TIEAs in the Courts of International Financial Centres

By Alex Potts, Partner, Sedgwick Chudleigh, Bermuda (01/07/2015)

Despite the inevitable move towards automatic exchange of tax information and Common Reporting Standards internationally, there continues to be a steady flow of litigation in the Courts of International Financial Centres such as Bermuda, the Cayman Islands, and Singapore relating to challenges to inter-governmental Tax Information Exchange Agreement (TIEA) requests.

These challenges are expected to continue, since even after FATCA and Common Reporting Standards are fully implemented, TIEA requests are likely to remain an important tool by which Governments might make specific, targeted requests, and associated orders for, compulsory production of information that might not otherwise be provided automatically.

This article provides an update on recent developments of interest.

In Minister of Finance v AD [2014] SC (Bda) 10 Civ (in a judgment of the Supreme Court of Bermuda dated 27 January 2015), Hellman J acknowledged that it is a fundamental principle of fairness at common law that a party should have access to the evidence on which a court case against him is based, and, as a result, an opportunity to comment on it and, if appropriate, challenge it.

The Judge went on to emphasize that, at common law, any document disclosed to the court on an ex parte application for a production order, including a production order made under a TIEA, must be disclosed to the party or parties to whom the production order is addressed.

In his judgment, Hellman J considered the meaning and effect of recent, controversial amendments to section 5(2) of Bermuda’s International Cooperation (Tax Information Exchange Agreements) Act 2005 (the 2005 Act). This section provides that the Supreme Court may make a TIEA production order “if on such an application it is satisfied that conditions of the applicable agreement relating to a request are fulfilled or where the court is satisfied with the Minister’s decision to honour a request in the interest of Bermuda”.


The Judge explained that, in his judgment, the requirement that the Court must be “satisfied with the Minister’s decision to honour a request in the interest of Bermuda” means that the Court must be satisfied that the Minister has decided to honour a request in the interest of Bermuda, not that the Court is competent to judge the merits of the Minister’s decision.


The Court then went on to consider further recent amendments to section 5(6A) and 5(6B) of the 2005 Act, which had come into force as recently as 8 December 2014, shortly before the ex parte application for a production order was made on 30 December 2014. Despite creative argument from the Government’s lawyers, including reference to the Government’s Explanatory Memorandum to the legislative amendments, the Court held that the recent amendments to the legislation could not be interpreted so as to interfere with the respondent’s common law right to see the evidence that was before the Court when the ex parte order was made. In order to achieve such an extraordinary result, clear and obvious statutory language would have been required, and even then it would be doubtful that such legislation would be consistent with Bermuda’s Constitutional provisions designed to protect the right to a fair trial.


There are other aspects of Bermuda’s 2014 amendment legislation that remain to be tested in future cases. One provision relates to the costs of compliance with tax information production requests, which the legislation now provides, expressly, shall not be paid by Bermuda’s Minister of Finance. There is, however, a statutory mechanism that provides for a process of consultation with the foreign requesting government on the question of costs, in the event that the TIEA request relates to an “exceptionally large volume of information requests”, in excess of 10,000 pages of information. The legislation also seeks to narrow the circumstances in which the Minister of Finance might be liable for the costs of any legal proceedings seeking to challenge the legality of a production order. 


In ABU v Comptroller of Income Tax [2015] SGCA 4, the Singapore Court of Appeal (in a judgment dated 22 January 2015) dismissed an appeal against a production order made on the application of Singapore’s Comptroller of Income Tax, pursuant to a request received from the National Tax Agency of Japan. The Court of Appeal concluded that the Court’s role was one of administrative review, rather than substantive review, and that it need not go behind the face of the request to assess its validity. The Court also concluded that tax information requests could relate to periods both before and after the relevant treaty coming into effect.


The Singapore Court of Appeal’s approach is consistent with the restrictive, public policy-driven approach taken by the Royal Court of Jersey in Larsen Oil & Gas Drilling Limited v Comptroller of Taxes [2014] JRC 143 (in a judgment dated 15 July 2014), in which an application for leave to apply for judicial review of a tax information production notice, on a request from the Norwegian Tax Authority, was dismissed, principally on the grounds of delay. The Bailiff, Sir Michael Birt, expressed the Court’s conclusions forcefully: “There is an important public interest in the Island assisting proper requests for assistance under a TIEA in a timely fashion subject of course to any challenge properly brought within the timescales envisaged in the legislation or Rules of Court.  I consider that there would be prejudice both to the Norwegian Tax Authority and to the good administration of the Norwegian TIEA by Jersey if this matter were allowed to be reopened at such a late stage”.  


All three recent judgments from Bermuda, Singapore and Jersey highlight the tensions that continue to arise in any common law system between the rights of individuals and commercial entities to a fair Court hearing, including in the context of applications for judicial review of administrative action, as well as their rights of privacy and commercial confidentiality, when contrasted with the international imperative and strong public policy in favour of quick and efficient tax information exchange between governments (despite the fact that there is still no system in place for the international enforcement of domestic tax liabilities).


Moving beyond TIEAs into the next generation of automatic tax exchange, those interested in FATCA-related challenges will want to follow developments in the context of Canadian Federal Court proceedings that were issued in 2014 on behalf of two US expatriates resident in Canada, in the case of Hillis and Deegan v The Attorney General of Canada, File No T-1736-14. The Plaintiffs in that case seek to have the Canadian FATCA legislation and associated USA-Canada Inter-Governmental Agreement declared void on the basis that it allegedly violates their rights under Canada’s Constitution and Canada’s Charter of Rights and Freedoms. The Canadian government filed a Defence in November 2014, maintaining the legality of automatic exchange of tax information under Canadian law. The case is now in its discovery phase, with the Canadian Government reportedly asserting that it needs time to review over 100,000 potentially relevant FATCA-related documents.  


In the meantime, the Cayman Islands’ Department of International Tax Cooperation recently announced in February 2015 that the Cayman Automated Exchange of Information Portal, which is designed to be compliant with US and UK FATCA reporting, as well as the Common Reporting Standards, is in its final testing stages. The update suggests that the Portal will be operational in March 2015, but the Cayman notification and registration deadline has been extended to 30 April 2015, with a first reporting deadline of 31 May 2015. In light of international business concerns regarding cyber-security, it remains to be seen whether the Cayman Islands’ Department of International Tax Cooperation’s security protocols are sufficiently robust to withstand any potential cyber-attacks. 


The role of the Cayman Islands as an international financial centre that complies with tax information requests has recently been scrutinized by Mr Justice Perram in Hua Wang Bank Berhad v Commissioner of Taxation [2014] FCA 1392 (in a judgment dated 19 December 2014), who made findings of fact based, in part, on tax information documents produced to the Australian Government by the Cayman Islands Tax Information Authority, which resulted in the Court dismissing the various taxpayers’ appeals against the income tax assessments levied against them by the Commissioner of Taxation. In his findings, Perram J commented that the facts of the case “strongly suggest widespread money laundering, tax fraud of the most serious kind and, possibly in some instances, insider trading”. These findings, which are the subject of a pending appeal, are to be contrasted with the Cayman Grand Court’s findings, in 2013, that the Cayman Islands Tax Information Authority should not have disclosed the tax information documents to the Australian Tax Office without a prior Cayman Court order directing them to do so.


If the past is any guide to the future, it is likely that the Courts of international financial centres will continue to be kept busy with increasingly creative debates regarding the legality and proper scope of tax information exchange.