Australian authorities drop Cayman tax evasion charges

Case strained Cayman-Australian tax information exchange relations

Australian authorities have dropped tax evasion and money laundering charges involving entities in the Cayman Islands.  

The case threatened to strain Cayman-Australian tax information exchange relations last year, after Australian courts accepted company information from Cayman as evidence, despite a Grand Court ruling that the records were unlawfully provided and should not be used.  

Australian accountants Vanda Gould and John Leaver, as well as Swiss resident Peter Borgas had been arrested on charges that they used a network of entities in the Cayman Islands and other offshore centers to evade Australian tax on certain share trades. 

The case was built in part on information from the Cayman Islands obtained through a tax information exchange request by the Australian Taxation Office.  

In September 2013, the Cayman Islands Grand Court quashed the Cayman Islands Tax Information Authority’s decision to hand over information on the ownership of Cayman-registered M.H. Investments and J.A. Investments, which controlled some of the entities that allegedly received undeclared profits from the trading of Australian Stock Exchange listed shares.  

According to the court’s judgment, the Tax Information Authority should have applied to the Grand Court for directions before passing on the information and had failed to ensure that the information did not predate the underlying tax information exchange agreement coming into effect.  

Moreover, the Tax Information Authority had failed to notify the companies that were subject to the request and thereby, in the circumstances, 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 judgment said. 

However, in October last year, Australian courts ignored Justice Charles Quin’s ruling that Cayman’s Tax Information Authority had to obtain a guarantee from Australian authorities that the exchanged records would not be used in court proceedings and the documents should be returned or destroyed. 

Australian federal court judge Nye Perram said the decision was a matter of domestic Cayman law that did not affect the lawfulness of the Australian tax office receiving the material. He acknowledged that using the documents as evidence “might be an offense under the laws of the Cayman Islands” but accepted the tendering of the information in the Australian proceedings. 

The criminal charges were withdrawn in the Sydney Local Court on May 13. Related civil cases in which the three men challenge a AUS$40 million tax bill are still before the Federal Court. 

Despite the tendering of documents as evidence in the Australian case, the Cayman Islands ministry of financial services said Cayman and Australian authorities have an excellent working relationship. “The handling of any particular tax case in Australia is a matter for the Australian Taxation Office, and does not affect the cooperation provided to the ATO under the TIEA,” the ministry said. 

The Grand Court decision declaring the exchange of information unlawful is pending appeal, the ministry added.  

The fallout of the Grand Court decision has led some to speculate that Cayman is planning to change the Tax Information Authority Law.  

Thomas Lowe QC, barrister with Wilberforce Chambers in London, who spoke about the case in a session on tax information exchange at the Offshore Alert conference in Miami earlier this month, said, “Many offshore governments are so frightened of constant OECD assessments that they are quite willing to cross the human rights line” to please onshore reviewers.  

“For example, recently it seems the Cayman Islands government is currently seeking to mend its legislation in order to reverse a perfectly sensible decision by the Grand Court which expressed concern about the high handed behavior of the tax authorities,” he noted.  

The ministry did not comment on a question of whether the government is seeking to amend legislation in light of the decision.  

However, other offshore centers have yielded to onshore pressure to make their legislation governing tax information exchange more flexible. Both Bermuda and Jersey amended domestic legislation after the French government threatened to put the jurisdictions, together with the British Virgin Islands, on a blacklist that would have subjected fund transfers between France and the blacklisted countries to a punitive 75 percent tax rate.  

French authorities were unhappy with ongoing appeals and legal challenges against information disclosures in response to French information requests and resorted to the measure when they felt that they did not receive all of the information sought in tax information exchange requests in a satisfactory way.  

Legislative changes in Bermuda and Jersey subsequently limited appeals to judicial review grounds only and excluded certain elements from the scope of the judicial review. The period allowed for lodging an appeal was also shortened.  

In addition, Jersey bypassed its own Court of Appeal and now forces appellants to go directly to the Privy Council. Bermuda and Jersey were removed from the blacklist in December 2013. 

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