I attended a unique conference in Vienna recently. Tax experts from over twenty countries presented and discussed case laws from their respective countries. The cases were, for the most part, the ones decided in the year 2010 implying the topicality of the issues. Of course, there was a European perspective and some of the cases had elements of EU law and the freedom of establishment and other rights guaranteed by the EU. However, there were many cases which dealt with novel issue or issues which had already arisen before the Indian Courts and Tribunals and it will be interesting to have a different perspective about these cases, particularly when India is now contributing the maximum toward the development of the case laws in the area of international taxation.

Exchange of information is the flavour of the season in India. Every other day, the Government keeps announcing that it has either entered into or is going to enter into agreements with various countries or jurisdictions and this is frequently touted as one of the ways to bring back the Indian black money stashed abroad. While exchange of information is an important tool in the hands of the tax administration, it is definitely not a panacea. There are also issues relating to actual working of such agreements depending on the administrative practices of the respective countries. In the area of international taxation, however, there are not many case laws relating to exchange of information, this being principally a matter between the two tax administrations. However, even for exchange of information, there may be constitutional or other similar rights of taxpayers, which may get affected, and the tax administrations then have to deal with such situations. In this connection, we had two interesting cases that were discussed in the conference- one from New Zealand dealing with the exchange of information provision under the New Zealand- Australia tax treaty and one case from Switzerland dealing with the exchange of information provisions of the US-Switzerland tax treaty and related agreements. To the Indian mind, black money ‘stashed abroad' are mostly in Swiss Banks and hence it may be interesting to see how the Swiss judiciary dealt with the issue even when the request for information came from the mighty Americans.

Coming to the New Zealand case first, this was presented by Shelly Griffiths of the University of Otago, Dunedin. In this case, [ Avowal Administrative Attorneys v District Court at North Shore [2010] NZCA 183,] while investigating the affairs of one Mr. Petroulius, an ex-Australian Tax Office (ATO)official, the Australian authorities initiated exchange of information process with the Revenue authorities of New Zealand in the year 2004. In the course of a long enquiry spanning over two years, it was found that Mr. Petroulius along with certain others were involved in promoting schemes which eroded the tax bases of both Australia and New Zealand. Simultaneous search and seizure operations were therefore carried out in several premises in Australia and New Zealand, which were likely to contain incriminating books of accounts and documents. While searching one of the business premises in New Zealand, the employees of the law firm Avowal which shared the premises with Mr. Petroulius, the rogue ex ATO official, claimed privilege over all the materials in the computer and hard drives. Under the New Zealand practice, before accessing a computer, a key word search is necessary in order to determine the relevancy of the material for the tax administration. However, because of the privilege claim, this could not be carried out and the revenue agents decided to clone the hard drives so that the privilege issue could be sorted out by the Courts.

The search action was challenged in the High Court. It was argued that the Commissioner had power to seize only documents and that the hard disks could not be called documents. It was also argued that the search was against the New Zealand Bill of Rights Act, 1990 and that a search could not be carried out merely to furnish information to the ATO. Also, what is interesting from the perspective of tax treaty interpretation is an argument that under Article 26 of the double taxation avoidance agreement between New Zealand and Australia, New Zealand authorities are not required to do something, which was not possible under the Australian laws. The language of the relevant portion of Article 26(2) of the New Zealand- Australia tax treaty (as indeed the language of most of Indian treaties) was as follows:

“ 2. In no case shall the provisions of paragraph 1 be construed so as to impose on the competent authority of a Contracting State the obligation:

(a) to carry out administrative measures at variance with the law or administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the law or in the normal course of the administration of that or of the other Contracting State;….”

It was pointed out that there were judgments from the Australian Courts to the effect that Australian tax authorities could not resort to search against taxpayers in another state. Moreover, under Australian case laws,a key word search is a must and since in this case the New Zealand Revenue did not undertake a preliminary screening, their actions did not conform to the Australian law or practice and hence there was no obligation to supply information to the ATO.

Under the New Zealand Income Tax Act, the commissioner is also required to maintain secrecy over information obtained from search operations except in cases where he is required under the Treaties to disclose information. It was argued that since in this case, the New Zealand authorities were not required to disclose the information, disclosing the information to the ATO was not permissible.

The High Court held that the in the instant case, as a matter of fact, the information was required both in New Zealand and Australia. Therefore the argument that the search was for the purpose of supplying information to Australia was not a valid one. However, even if the search were to take place only for the purpose of supplying information to Australia that would have been valid. The High Court also held that computer data amounted to documents; that exact one to one matching of the administrative practices of the two countries was not necessary, as that would make the working of the DTAA unworkable.

In the appeal filed before the New Zealand Court of Appeals, it was pointed out that the term “books or documents” is defined in s 3 of the TAA(New Zealand Income Tax Act) as follows: “ All books, accounts, rules, records, registers, papers, and other documents and all photographic plates, microfilms, photo static negatives, prints, tapes, discs, computer reels, perforated rolls or any other type of record whatsoever .”

It was therefore argued that computer hard drive did not come within this definition. However,the High Court had pointed out that the inclusion of computer reels indicated the Parliament's intention to include devices for storing electronic data. The Court of Appeal also held that ‘record' could denote both information, which is recorded as well as the medium in which recording, is made and hence computer hard drive comes within the concept of ‘any other records whatsoever' of the definition.

An interesting argument was that under section 81 of the TAA (New Zealand Income Tax Act), the tax authorities must maintain secrecy of information derived from a search. One of the exceptions is provided in section 88 which states as follows:

“ Notwithstanding any obligation of secrecy imposed by any enactment, the Commissioner may disclose such information as is required to be disclosed under a double tax agreement to a person authorized to receive such information under the law of the territory in relation to which the double tax agreement or tax recovery agreement has been made.”

It was argued that under art 26(2)(b) of the DTA, New Zealand was not under an obligation to supply information which was not obtainable under the law or the normal course of administration in New Zealand and /Australia. Since the tax agents did not undertake the preliminary screening, it was argued that their action did not conform to the Australian law or practice and hence supply of information to Australia was illegal.

The Court of Appeal reiterated the finding of the High Court that the information was required even for New Zealand tax purposes. Secondly, while carrying out a search, the tax authorities cannot retrospectively comply with the search provisions of Australia, which is an absurd proposition. Therefore information obtained from s16 operations (equivalent to section 132 operations in India) is information, which is obtainable under the laws of New Zealand, and which has to be shared under Article 26(1) of the tax treaty. It was held that the difference in practice in Australia exhibited by the existence of guidance etc. does not change this. It was also pointed out that Article 26(2) (b) refers to law or practice and not law and practice . As long as information is obtainable under the law of Australia, it is of a kind which must be supplied under Article 26. The Court also accepted the alternate argument of the Commissioner that Article 26(2) (b) provided only that there was not an obligation to supply information but did not prevent the Commissioner from doing so voluntarily.

The UBS case:

The UBS case was presented by Michael Beusch, a judge of the Swiss Federal Administrative Court. The case will be of particular interest in India in view of the contemporaneity of the various proposals of the civil society in the agitation against black money in tax havens.

These days, we often hear that if the Americans can get information about its citizens and residents having accounts in Swiss banks, why Indian tax authorities cannot get the same. For starters, the Exchange of Information provision in the tax treaty between USA and Switzerland is differently worded. The provision is different from even the latest OECD standard of exchange of information.

As far as the Swiss-Us tax treaty is concerned, as Michael Beusch pointed out there are in fact, three instrumentalities through which the exchange of information with the USA can be effectuated. First,the revised 1996 convention for the avoidance of double taxation and its Protocol' which, inter alia, defines ‘prevention of tax fraud or the like'. Secondly, there is a mutual agreement clarification given under Article 25(3) in 2003. In this agreement, information is required to be exchanged even on the basis of suspicion. It leaves very little to imagination and gives 14 hypothetical examples of situations in which information has to be exchanged (much like the examples in the India-US treaty on royalties and fees for included services.) The example in Hypothetical 1 is commonplace in India and is reproduced below:

“HYPOTHETICAL 1

An individual subject to the requesting State's income tax operates a business with substantial cash sales. He keeps one set of books and records in which he records all business expenses; however, he causes a substantial portion of the cash sales of the business to be omitted from this set of books. The individual keeps a second set of books and records that includes the total amount of cash sales, including the cash sales not recorded on the first set of books and records. Because the first set of business books and records are used to prepare the individual's income tax return, a substantial portion of his taxable income is not reported on the tax return. Specifically, the individual's income tax return, and the component to that return on which the individual reports business receipts, expenses, and other items related to the business, understates the gross business receipts and other income related entries.

The individual maintains a bank account in the requested State in his own name into which he deposits the portion of his business income that is not reported on his tax return. Based on information provided by an informant, including a copy of the second set of books and records that the informant secretively took from the business premises, tax officials of the requesting State commence an investigation of the individual for possible tax violations under the laws of the requesting State. The taxpayer provides the first set of books and records to these officials to support the false information on his tax return.

The requested State would obtain and provide information relating to the bank account in the requested State of the individual in response to a specific request by the requesting State under Article 26 of the Convention.”

However, despite such provisions for exchange of information, as we all now know,UBS happened. To recapitulate the facts very briefly, between the years 2000 and 2007, UBS facilitated US taxpayers to establish accounts at UBS and conceal their ownership or beneficial interest till such time as a former UBS banker became a whistle blower and spilled the beans to the US IRS. Subsequently, UBS agreed to pay a penalty of 780 million USD and agreed to disclose the names of the US beneficiaries.

To facilitate such disclosure, Uncle Sam then entered into a special agreement in 2009 titled “ Agreement on the Request for Information from the Internal Revenue Service of the United States of America regarding UBS AG ”. Accordingly, the IRS formally requested the Swiss Federal Tax Administration to release the names of the US taxpayers who had accounts with UBS Switzerland and had the authority to act as beneficial owners of these accounts and who did not submit their W-9 certificates. (Taxpayers identification number).The Swiss tax authorities thereupon asked UBS for the information. However, one of the affected parties appealed to the Swiss Federal Administrative Court against such disclosure.

The Court considered the ambit of the expression ‘tax fraud and the like' used in the DTA. The agreement of 2009 clearly specified that if some one did not submit the w-9; it would be a case of ‘tax fraud and the like' . The question therefore was whether the 2009 agreement was an international agreement which would be binding on the Court or was it a mere mutual agreement in terms of Article 25(3) relating to Mutual Agreement Procedure. In the event, the Swiss Federal Court held that it was a mere mutual agreement and that the DTAA between Switzerland and the USA could not be amended in such a manner through the backdoor. In coming to this conclusion, the court took into account the narration in the agreement itself and the fact that the parties had agreed to ratify the new protocol in accordance with their constitutional processes. Accordingly, the Court denied the mutual assistance.

As a result of the decision, after another round of negotiations, a protocol was signed in March 2010 between Switzerland and the USA which was duly ratified by the Swiss Parliament and which will now be binding on the Courts.

(to be concluded)