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Taxation Law - The Future - The Loss of Privacy and Confidentiality

Date: August 05, 2010

Authors: Tony Anamourlis B.A., LL.B., MTaxLaw, GradDipLegPrac, SJD Candidate (La Trobe); ATIA

Future Directions

At first glance the Brussels Agreement is far reaching in terms of providing the CIA and perhaps other USA authorities to access information held by banks. However there are a number of matters that should be considered in relation to this issue. Firstly it is important to recognise that the initial direction of the agreement is to focus on money transfers and bank details relating to Terrorist activities. In this respect it is uncertain whether the agreement will be used to facilitate other enquiries of taxpayer’s affairs and especially those in relation to tax avoidance and tax evasion.

Secondly, the issue arises as to whether such an agreement can be used to undertake a” fishing expedition.’ Essentially this means that such powers can be used as a point of general inquiry to investigate bank details in a broad sense rather than focusing on specific individuals, their wealth situation and money transfers.

Thirdly, a further issue arises as to whether there is the possibility that the “Brussells agreement” could be used to analyse banking details of entities and individuals outside of the EU. At the moment the agreement is confined to countries who are EU members. Clearly as the “Brussels agreement” is EU based, the issue of bank secrecy and confidentiality of a taxpayer’s affairs can be easily protected by relocation outside of the EU such as Switzerland and other similar countries.

Fourthly, it is important to note that where any transaction is undertaken outside of the EU it still remains possible that part of the transaction or banking route may involve an EU country. Where this is the case it may lead to the start of an audit or investigation trail which may lead to other countries and the possibility of further investigations and also tax audits.

Fifthly, in many ways the Brussels agreement is a reflection of a broader global focus on the issue of terrorism and tax evasion. The recent meeting of the G20 and pronouncements by the OECD have recognised the threat to global economies of tax avoidance and especially tax evasion. On this issue the OECD has commented that:

“The global economic crisis and recent tax evasion scandals have spurred calls for fairness and transparency of the tax system. Removing practices that facilitate tax evasion is part of a broader drive to clean up one of the more controversial sides of a globalised economy. The OECD advocates exchange of information between tax authorities on request in cases of specific tax inquiries to better equip tax authorities to tackle tax evasion”[1].

While the Brussels agreement has initially focused on terrorism in many ways it has at the same time raised the issue of banking secrecy and its involvement with tax evasion. In this sense, it may be argued that both activities are closely linked.

Sixthly, based on these developments it would be prudent for taxpayers and their related business entities to be aware of these recent developments. It is likely that as the terrorism threat continues and fiscal leakage continues to occur there is likely to be an increased global focus on activities that are not bona fide. For this reason it is prudent that taxpayers should have proper documentation of all their business transactions and ensure that they can stand the test of scrutiny by local authorities and especially those in offshore jurisdictions where the access powers are increasing in strength and focus.

A Practitioner and Client Perspective on EU Business Transactions

As a result of the increased focus on tax avoidance and tax evasion on a global level taxpayers and their advisors should take a number of steps to ensure that any business transactions in the EU are bona fide and are capable of explanation by reference to ordinary commercial business dealings. Some of these steps are:

  1. Ensure that the tax advisor has a proper letter of engagement with the client in outlining the work to be undertaken by the advisor;
  2. Ensure the tax advisor is informed at all times of offshore transactions entered into by the client to ensure that they are commercially appropriate from a tax perspective;
  3. Ensure that there is proper documentation relating to any offshore transaction to indicate the bona fides of the transaction;
  4. Ensure the taxpayer is fully briefed and aware of any issues that may be sensitive or subject to investigation by the tax or other authorities in relation to tax avoidance or tax havens;
  5. Ensure that where there are other parties to an offshore transaction that the taxpayer is fully aware of the other parties integrity and role in the transaction;
  6. Ensure that where there is a difference of opinion on an issue between a taxpayer and their advisor that there is appropriate documentation held by the taxpayer and advisor to reflect the outcome and the course of action decided upon;
  7. Ensure that the taxpayer is made aware of any risks associated with a questionable transaction and the risks of penalties that may be imposed;
  8. Ensure that the client and taxpayer are aware of new TIEA’s and their effect on their offshore business activities;
  9. Ensure that there is trust between the taxpayer and their advisor. If this is not possible serious thought must be given to a cancellation of the professional engagement either by the taxpayer or their advisor.

Conclusion

While the Brussels Agreement is focused on terrorist activities and overcoming bank secrecy issues it should be recognised that it may also be used to obtain other details in relation to a taxpayer’s affairs. While it focuses on EU countries it has the possibility to extend beyond EU countries. In this respect appropriate documentation of business transactions, especially involving EU countries should be undertaken to reflect the bona fide nature of any business dealings with such countries.

[1] OECD. Work on Tax Havens media release, 13 November 2009.
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