Taxation

A Guide to Tax Information Exchange Agreements

Tax Information Exchange Agreements

In the age of globalization, the exchange of information has become an important facet of the enforcement of tax laws. The introduction of TIEA has provided the international financial community with broad benefits for relevant offshore financial jurisdictions. TIEA is a common form of a bilateral agreement on administrative assistance. TIEAs are generally based on the Model Tax Information Exchange Agreements (Model TIEA) developed by the Organization for Economic Co-operation and Development (OECD) in 2002. TIEAs are entered into between two countries to build up an official system for the exchange of information on taxes. TIEAs are a result of the OECD’s work to address harmful tax practices. Effective exchange of information is one of the ways to address harmful tax practices. TIEA facilitates the free exchange of financial tax information irrespective of the contrast between the two nation’s necessities to predicate offense to illegal tax avoidance.  Further, TIEAs permit a full exchange of information on everyday tax matters as well as criminal tax matters between the two signatory countries. TIEAs come into effect when the two nations give their lawful impact on it.

Under TIEA, the tax administration of contracting states provide information relevant to the determination, assessment and collection of taxes covered under TIEA. TIEAs are also an effective mechanism for the recovery and enforcement of tax claims and the investigation and prosecution of tax matters. All taxes must be expressly mentioned in the TIEA as the provisions of TIEA apply only to the taxes mentioned in the TIEA. Further, the exchange of information regarding tax is placed only upon request. The request is accepted only if a legitimate solicitation is made as per the deal arrangement bringing out a prima facie case. The exchange of information has to be treated as confidential. The OECD released a Model Protocol in 2015 extending the scope of TIEA to an automatic and spontaneous exchange of information. The terms of the Protocol can be included in the provisions of bilateral agreements to enable automatic exchange.

What are the scope and objective?

The Model TIEA provides that competent authorities of Contracting States shall assist with the exchange of information relevant to the administration and enforcement of domestic laws. TIEA aims to establish a legal framework for exchanging information relating to tax mutually between countries. They complement Double Taxation Avoidance Agreements (DTAAs) and intend to ease the way DTAAs are concluded. Tax Information Exchange Agreements ensure that individual countries’ tax laws are implemented and executed. Without Tax Information Exchange Agreements exchange of information or request for the exchange of information would not have been possible without violating the formal obligation of secrecy of such jurisdiction.

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How is information exchanged under the Tax Information Exchange Agreements (TIEA)?

Article 5 of the Model TIEA provides that the competent authority can provide information only upon request. The information then exchanged is done the without considering that the conduct being investigated would constitute a crime under the laws of the other country. In case the information in possession of the competent authority is not sufficient to enable compliance with the request for information then all measures shall be taken to provide the requesting party with the information requested irrespective of the fact that the information needed by the requesting party is not for its own tax purpose. The Model TIEA provides that every contracting state has to ensure that its competent authorities have the authority to obtain and provide information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity; or any information regarding ownership of companies, partnerships, trusts, foundations, etc. However, Article 2 of the Model TIEA also provides that the requested party is under no obligation to provide information not held by its authorities or in possession or control of persons who are within its territorial jurisdiction.

The requested party also can decline a request for information if the disclosure involves information that is contrary to public policy. Further, a requested party can also refuse to grant information when the information requested is for the administration or enforcement of a provision of the tax law of the applicant country or any other connected requirement which discriminates against the nations of the requested party as against the national of the applicant party under similar circumstances. However, the request for information cannot be denied simply on the ground that the tax claim giving rise to the request is disputed.

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All information exchanged under the TIEA shall be treated as confidential. Article 8 of the Model TIEA provides that the confidential information shall be disclosed only to persons or authorities in the contracting states concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals concerning the taxes covered by the agreement. Further, such information can be disclosed in court proceedings and judicial decisions. Apart from this, the information should not be disclosed to any other person or entity or authority or any other jurisdiction without the express written consent of the competent authority of the requested party.

What is the need for Tax Information Exchange Agreements (TIEAs)?

A dispute arises when access to some information is secured by a legitimate foreign system. These issues were commonly sorted out by executing collaborative tax treaties. Until the OECD set up norms on the exchange of information for tax purposes and urged nations to implement these guidelines. The OECD along with the Financial Action Task Force whose members are individuals of G-20 nations expressed that a nation must have at least 12 (twelve) TIEAs. By setting the base of 12 (twelve) norms, G-20 countries are urging international financial centers to execute collective agreements in abundance to this ordered prerequisite. Countries that neglect to enter into TIEAs will be considered non-agreeing countries. As expressed by the G-20 countries[1], action will be taken against the non-agreeing countries. The purpose of TIEA is to facilitate global cooperation in tax matters through the exchange of information.

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What are the accompanying arrangements contained?

Usually, a TIEA contains the following accompanying arrangements:

  • Arrangements relating to the exchange of information ‘predictably applicable’ to the organization and implementation of domestic tax laws on the Contracting parties.
  • Arrangements classifying commitments securing the information given under TIEA.
  • Arrangements stating information relating to an individual not an occupant of the contracting party.
  • Arrangements to accumulate information on banking details, proprietorship details of companies/people/reserves/trusts and so forth.
  • Arrangements regarding the tax assessments including the meeting of people and assessment of records.

Conclusion

Tax Information Exchange Agreements (TIEAs) are, therefore, a tool that facilitates the exchange of information relating to tax between contracting states. It promotes cooperation and friendly relations between contracting countries as they mutually agree to exchange information in the manner decided by them.  Thus, Tax Information Exchange Agreements reduce conflicts among countries.

Also Read:
How Does International Taxation Operate?
The Principles of International Tax Planning
Tax Treaties and their role in International Taxation

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