Grand Court quashes tax info exchange

The Cayman Islands Grand Court quashed a decision by the Tax Information Authority to provide information to the Australian Taxation Office in response to four requests made under a tax information exchange agreement between Cayman and Australia.

In a decision dated Sept. 13, Justice Charles Quin directed Cayman’s Tax Information Authority to write to the Australian Taxation Office to formally revoke its consent that the information given could be used in court proceedings and confirm that the Australian Taxation Office would not divulge the content of the documents.

The court also directed the Tax Information Authority to demand from the Australian Taxation Office the immediate return of the documents and the destruction of the copies, as these had been unlawfully provided by the Cayman authority.

The Australian tax authority had made the information requests as part of an ongoing investigation into tax schemes arranged by Australian accountants Vanda Gould and John Scott Leaver and related companies.

Two Cayman-registered firms that were subject to the information requests, M.H. Investments and J.A. Investments, controlled two of these entities, which had allegedly received profits from trading shares listed on the Australian Stock Exchange. The ATO suspected that the accountants were the ultimate beneficial owners of the Cayman companies and requested the information to determine “the Australian income tax payable by Mr. Gould, Mr. Leaver and/or their associate entities.”

The Cayman Islands Tax Information Authority, which is responsible for tax information exchange requests in accordance with international agreements and Cayman law, obtained the requested documents from FCM Ltd., the registered agent of the Cayman companies.

While the judgment acknowledged that the authority owed a duty to assist the Australian authorities, it had to ensure that the requests were in compliance with the Tax Information Authority Law and the tax information exchange agreement and did not infringe the rights of those subject to the request.

According to the judgment, the authority failed to ensure that the information sought by the Australian Taxation Office only related to tax years and taxable periods after July 1, 2010, as prescribed by the tax information exchange agreement.

The Tax Information Authority also had “no legal authority to provide the ATO with its consent to use the material in court proceedings without first applying to a judge of the Grand Court for directions.”

Moreover, the Tax Information Authority had failed to notify the companies subject to the tax information exchange request of “the jurisdiction making the request and the general nature of the information sought.” This is required by section 17 of the Tax Information Authority Law for cases that are not criminal or alleged criminal matters, provided the authority knows the whereabouts of the taxpayers concerned. In the circumstances, producing the information infringed their rights to “a fair and public hearing” and their “rights to privacy” under the articles 7 and 9 of the Cayman Islands Bill of Rights, the judge ruled.

The Bill of Rights came into effect on Nov. 6, 2012, and leads the court to apply “a more anxious level of scrutiny and standard of review, just as the Human Rights Act influenced the approach adopted by the courts in England and Wales,” Justice Quin wrote.

Solomon Harris, the law firm that represented the Cayman companies that had filed for judicial review in the case, said in a note, “It is important to emphasize that the Cayman court wholly supported the [Tax Information Authority]’s object of assisting foreign tax authorities by providing information in appropriate circumstances. However, it confirmed that the [Tax Information Authority] was not immune, when pursuing that object, from a duty to the subject of the request to ensure the information being requested should properly be given to the foreign tax authority.”

“In this particular case, it turned out that the ATO had not properly informed the [Tax Information Authority] of the reasons it requested the information and the intended use of the information and, once those matters were considered, it was apparent that the information had not been provided in accordance with the TIA Law,” the law firm said.

In a note commenting on the case, Tony Travers, partner at Travers Thorp Alberga, concluded that “without the benefit of an enabling provision under the tax information exchange agreement,” the provisions of the Confidential Relationships (Preservation) Law continue to apply to protect the information from improper disclosure.

Given that it was the first case concerning the operation of the TIA Law, Solomon Harris noted, the decision gives “welcome guidance” to the Tax Information Authority, foreign tax authorities and the subjects of information requests on how information should be provided under law.