Information sharing discussed
by Andrew Nutbrown and Richard F Clarke of PricewaterhouseCoopers’s national Tax Investigation practice, who each formerly held a senior position in the Inland Revenue’s Special Compliance Office. Article published in the June 2002 issue of Tax Adviser.
United Kingdom (UK) Government Authorities are working closely to increase the amount and type of information exchanged between them. This crossover of information is designed to tackle tax evasion, benefit fraud and other abuses of the system. At the same time recent developments internationally mean that tax authorities worldwide will have access to more and more information about their customers.
Businesses which trade cross border need to be aware of these developments, as different authorities receive information from a wide variety of sources. In particular, businesses which supply information on UK trade, European Union (EU) business and international economic activity may find that the information in the hands of the various authorities leads to enquiries which are unexpected, very time consuming and difficult to deal with.
Exchange of information has been a long-standing feature of working between Customs & Excise and the Inland Revenue. The feeling on ‘the inside’ was that the Revenue tended to soak up more information than it gave out, often due to entirely legitimate concerns about taxpayer confidentiality. However the introduction of the Anti-Terrorism, Crime and Security Act 2001 allows the Revenue to breach taxpayer confidentiality under certain circumstances. These are specifically as follows:
- helping the intelligence services (e.g. MI5 and MI6);
- any criminal investigation, whether in the UK or abroad;
- any criminal proceedings, whether in the UK or abroad;
- the initiation or bringing to an end of such investigation or proceedings; or
- helping determine whether such investigation or proceedings should be initiated or concluded.
The act was introduced for quite specific criminally focused reasons, but since ‘crime’ is defined as including ‘tax evasion’ there is substantial scope for exchanges between the authorities to be initiated.
The treaty network
Tax legislation includes the authority for the Revenue in the UK to exchange information with other fiscal authorities. The legislation, at Income and Corporation Taxes Act 1988 (ICTA 1988), s. 788(2) refers to:
‘ … the exchange of information necessary for carrying out the domestic laws of the UK … including, in particular, provisions about the prevention of fiscal evasion …’
These exchanges are supported by the extensive network of Double Tax Agreements (DTAs), which often contain specific clauses relating to information exchange.
Information coming in to the UK is passed around the network of Revenue offices to the relevant file of the individual or company to which it relates. It is easy to think that this must be a rare event. In fact in the year to April 2000, the Revenue received or sent out in over 500,000 pieces of information relating to the affairs of taxpayers with UK connections. Some of this information will undoubtedly have led to enquiries, although under Self Assessment (SA) the Revenue do not, of course, have to reveal whether this was the driver to commencing an enquiry or not.
Within the EU further assistance is available to the respective Revenue authorities under the Mutual Assistance Directive. This process enables one EU country to ask another to use its domestic formal information powers to assist in an investigation. Cooperation is always noted, with a view to asking for reciprocal assistance in due course.
Additionally, in February 2002 further proposed strengthening of the links between EU member states was announced. Two new programmes, Fiscalis 2007 and Customs 2007 are designed to counter cross border tax and customs fraud by implementing:
- improved electronic systems for information exchange between national administrations;
- cooperation in investigations;
- training seminars for Customs and tax officials and experts; and
- the exchange of information between administrations.
The Commission has been concerned for some time that in the absence of formal directions at the highest level it was too easy for international evasion to escape attention. Also the European authorities felt that the concentration on indirect tax provided opportunities in the direct tax arena for cross border evasion. The Fiscalis programme attacks this for the first time, and is consistent with the approach of the UK Government to combat fraud and evasion. The government objective is to attack fraud and evasion head-on by exchange of information rather than supporting a complicated network of withholding taxes with the inherent problems of cash flow and double taxation this causes to the entirely innocent international business.
The global view
On 18 April 2002 the Organisation for Economic Cooperation and Development (OECD) released details of its model legal instrument, intended to establish exchange of information on a truly worldwide scale. The release of this model follows the well-publicised campaign by the OECD to ‘ address harmful tax practices that distort competition in the global market for mobile financial services’. A key factor in this was noted to be the lack of effective exchange of information. New developments such as these have the full support of the UK Government, and indeed Dawn Primarolo, the Paymaster General, has been actively canvassing support for increased exchanges. In December 2001, speaking to the British Swiss Chamber of Commerce in Zurich, she was categoric in her confirmation that the government views tax evasion as a crime and one that governments should fight together. The venue for her comments was unlikely to have been coincidental, considering the well-earned reputation of the host country for secrecy and security in financial matters.
Global businesses and other international traders need to be aware that there is an increasing network for exchange in place now, and that this will surely increase in the future. The UK authorities are looking to take a leading role in these developments, establishing pan-European and International links as appropriate for their purposes. Requests for this type of information, backed by the apparent threat of formal action, need to be considered with care. It should be noted that only information can be exchanged, not speculation, and the OECD guidance specifically rules out the use of exchanges for ‘fishing expeditions’. There are checks and balances in the systems, and these need to be applied properly in the face of the enthusiasm of the authorities to pursue the exchange of information route. This follows the general trend of the UK Revenue to use its own domestic first and third party information powers more frequently.
Businesses need to be sure that the information they are reporting to the authorities is consistent and properly managed, particularly if subsequent enquiries follow as a result of information received by the tax authority. Remember, be sure to get things right first time!
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June 2002 by