The trouble with TIEAs

  • Author : Rhys Newman
  • Date : November 2012
ABOUT THE AUTHOR: Rhys Newman is a student at Dalhousie University Schulich School of Law, Halifax, Nova Scotia, Canada

Over the past decade, the Organisation for Economic Cooperation and Development’s (OECD’s) focus on tax evasion has expanded to become a means of regulating offshore financial services. Its instrument to achieve this is the tax information exchange agreement (TIEA).

More than 500 TIEAs have now been signed, the vast majority of them since 2011, but the fact that TIEAs can impose onerous levels of new administration and require the alteration of other laws in many jurisdictions can result in problems. There are also other areas of possible confrontation regarding interpretations between contracting parties to TIEAs. They include the issues of sovereignty, secrecy, public policy and conflicting interests in the business community. All are contentious and raise the need for a comprehensive dispute resolution system.

The OECD recently added an arbitration process to address the possibility of future TIEA disputes. But what is really needed to create a level playing field for large and small jurisdictions is a formal dispute settlement process, consistent with that used by the World Trade Organization (WTO). This procedure would provide smaller jurisdictions with the assurance of fairness in resolving disputes, and afford all signatories the benefit of consistent processes and interpretive techniques in line with other international trade bodies.

Globalisation, financial services regulation and the OECD

Providing financial services such as banking, fund management, wealth management and other investment services to non-residents is a large and growing global industry. Much of this is carried out by the world’s largest countries, but a significant amount takes place in offshore financial centres (OFCs).

What these have in common is that they offer investors tax efficiency, and, in the view of the International Monetary Fund, ‘some of them are increasingly viewed as offering opportunities for money-laundering and tax evasion, as well as raising obstacles to anti-corruption investigations’1.

Regulating these centres involves heightened transparency requirements and the exchange of information on financial trading and taxes. This initiative has been undertaken by one of the world’s two largest economic research and oversight organisations: the OECD, which is backed by contributions from 34 of the world’s largest developed nations.

Problems with TIEAs

TIEAs have existed for just over a decade, but while the first were signed in 2000, most have been inked since 20112. It is difficult to pinpoint the effects of these agreements on the signing jurisdictions thus far, but there are several areas of potential confrontation based on the requirements of such agreements.

Legal and administrative framework

Many signatory jurisdictions will have to upgrade their legal and administrative frameworks to comply with the OECD Global Forum Working Group on Effective Exchange of Information’s5 annual assessments of their tax policies. These jurisdictions will also have to construct a framework to provide information demanded by OECD members and other signatories because ‘exchange of information requires an appropriate legal and regulatory framework to be in place3’. Jurisdictions signing TIEAs must also renegotiate existing tax treaties with all interested parties to respect the priority of TIEA mandates4. Establishing such administrative forums and reworking these documents is incredibly complex even for larger nations, but especially onerous for the smaller jurisdictions signing TIEA agreements.

Legal and administrative resources

Smaller signatory jurisdictions often lack the bureaucratic, legal and administrative resources needed to keep the detailed records and information services required to respond to requests by other signatories. A low-tax or no-tax jurisdiction simply does not collect this sort of information.

Refusing information requests

The TIEA is based on a template developed by the Global Forum based on its 1998 report Harmful Tax Competition6.

TIEA agreements are not binding7, and both bilateral and multilateral versions exist. Most of the agreements signed have taken the bilateral form. Once the agreement enters into force, the parties mutually identified are bound to undertake the rights and obligations agreed to8. The agreement template states that the interpretation of these instruments ‘is determined by principles of international law9.’

There are only limited circumstances where a jurisdiction can decline to assist in a request of information. In a paper by Business Bermuda, these were identified as: ‘where the request is contrary to public policy, the communications requested are subject to solicitor-client privilege or a similar privilege, if the information would disclose a trade, business, industrial, commercial or professional secret or if the requesting tax authority is seeking information that it is not permitted to seek domestically10.’

In the template agreement itself, there are several other areas of possible conflict between signatory parties. First, ‘a requested party is not obligated to provide information which is neither held by its authorities nor in the possession or control of persons who are within its territorial jurisdiction…’11. The definition of ‘persons’ under this document is broad enough to include all forms of corporate entities. Corporate entities are able to exist in multiple jurisdictions at the same time, and are able to control other forms of legal persons, such as subsidiaries.

Therefore, if a requested party does not have to provide information that is not in the possession of persons (corporations or their subsidiaries) in their jurisdictions, it would appear that corporate entities with a presence in the requested parties jurisdiction may be able to shelter information in subsidiaries or other branches of another corporate entity that does not exist in the jurisdiction of the requested party12.

A wide array of entities can be scrutinised upon request of a contracting party13. This includes all parties to a trust agreement: settlors, trustees and beneficiaries14. It is unlikely that a trustee would divulge such information when requested to do so by the ‘competent authority’ of a requested party. Most jurisdictions would need to establish new laws requiring trustees to provide such information on request. The effects of such legislation could be detrimental to the domestic trust and investment industries of any TIEA signatory jurisdiction.

A requested party is to use all ‘relevant information gathering measures’ to assist in finding the information requested. These measures are determined by the requested party and not the party making the request for information15. This provides that the requested party determines to what extent their resources are to be used to provide the information in question. This subjective approach may not involve the level of scrutiny expected by a requesting party, and perhaps the information requested may not be found using the measures and resources available to smaller jurisdictions. What constitutes ‘relevant information-gathering measures’ therefore raises another point of debate.

Importantly, ‘the requested party may decline a request for information if the disclosure of the information would be contrary to public policy’16. The term ‘public policy’ is expanded to mean serious intrusions into state secrets; however, the term has often been applied in broader contexts internationally. Since states can decline a request simply on the grounds of public policy, it is likely that there would be a number of refusals based on this ground alone.

Taking all this into consideration, it seems inevitable that significant disputes arising from information requests are likely to become common.

“What is really needed to create a level playing field for jurisdictions is a formal dispute settlement process”
The OECD dispute resolution process

The OECD’s consensus-based approach to dispute resolution may illustrate an attempt to respect the sovereignty of signatory jurisdictions, but the result is a process that lacks timeliness, certainty and consistency.

The arbitration process, adopted in 2007, is initiated voluntarily by the parties after a dispute between a requesting jurisdiction and one receiving the request remains unresolved for two years: an exceptionally long timeframe, during which tax laws of a jurisdiction could change, rendering the dispute moot.

Under the current arbitration system used by the OECD, resolution is adopted by consensus and only binding upon parties to the extent that the parties agree. The process does not allow for the arbitration of an entire issue, serving instead a narrower interpretive function to aid the involved parties in solving the dispute on their own terms.

If, instead, the OECD operated as a facilitator for a central dispute settlement process, all signatories would be able to benefit from consistent processes and interpretive techniques in line with other international trade bodies. This would result in greater consistency of the interpretation of provisions and concepts in TIEAs.

The inclusion of an appellate body would also forgo the need for a consensus agreement in much the same way as under the WTO, where veto power is replaced by a secondary review mechanism on the interpretation of independent panels.

Since the OECD is dealing with international trade in financial and investment services, there is a distinct overlap between the OECD and the WTO. The reasons for refusing to supply information under the TIEAs are similar to the reasons for disputes under the WTO: treaty interpretation and interests of sovereignty.

The WTO system

The WTO, created in 1995, has 153 member countries and the goal of creating a single dispute settlement system to govern all difficulties that may arise during negotiations and resulting agreements signed by member nations17. It also recognises the need for less developed countries to have greater flexibility on tariff protection, to spur their economic development18.

The WTO applies international conventions and customs, judicial decisions and the teachings of the most highly qualified publicists as evidence of generally accepted international practices of interpretation19. These principles are observed in the operation of its own Dispute Settlement Body, and its Appellate Body considers precedents of other international courts. It also looks to the Vienna Convention on the Law of Treaties for guidance on customary international law20.

“The OECD’s consensus-based approach to dispute resolution lacks timeliness, certainty and consistency”

Importantly, the WTO mandate also establishes that it will provide the forum for negotiations among member nations21. It is required to cooperate ‘with other intergovernmental organisations with responsibilities related to the WTO’22.

This allows the WTO and OECD to exchange methods and mechanisms, and could provide a guide for an enhanced OECD dispute resolution body.

Conclusion

The OECD will undoubtedly face disputes raised by the plethora of TIEAs signed in the past decade, and requires a more efficient settlement system. As the WTO also regulates international trade in services, its dispute resolution processes could serve as a broad precedent for how to structure and administer an international dispute settlement system.

The WTO system recognises that complex international trade agreements require judicial interpretation, unbiased review respecting the principles of consistency, expediency, and an appeal process. Its system draws on predictable interpretative methods that have been accepted internationally.

The TIEA signatory jurisdictions differ in size and wealth, leading to a varying degree of access to local dispute resolution systems. Using a WTO-style dispute resolution system would allow the OECD to provide the forum as well as the resources to create a more equitable and accessible process. Such a system would also allow universal precedents to develop, which will improve the predictability and consistency of TIEA dispute resolutions and, in turn, encourage more jurisdictions to sign these agreements.

Offshore Financial Centers, IMF Background Paper, at part III, para 1
OECD Centre for Tax Policy and Administration: Exchange of Information – Tax Information Exchange Agreements www.oecd.org/ctp/exchangeofinformation/taxinformationexchangeagreementstieas.htm
OECD: Tax Transparency 2011: Report on Progress. The Global Forum on Transparency and Exchange of Information for Tax Purposes (2 December 2010), www.oecd.org/dataoecd/35/16/46615395.pdf
Markus Meinzer et al, Tax Information Exchange Arrangements (April 2009), www.taxjustice.net/cms/upload/pdf/TJN_0903_Exchange_of_Info_Briefing_draft.pdf
OECD Committee on Financial Affairs: Agreement on Exchange of Information on Tax Matters (AEITM), at para 2, www.oecd.org/dataoecd/15/43/2082215.pdf
OECD Committee on Financial Affairs: Harmful Tax Competition: An Emerging Global Issue (Paris: OECD 1998)
AEITM, Part I, para 4
AEITM, Part I, para 5
AEITM, Part I, para 7
Cheryl Packwood, Bennet Jones LLP: ‘New Opportunities for Canadians Investing in and Through Bermuda’ (February 2012), The Business Bermuda Nexus, 12 at 7
AEITM, 4 Part II, Article 2
AEITM, 5 Part II, Article 4, para 1(c) and 16 under Part III, Article 4, para 1(d)
AEITM, 7 Part II, Article 5, para 4(b)
AEITM, 17 Part III, para 18
AEITM, 20, para 42
AEITM, 9, para 4
Mitsue Matsushita, ‘Some Thoughts on the Appellate Body’ (205), in McCrory et al, the WTO, at ch 30, p1391, Part II, Sub A
General Agreement on Tariffs and Trade, Article XXVII, bis 3(b)
Statute of the International Court of Justice, Int, 1946, s38(1)(a)
WTO Legal System, at 406
Uruguay Round Agreement, Marrakesh 22. Agreement Establishing the World Trade Organization, Article 3.2: Functions, www.wto.org
See WTO Marrakesh, at Article 5.1

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