Justice limits the exchange of tax information

  1. Introduction

The exchange of tax information (EOI) is a fundamental tool for tax administrations (TAs)[1], which should be used in accordance with principles, scope and limitations[2], among others the rights of taxpayers and other subjects involved.

These rights are treated, in the evaluations of international standards, as limits of these cooperative practices, which may affect the rating of the respective country.

For its part, the advance of the automatic exchange (AEOI) of financial accounts /Common Reporting Standard (CRS) has gained importance since 2017 and  will increase in relevance, starting from the AEOI relating to digital platforms[3] and crypto assets[4]. This modality, which involves sharing large volumes of data, arouses renewed interest, in particular on confidentiality.

  1. National and international legal frameworks.

The international legal instruments that regulate the EOI expose the rights of taxpayers as a limit to the EOI.

Article. 21.1 of the Convention on Mutual Administrative Assistance in Tax Matters, states that nothing in the provisions shall be interpreted as limiting the rights and guarantees granted to individuals by the legislation or administrative practice of the requested State. It is left to the National States to regulate and safeguard such rights, e.g., personal data protection legislation, rights to prior notifications, appeals, etc.

  1. Revisions of international standards.

The Observatory for the Protection of Taxpayers’ Rights of IBFD[5] warns that the revision of the Global Forum on Transparency and Exchange of Tax Information would have influenced some countries to revoke the taxpayer’s right to be notified of an EOI.

The evaluation of the on-demand standard consists of:

  • Existence of the information (A.1 Property, A.3 Accounting and A.3 Banks).
  • Access to information (B.1 Powers of access, B.2 Rights and guarantees)..
  • Information Exchange (C.1 EOI Instruments, C.2 Network of Agreements, C.3 Confidentiality, C.4 Rights and guarantees and C.5 EOI compliance time).

Within the powers of the TAs to access information, in section B.1, the possible limits are analyzed, among others the “attorney-client privilege[6]“or in broader terms, the professional secrecy.

With regard to B.2, the premise is that such rights (e.g., to notification, appeal) should be compatible with an “effective” EOI and not unduly impede or delay it. The rules on notifications should allow for exceptions (very urgent in nature or likely to undermine the likelihood of success of the investigation).

Within the topic of EOI with other countries, in section C.3, the premise is that the EOI mechanisms of the jurisdictions should guarantee the confidentiality of the information received. States should not conduct EOI without the assurance that the information provided will only be used for the permitted purposes and that its confidentiality will be preserved.

With respect to section C.4 and under the premise that the EOI mechanisms should respect the rights and guarantees of taxpayers and third parties, the requested parties may not provide information regarding commercial, business, industrial, commercial or professional secrets, or information that is subject to professional secrecy, or information whose disclosure is contrary to public order.

On the other hand, regarding the AEOI/CRS standard, the Global Forum also carries out reviews. The information exchanged must be properly safeguarded and used only for the intended purpose.

There is also a mechanism to react to confidentiality violations and discontinue the AEOI.

  1. Some aspects dealt with by international jurisprudence.
  • Use of illegally obtained information.

    The “Delgado de la Coba” case reached the Constitutional Court of Spain, stating that the information used -provided by the French authorities- had been obtained in an unauthorized way by an employee of HSBC bank in Switzerland, applying the “exclusion rule”.

    The Court (2019) rejects the proposal, noting that the employee had no link with the Spanish authorities when he took the information, it cannot be compared, as to their legal consequences, with the action infringes on the agent of the authority that embodies the State’s interest in the punishment of the criminal violations.

    The interference with the right to privacy lacks any instrumental connection, objective or subjective, with actions carried out by the Spanish authorities.

    The data that are used refer to peripheral and innocuous aspects of the so-called ”economic privacy”.

  • Professional secrecy.

    Although it did not involve an EOI, the U.S. Court of Appeals for the Fifth Circuit (2020), ruled that the Taylor Lohmeyer Law Firm must disclose to the IRS those in whose name it acquired or formed a foreign entity, opened or maintained a foreign financial account, or assisted in the conduct of any foreign transaction, including records or other data relating to the creation of offshore financial accounts and the acquisition, establishment or maintenance of offshore entities or entity structures.

    The issue at stake was whether attorney-client privilege would allow the firm to reject the summons. The investigation arose because during the audit of an American taxpayer, it was revealed that he hired the firm for tax planning[7].

  • Misinformation.

    The “Aloe Vera” case involved information provided by the IRS to the Japanese tax authority (NTA) (art. 26 of the Tax Convention), based on a simultaneous audit initiated in 1996.

    The affected taxpayers complained in 1999 to the IRS that the NTA disclosed this and other false information to the press, seeking recognition of damages knowing that the NTA would disclose it.

    The plaintiffs obtained US$ 1000 in legal compensation, not the damages calculated at US$ 52 million, because they did not prove that the adjustment estimated by the IRS had been the effective cause for which the NTA decided to initiate the audit, which concluded with the adjustment that was leaked to the press.

    In 2017, the Ninth Circuit Court of Appeals upheld the criterion and added that the proposal for a simultaneous audit carried out by the IRS contained enough details about the plaintiffs’ business to attract the attention of NTA, regardless of the amount of the erroneous estimate.

  • Right of notification and participation.

    Mr. “Sabou” claimed that the Czech tax authorities had obtained information from him without notifying other authorities of his request and that he was unable to participate in the questioning and examination of witnesses. The CJEU (2013) concludes that European legislation and the interpretation of the fundamental right to be heard do not confer such rights on a taxpayer. In a tax inspection procedure information is collected, where the EOI is located. When the taxpayer is notified of the determined adjustment, that is where the right to be heard is granted.

    In the “Berlioz” case, a penalty was applied to a Luxembourg company, for failing to comply with the order to provide information to the required tax authority, based on a request for information from the French tax authority. The CJEU (2017) concludes that the Member State judge, who hears an appeal against this sanction, is perfectly entitled to examine its legality, in order to respect the right to effective judicial protection, contained in Article 47 of the Charter of Fundamental Rights[8]. The obligation of cooperation extends only to “foreseeably relevant” information. To this end, the judge must have full access to the request for information, including any data that the authorities of the requesting State have provided or required, which does not apply to the taxpayer, who may not have that full access, although, in order to be respectful of their fundamental rights, they can access the essential data of the request for information.

    Other interesting cases were “C245-19 and C246-19”, the first originated by appeals filed by a person receiving a request for information in his possession and the second, by the appeal filed by a taxpayer submitted to one and by third parties who maintain legal, banking, financial or economic relations with him.  CJEU (2020) understands that the aforementioned art. 47, opposes, on the basis of the right of effective judicial protection, that the legislation of a Member State excludes the possibility of lodging an appeal against an application to a person who possesses certain information in order to process an application from another Member State.  On the contrary, it does not preclude such national legislation from excluding from such right the taxpayer subjected to the investigation (“Sabou”) as well as by third parties to whom the information concerns.

  • Foreseeably relevant information. Requests for groups of people.

    In the case law cited above, the CJEU (2020), it was also held that the criterion of “foreseeable relevance” is met when such a request identifies the person who holds the information, that of the investigated taxpayer and the verified period, and if it refers to contracts, invoices or payments that, although not precisely identified, provide useful clues.

    For its part, the CJEU(2021), in case C437/19, referred to a request for information relating to a group of unidentified persons, by the French tax authorities to identify shareholders and beneficial owners of a Luxembourg S.A., concluded that the concept “foreseeably relevant” is fulfilled even when the persons to whom the information refers are not individually identified, but it is proven, by clear and sufficient explanations, that it is carrying out an investigation on a limited group, justified on well-founded suspicions of non-compliance.

[1] A fundamental tool for the Latin American Tax Administrations: the exchange of Tax Information
[2] Taxpayers’ rights and guarantees in relation to the exchange of tax information and its new paradigms. Part I and Taxpayers’ rights and guarantees in relation to the exchange of tax information and its new paradigms. Part II
[3] New obligations for digital platforms: according to the OECD and the European Union
[4] New rules for the exchange of information for tax purposes regarding cryptoassets.
[5] They expose that in 2020 an additional 10% of the surveyed jurisdictions reported that their previous recognition of the right to be informed was removed due to the Global Forum review, representing a slight increase compared to 7% in 2019.(https://www.ibfd.org/ibfd-academic/observatory-protection-taxpayers-rights-optr).
It includes any information that constitutes “confidential communication,” between “a client and a lawyer, solicitor or other admitted legal representative”, when “it is produced for the purpose of seeking or providing legal advice” or is “produced for the purpose of use in legal proceedings.” It does not cover documents or records given to an attorney in an attempt to protect such documents or records from disclosure.
[7] From 1995 to 2009 the taxpayer hired the firm to form offshore entities and offshore accounts, to allocate income to them and avoid income tax.
[8] The CJEU (2021), in case C437/19, concluded that in the event of a breach of the information requirement, the addressee of the injunction must be granted, once its legality has been confirmed by the competent judge, the possibility of complying within the deadline established for this by the national law, without this implying the maintenance of the sanction imposed on him to exercise his right to effective judicial protection.

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