The number of exchange of information agreements has increased dramatically in recent years. It is commonly accepted that the need of the governments to have effective tax administrations (i.e., that their taxpayers pay the right amount of tax in their respective jurisdictions) must be balanced with the right of taxpayers to privacy and confidentiality. Otherwise, it is presumed that taxpayers will lose their confidence towards their tax systems and thus the agreements will be less effective.
Legal basis for automatic exchange of information
The legal basis for the automatic exchange of information is as follows:
- Article 26 of the OECD Model Tax Convention on Income and on Capital (15 July 2005) is the provision which provides for exchange of information according to a double taxation convention, and
- Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, or
- The domestic laws of EU countries.
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (hereinafter referred to as the “Convention”) was developed jointly by the Council of Europe and the OECD and opened for signature by the member states of both organizations on 25 January 1988 and amended by Protocol in 2010. It has been designed to promote international cooperation in order to improve the operation of national tax laws and combat tax avoidance and evasion.
The scope of the Convention is broad and covers a wide range of taxes (such as income, profits, capital gains, local taxes, inheritance or gift taxes, estate and social security contributions) and goes beyond exchange of information on request. It also provides for other forms of assistance such as spontaneous and automatic exchanges of information, simultaneous tax examinations, performance of tax examinations abroad, service of documents, assistance in recovery of tax claims and measures of conservancy and may also facilitate joint audits.
Article 6 of the Convention provides for automatic exchange of information. To implement Article 6, an administrative agreement between the competent authorities of two or more interested Parties to the Convention is required.
As of 17 July 2014, the signatories to the Convention are the following countries: Albania, Andorra, Argentina, Australia, Austria, Azerbaijan (original Convention only), Belgium, Belize, Brazil, Canada, China, Chile, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guatemala, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Kazakhstan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Nigeria, Norway, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Switzerland, Sweden, Tunisia, Turkey, Ukraine, United Kingdom, and United States.
The following jurisdictions are also covered by the Convention through territorial extension by Denmark: the Faroe Islands and Greenland; by territorial extension by the Netherlands: Aruba, Curaçao and Saint Maarten; and by territorial extension by the United Kingdom: Anguilla, Bermuda, the British Virgin Islands, Cayman Islands, Montserrat and Turks and Caicos, Gibraltar, Isle of Man, Jersey, Montserrat.
Taxpayer’s right of confidentiality
- Confidentiality under Article 26 of the OECD Model Tax Convention
Article 26(2) of the OECD Model Tax Convention provides that:
“Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.”
Disclosure is limited to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, enforcement, prosecution and determination of appeals, in relation to the taxes with respect to which information may be exchanged under the treaty.
The provisions of Article 26(2) concern information exchanged under Article 26 of the OECD Convention referred to above and also apply to information exchanged relating to the Convention on Mutual Administrative Assistance in Tax Matters.
- Confidentiality under Article 8 of the Model Agreement on Exchange of Information on Tax Matters (“TIEA”)
Article 8 of the TIEA provides that:
“Any information received by a Contracting Party under this Agreement shall be treated as confidential and may be disclosed only to persons or authorities (including courts and administrative bodies) in the jurisdiction of the Contracting Party concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this Agreement. Such persons or authorities shall use such information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. The information may 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.”
The TIES is similar to the OECD Model Convention as both ensure a minimum standard of confidentiality by requiring that information be kept confidential, and by limiting the persons to whom the information can be disclosed and the purposes for which the information may be used. The Model Convention contains the additional requirement that information should be treated “as secret in the same manner as information obtained under domestic law.”
- Confidentiality under Article 22 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters
The Multilateral Convention states:
“Article 22 – Secrecy
1. Any information obtained by a Party under this Convention shall be treated as secret and protected in the same manner as information obtained under the domestic law of that Party and, to the extent needed to ensure the necessary level of protection of personal data, in accordance with the safeguards which may be specified by the supplying Party as required under its domestic law.
2. Such information shall in any case be disclosed only to persons or authorities (including courts and administrative or supervisory bodies) concerned with the assessment, collection or recovery of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, taxes of that Party, or the oversight of the above. Only the persons or authorities mentioned above may use the information and then only for such purposes. They may, notwithstanding the provisions of paragraph 1, disclose it in public court proceedings or in judicial decisions relating to such taxes.”
The Multilateral Convention is similar to both the OECD Model Convention and the TIEA as all three conventions require that the information be kept confidential.
Tax confidentiality in Cyprus according to local legislation
All of the treaties for the exchange of information concluded by the Republic of Cyprus contain a provision ensuring the confidentiality of information exchanged and limit the disclosure and use of information received.
Any person having an official duty or being employed in administering the Income Tax Law or the Assessment and Collection of Taxes Law, hereinafter referred to as ‘ACTL’ (containing the provisions in respect of obtaining and exchanging information) must deal with the information and all documents relating to the income or object of tax of any person as secret and confidential and has to make and subscribe a declaration to that effect before a judge (s. 4(1) Income Tax Law and s. 4(2) ACTL). Such information or documents shall not be communicated other than for the purposes of the respective laws. According to s. 169 (3) of the Constitution of the Republic of Cyprus, treaties have precedence over domestic law.
In addition, section 67 of the Public Services Law provides that “all information, written or oral, which comes to the knowledge of a public officer in the execution of his duties, shall be confidential and its communication to any person shall be prohibited, except for the proper performance of an official duty or on the express direction of an appropriate authority”. All officers working for the IRD (income revenue department) must issue a declaration before the Court in this regard. According to s. 79 of the Public Services Law, breach of the confidentiality is considered a disciplinary offence, which may result in disciplinary punishments varying from a reprimand to dismissal.
Does Cyprus provide adequate protection on taxpayers’ confidential information?
In Cyprus the domestic legislation provides a high level of confidentiality to international investors.
Cyprus has established an exchange of information relationship with 53 jurisdictions through a network of Double Taxation Agreements (“DTA”) and Council Directive 2011/16/EU.
Cyprus ensures protection on taxpayers’ confidential information, through the following ways:
- First, as stated above, Cyprus has in place legislative provisions which provide punishment in the event a government official breaches any confidentiality clauses.
- Second, the powers of the Director of the Inland Revenue to obtain information for information exchange purposes is subject to the legal privilege recognized by Cyprus law.
According to the Advocates’ Law (Cap. 2) and the Advocates Code of Conduct Regulations of 2002, the legal professional privilege is recognized as a fundamental and primary right and duty and it must be protected by the courts and any public authority.
Section 13(3) of the Advocates Code of Conduct contains the core of the legal privilege:
“Advocates must, without any time limitation, respect the secrecy of all confidential information or evidence which has come to their knowledge in the course of their professional activity.”
- Third, Article 6 (11) and Article 6 (12) of the Assessment and Collection of Taxes Law provide detailed conditions to be followed when an exchange of information takes place according to DTA or according to Council Directive 2011/16/EU.