the French government has decided to ‘blacklist’ Bermuda for the time being. From the French perspective, Bermuda’s TIEA requests are not guaranteed to be enforced by the Ministry of Finance and the Bermuda courts in the way in which France would like, ie secretly and without the level of disclosure and delay associated with judicial review proceedings.

While the French government’s decision to ‘blacklist’ Bermuda does not have a significant direct effect on Bermuda’s business community (the number of French taxpayers with Bermuda business connections being fairly minimal), it does highlight an important issue that will have to be resolved by further negotiation, both at the OECD level and between the governments directly. 

Is Bermuda’s wave just one ripple in an international tide of TIEA litigation?

The Bermuda case law is of interest internationally, as other offshore financial centres have started to experience similar waves of litigation designed to challenge and test the strengths of TIEAs and TIEA-related legislation.

In Jersey, for example, the Royal Court has recently dismissed an appeal against a TIEA request from Norway, in the case of Volaw Trust & Corporate Services Limited and Larsen v Comptroller of Taxes [2013] JRC 095, although the Royal Court’s decision is the subject of a further appeal to the Court of Appeal by the taxpayer and requested party.

 

Similarly, the Grand Court of the Cayman Islands has just upheld a legal challenge to the legality of four TIEA requests from Australia, by a judgment of Mr Justice Quin dated 13 September 2013, in the case of MH Investments Ltd & JA Investments Ltd v Cayman Islands Tax Information Authority[2].

 

Will the Wave of TIEA-related Litigation Last?

 

In the long-term, it is uncertain how long the wave of TIEA-related litigation will be surfed. With the Bermuda government’s recent decision to implement FATCA Model 2 Intergovernmental Agreements with the USA and the UK, and Bermuda’s recent request to the UK government that the Multilateral Convention on Mutual Administrative Assistance in Tax Matters be extended to Bermuda (further to OECD, EU, G5, G8, and G20 initiatives to move to an international standard of automatic disclosure of tax information), TIEAs and TIEA-related complaints might soon become redundant. In the brave new world of automatic disclosure of tax information, there might simply be no TIEA requests left to challenge. Whether or not there are any ‘non-cooperative’ jurisdictions left for the OECD or the French government to complain about, however, will depend on whether or not inter-governmental promises of automatic disclosure are actually kept.   

 

 

 

About the Authors:

 

Alex Potts is Special Counsel at Sedgwick Chudleigh in Bermuda. He is admitted to the bars of England and Wales, the Cayman Islands, and Bermuda, and he has a wide-ranging commercial litigation, trusts litigation, and insurance practice. 

 

Amy Murray is an Associate at Sedgwick Chudleigh in Bermuda, with a general commercial, insurance, and trusts litigation practice.

 



[1] See Bermuda Trust Company Ltd v Minister of Finance [1999] Bda LR 45, Minister of Finance v Braswell [2003] Bda LR 24, Lewis & Ness v Minister of Finance [2004] Bda LR 66, and Coxon v Minister of Finance [2007] Bda LR 78.

[2] Cause No. 391 of 2012.