Australian tax data exchange unlawful, court rules

A judge’s ruling that the Cayman Islands Tax Information Authority acted unlawfully when it handed over a trove of documents on two Cayman-registered companies to Australian tax authorities has been upheld by the Court of Appeal.

The court ruled that the decision to provide documents, requested as part of an investigation into a suspected offshore tax-evasion scheme involving two Australian accountants, was mishandled by Cayman’s tax authority.

The written judgment from Sir John Chadwick, president of the Court of Appeal, upholds an earlier Cayman Islands Grand Court ruling that the Tax Information Authority had not followed all of its legal obligations before releasing the information to its Australian counterparts, following an application under the relevant Tax Information Exchange Agreement.

The ruling could have implications for how future requests for information from foreign authorities are handled under Tax Information Exchange Agreements.

Anthony Travers, senior partner of Travers Thorp Alberga and former chairman of Cayman Finance, said the court judgments make it clear that a high level of scrutiny and review is essential before private information is shared with foreign tax authorities.

“What is clear from the Court of Appeal judgment is that to obtain information that would otherwise be regarded as confidential under Cayman Islands law through the mechanism of a Tax Information Exchange Agreement requires strict compliance with the terms of that agreement,” he told the Cayman Compass.

In his original September 2013 ruling, Justice Charles Quin quashed the Tax Information Authority’s original decision to provide information to the Australian Taxation Office on two Cayman-registered firms, MH Investments and JA Investments, which it obtained through FCM Ltd., the registered agent of the two companies.

Justice Quin’s decision followed a request for judicial review from the two companies.

Australian tax authorities, at the time, were in the midst of an investigation into alleged tax schemes arranged by Australian accountants Vanda Gould and John Scott Leaver, who they suspected were the ultimate beneficial owners of MH Investments and JA Investments.

Justice Quin ruled that the Cayman Tax Authority had consented to four requests for information from the Australian Taxation Office without ensuring that the information sought related to periods after July 2010, as stipulated by the terms of the Tax Information Exchange Agreement between the two countries.

The Tax Information Authority also had no authority to consent to the use of the documents in foreign proceedings without applying to the Grand Court for directions.

This, together with the failure to notify the parties subject to the information request and allowing them to make written representations on whether the information should be released, had infringed their rights to privacy, as well as to a fair and public hearing under the Cayman Islands Bill of Rights, Justice Quin ruled.

He ordered the Tax Information Authority to write to the Australian Taxation Office demanding the return of the files and revoking its consent for use of the documents in court proceedings. The Australian courts refused this request but subsequently dropped criminal tax evasion and money laundering charges against Gould and Leaver.

The Tax Information Authority appealed Justice Quin’s ruling, arguing that Gould and Leaver, and not the two Cayman Islands investment firms, were the parties subject to the information request, and therefore be entitled to contest the release of the information.

The Court of Appeal dismissed this interpretation. Sir John Chadwick wrote, “In failing to serve notices under section 17(1) on either JA Investments Limited or on MH Investments, the Authority failed to afford to those companies the opportunities to challenge the validity of the requests which, under the law, they were intended to have.

“In those circumstances, the Authority reached the conclusion that the requests were in accordance with the Australian Tax Information Exchange Agreement without taking into account whatever representations those companies might have wished to make.”

The judgment notes that the law has subsequently been changed to specifically indicate that the person entitled to be notified is the “foreign taxpayer under investigation,” which in this case would have been Gould and Leaver.

The judgment notes that the authority had not notified Gould and Leaver, either, and would therefore have been in breach of the law in any event.

Mr. Travers said the Court of Appeal, in upholding Justice Quin’s judgment, confirmed the protections afforded by the law to the rights of individuals and companies subject to requests for confidential information by foreign tax authorities.

He said the subsequent change to the law would not have changed the outcome of this case. Mr. Travers added, “Subsequent revision to this legislation changing the identity of the persons upon whom notice must be served does not adversely affect the efficacy of the Tax Information Exchange Agreement but avoids any doubt as to the correct procedure that must be followed by the Tax Information Authority and clarifies the identity of the persons who must in the specified circumstances receive due notice of the information request so that appropriate challenge may be made to the court in good time where warranted.”