17 June 2013

First Appeal to the Royal Court of Jersey under TIEA Regulations

This is the first appeal to the Royal Court of Jersey from a decision of the Jersey Comptroller of Taxes (the “Comptroller”) to serve a notice under the Taxation (Exchange of Information with Third Countries) (Jersey) Regulations 2008 (the “Regulations”), in response to a request for information issued under an agreement between Jersey and a third country for the exchange of information relating to tax matters.

Facts

This appeal concerns a notice issued by the Comptroller under Regulation 3(2) of the Regulations (the “Notice”), following receipt of a request from the Norwegian Tax Authority (the “NTA”) on 26 February 2010 (the “Request”) issued pursuant to an agreement between Jersey and Norway for the exchange of information relating to tax matters, which came into force on 7 October 2009 (the “TIEA”).

The NTA, which is the Norwegian competent authority for the purposes of the TIEA, requested assistance in relation to the tax investigation of Mr Larsen. The Request was a substantial document and set out in detail the circumstances that led to the request for assistance being made. For a number of years, the NTA had been monitoring the income of Mr Larsen and Norwegian companies that were wholly or partially owned by him.

Amongst other things, the NTA suspected that Mr Larsen may have submitted incorrect information concerning his direct or indirect ownership of foreign companies. In support of its suspicions, the NTA referred to criminal charges that had been brought against Mr Larsen in respect of tax evasion and fraudulent breach of trust, in addition to the non-reporting of taxable property in foreign companies. The NTA stated that the Request concerned “criminal tax matters” and that information, which was sought for income tax purposes, was required for the period from 1 January 1996 to 31 December 2008.

The Notice required the production of various documents and records held by Volaw in relation to its dealings with Mr Larsen and four companies that are administered by Volaw, in which the NTA suspect that Mr Larsen has an interest. Information was requested for the period from 1 January 1996 to 31 December 2008.

The principal grounds of appeal against the Comptroller’s decision to issue the Notice can be summarised as follows:

1. that there is no power under the Regulations to require the production of information that pre-dates the entry into force of the TIEA;
2. that the threshold condition for the application of Regulation 3 was not satisfied because there were and are no reasonable grounds for believing that Mr Larsen may have failed to comply with the domestic law of       Norway concerning income tax and that such failure has led or is likely to lead to serious prejudice to the proper assessment of tax; and
3. that the true purpose of the Request was to assess Mr Larsen’s civil tax liability and, where disclosure is sought in relation to a “criminal tax matter”, there is no power to require the production of information other than for the purposes of a criminal investigation or prosecution. 

Law

The Regulations provide a right of appeal to both a taxpayer and a third party service provider against a notice issued by the Comptroller under a tax information exchange agreement. On hearing the appeal, the Court may “confirm, vary or set aside” the notice.

In reaching its decision on the appellants’ grounds of challenge, the Court was required to construe certain provisions of the TIEA and the Regulations. 

1.       The TIEA

The scope of the TIEA is encapsulated in Article 1, which provides that:

“The Parties shall provide assistance through exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Parties concerning the taxes covered by this Agreement, including information that is foreseeably relevant to the determination, assessment, recovery and enforcement or collection of tax with respect to such persons subject to such taxes, or to the investigation of tax matters or the criminal prosecution of tax matters in relation to such persons”.

Article 4(1) of the TIEA sets out Jersey’s primary obligation to exchange information upon request and states that:

“The competent authority of the requested Party shall provide upon request by the requesting Party information for the purposes referred to in Article 1”.

The TIEA only applies to specific taxes which in the case of Norway, includes tax on general and personal income.

Article 10 of the TIEA draws a distinction between the entry into force of the TIEA for “criminal tax matters” and “all other matters covered in Article 1”. It provides that the TIEA shall have effect:

“(a) for all criminal tax matters on that date [i.e. the date the TIEA came into force]; and

(b) for all other matters covered in Article 1 on that date, but only in respect of any tax year beginning on or after the first day of January of the year next following that in which the Agreement enters into force or, where there is no tax year, all charges to tax arising on or after that date”.

“Criminal tax matters” are defined in Article 3(1)(f) to be “tax matters involving intentional conduct

whether before or after the entry into force of this Agreement, which is liable to prosecution under the criminal law of the requesting Party”.

2.       The Regulations

The Regulations provide in Jersey law a procedure for obtaining information if a request is received under a tax information exchange agreement and empower the Comptroller to require a taxpayer or a third party to produce “tax information” provided that certain thresholds in relation to those documents or information are satisfied. The Court had regard to the Regulations that were in force at the date of the Comptroller’s decision on 28 May 2012. However, amended Regulations came into force on 1 January 2013, which (amongst other things) altered the threshold to which the Comptroller must be satisfied before issuing a notice.

Regulation 3(1) of the Regulations prescribed the standard to which the Comptroller had to be satisfied before issuing a notice to a third party service provider, in particular he had to have “reasonable grounds” for believing that:

1. “a taxpayer may have failed to comply, or may fail to comply, with a domestic law of a third country concerning tax”; and
2. “any such failure by the taxpayer has led, is likely to have led, or is likely to lead to serious prejudice to the proper assessment or collection of tax”. 

Decision

The Court dismissed the appeals and ordered that Volaw be required to comply with the terms of the Notice. The Court addressed the key grounds of appeal as follows:

Whether information that predated the entry into force of the TIEA could be obtained.

• The appellants argued that information that was generated prior to the entry into force of the TIEA on 7 October 2009 could not be obtained, on the basis that the TIEA did no more than recognise the power to obtain information pursuant to the Investigation of Fraud (Jersey) Law 1991 Law (the “Fraud Law”), which enables information relating to matters of serious or complex fraud to be made available to foreign authorities. The appellants said that to do otherwise would breach the presumption against retrospective legislation.
• The Court agreed with the Comptroller that such information could be obtained if it related to a “criminal tax matter”, as a consequence of Article 10, which draws a distinction between the entry into force provisions for “criminal tax matters” and all other tax matters.
• The Court referred to the English decision of HMRC v Ben Nevis (Holdings) Ltd [2012] EWHC 1, which drew a distinction between the legal effect of past acts or omissions being retroactively changed by the law (which would be objectionable) and simply basing new legal consequences on past acts (which would not be objectionable). The Court said that “the basis of liability for Norwegian tax or prosecution for a Norwegian criminal offence relating to tax remains exactly the same as before. All that the TIEA and the 2008 Regulations do is make provision for the exchange of information that may have a bearing on such matters”.
• The Court dismissed the argument that the TIEA does no more than recognise the power to obtain information pursuant to the Fraud Law, as this would produce “an absurd result, namely that notwithstanding Jersey’s inter-state commitment to Norway, Jersey’s domestic legislation giving effect to that commitment would have the effect of reducing its ambit and effect”.

Whether there are reasonable grounds for believing that Mr Larsen may have failed to comply with Norwegian law as regards income tax.

• The appellants said that there was no basis for the NTA’s accusations and that there was nothing that could give rise to an income tax liability on the part of Mr Larsen under Norwegian law.
• The appellants suggested that the Comptroller failed to approach his task with the requisite degree of rigour; that he had abrogated his quasi-judicial gatekeeper function and failed to give sufficient weight to the protection of Jersey nationals and taxpayers.
• The Court rejected this ground of appeal and said that the Comptroller had good grounds for believing that the Tax Authority’s suspicions were well-founded and therefore he was entitled to issue a notice under Regulation 3(2).
• The Court provided guidance as to what factors the Comptroller should take into account when deciding whether to issue a notice and said that:

“Where the Comptroller is faced with conflicting assertions as between the requesting authority (Norway) and those affected by the request (Mr Larsen) it is not for him to reach any conclusion on where the truth lies: his role is not to act as final adjudicator but simply to decide, having regard to the material before him, whether there are “reasonable grounds for believing” the two matters prescribed by the first paragraph of Regulation 3”.

The use to which disclosure obtained in relation to a “criminal tax matter” can be put.

• The appellants argued that the true reason the NTA wanted the documents was to conduct a civil tax assessment of Mr Larsen and that if the documents are to be disclosed, then they can only be used for a criminal investigation or prosecution.
• The key issue in this ground of appeal was whether Article 10, which enables information to be obtained in respect of “criminal tax matters” from an earlier date than civil tax matters operates as a restriction on use by the recipient.
• The Court rejected this ground of appeal and concluded that information obtained for the purposes of a criminal investigation can be subsequently used for any of the other purposes set out in Article 1, with the effect that information obtained for the purposes of a criminal investigation or prosecution can be used to conduct a civil tax assessment.
• The Court also rejected the appellants’ suggestion that the NTA was acting in bad faith and that the real reason the NTA wanted the information was to perform a civil tax assessment. The Court said that “there would have to be compelling evidence before this Court before it would be justified in making such a finding”. 

Comment

The Royal Court has recognised that for tax information exchange agreements to operate effectively, the threshold to which the Comptroller must be satisfied before issuing a notice cannot be unduly onerous. Whilst the Comptroller should carefully consider a request received pursuant to a tax information exchange agreement, he is not obliged to resolve issues of foreign law or reach definitive conclusions in respect of an individual’s tax liability.