Automatic tax information exchange raises human rights issues

The automatic transfer of tax information by the government to more than 100 countries and tax authorities scheduled to begin in 2017 may infringe on privacy rights and face other human rights challenges under the Cayman Islands Bill of Rights, according to speakers at the Mourant Ozannes Trust and Private Client Conference last week.

Robert Mack, associate with Mourant Ozannes, and Paul Bowen, QC from Brick Court Chambers in London, at Friday’s conference explored “whether there are any viable counterbalances capable of stemming the flow of confidential information” going to tax authorities worldwide as a result of the OECD common reporting standard and the U.S. Foreign Account Tax Compliance Act.

They considered in a joint presentation whether there are potential challenges to the introduction of automatic tax information exchange regimes in the Cayman Islands, in particular under the Bill of Rights.

Mr. Mack explained that some of his clients are concerned with the implications of the release of this type of information to tax authorities. “Some of them can be quite dire, so we are looking at how can we address those concerns as advisers,” he said.

Their main contention is that the automatic exchange could violate the rights to privacy of a client whose data is transferred to a foreign tax authority, if data protection and privacy standards in the receiving state are not up to the standards guaranteed by Section 9 of Cayman’s Bill of Rights.

If the country that receives the data also has a high level of corruption and is rife with cases of kidnappings and blackmail, the lawyers argued that a challenge under Section 2, guaranteeing the right to life, and Section 3, prohibiting torture, could conceivably be brought against the Cayman Islands government.

Mr. Mack cited a fictional case study in which the family of a settlor of a trust is kidnapped because a corrupt tax official in his home country leaked information on the trust to organized crime. Mr. Mack noted that even if the evidence of such a threat was insufficient to prevent information disclosure under Sections 2 and 3 of the Bill of Rights, it would add weight to the right protecting privacy under Section 9.

The confidentiality of taxpayer information has always been a cornerstone and requires governments to have domestic laws and administrative practices in place to ensure that the taxpayers’ data is protected.

The Multilateral Competent Authority Agreement, which together with national laws and regulations governs the information transfer, prescribes that the exchange of information can begin only when these requirements on data protection are met.

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has set up a working group which assesses, on the basis of a questionnaire about domestic laws and regulations, how the receiving state restricts the use of information exchanged for tax purposes and how its tax administration prevents the misuse of confidential data.

Under the common reporting standard, it is up to the sending state to impose more stringent requirements before exchanging information with another participating state, and it is the sending state that has to satisfy itself that privacy standards are met by the receiving state.

The Multilateral Competent Authority Agreement shows that the Cayman Islands Tax Information Authority will apply certain safeguards by referencing an as yet to be completed Annex C to the agreement. But it is unclear what criteria the tax authority will apply when deciding whether it is satisfied the confidentiality and data safeguards are sufficient.

Mr. Mack and Mr. Bowen cited two European human rights cases in which the bulk collection and transfer of Internet and social media data was struck down by the courts because it was disproportionate and the sending state had not verified that the receiving state had sufficient data protection and privacy safeguards in place.

The lawyers suggested on this basis that the Cayman tax authority could not simply adopt the conclusions of the OECD working group and will have to apply privacy safeguards that go beyond those of the tax conventions and which must at the very least meet the minimum standards set by the Bill of Rights.

Taxpayers who are concerned about the exchange of their taxpayer data should ask the Tax Information Authority which criteria it used to assess the receiving country’s data protection regime.

If the authority claims that it relied on the OECD working group in its assessment, the client could file for judicial review of that decision, the lawyers advised.