An Analysis of the scope of Art. 26 OECD Model and its requirements
Titel[FD1]
F. Debelva[1] & N. Diepvens[2]Auteur
In this article, the authors examine the requirement contained within Art. 26 OECD Model. The focus lies on the scope of the article and the principles of relevance, subsidiarity, sovereignty and reciprocity, and the limitations relating to trade secrets and information contrary to public policy.Abstract
1IntroductionIntro
The application of Art. 26 OECD Model regarding the exchange of information (EOI) requires several requirements to be met. In this contribution, the authors start by discussing the scope of application Art. 26. In a second part, the substantive requirements for the application of this article are discussed.
12Scope
1.12.1Personal scope
Article 26 of the OECD-model of 1963 consisted of two paragraphs. The first paragraph contained the procedure for the exchange of information. The personal scope of the exchange of information was at that point in time limited to the persons mentioned in article 1 OECD-model (i.e. those persons falling under the material scope of the treaty itself). Therefore, contracting states could only exchange information regarding individuals that were a resident of one of the two states. The personal scope was, however, expanded by the 1977 version of the OECD-model, by dint of the addition of adding the clause: “the exchange of information is not restricted by article 1”. Since As a result of this amendmentthen, the exchange of information is not only possible with regard to residents of the contracting states, but also with regard to residents of third states and entities or persons that, according to article 4 OECD-model, are not subject to tax as a result of the allocation qualification as a resident of one of the two states.[3] For example, when the requesting state sends a request for information with regard to financial accounts opened by a resident of a third state, the requested state can’t decline this request merely because the bank account was opened by a non-resident. The aforementioned expansion of the personal scope does not imply that there no longer has to be a direct link between the requested country and the resident of a third state. When there is no such link, the tax authorities of the requested state cannot be required to obtainexchangethe information whichthat is not available or the information that is located outside of its the territorial jurisdiction.
of the requested state.
The text of article 26 OECD-model contains no information about the position of the taxpayer to whom the information is requested. The legal status of the suppliers of the information is but arranged bysubject to the formal(tax) law of their own country.[4] Nevertheless the “Global Forum”, founded by the OECD, stated that, in order to transform the exchange of information into an efficient instrument, it would be indispensable that the obligation of a state to provide information is not limited by the residency or the nationality of the person to whom the information relates or by the residency of the nationality of the person who is in possession of the requested information.[5]
1.22.2Material scope
Just like the aforementioned personal scope, the material scope of article 26 OECD-model differs substantially from the scope of the other articles of the OECD-model. However, this has not always been the case. In the version of 1963, exchange of information was only possible for the taxes mentioned in article 2 of the OECD-model, i.e. . Those taxes were taxes on income, capital, or on elements of income or of capital, including gains from the transference of real estate, salaries, and capital appreciation.[6]
All of that changed in 2000. The last sentence of the first paragraph of article 26 was changed into: “the exchange of information is not restricted by Articles 1 and 2”. Consequently, states could revise their DTCs in order to include all types of taxes. In principle, custom duties would also be covered by article 26 OECD-model, since such duties can undoubtedly be characterized as taxes. The glossary of tax terms of the OECD classifies a “tax” namely as a “compulsory unrequited payment to the government”.[7] However, assince the exchange of information concerning the application of customs duties has a basis in other international instruments, the provisions of these more specialized instruments will generally prevail and therefore the exchange of information concerning custom duties will not, in practice, be governed by article 26 OECD-model.[8] The exchange of information under article 26 OECD-model hence covers “taxes of every kind and description”, and not only the taxes on income and capital. A contracting state has therefore the right to ask the other contracting states for information pertaining gift taxes, notwithstanding the fact that these taxes are not provided in the OECD-model.
22.3Aim of the information exchange
The EOI provision contained in a treaty can provide for a basis for the exchange of information which is relevant for carrying out the provisions of a treaty or for the administration or enforcement of the domestic laws of the contracting states. This is what is referred to as a big (or major) exchange clause. It is also possible that a treaty only allows information exchange solely for carrying out the provisions of the treaty itself, i.e. a small (or minor) exchange clause. The current version of Art. 26 of the OECD Model contains the former clause.[9] It is not possible however to exchange information which aims to impose a tax which is contrary to the tax treaty (Art. 26(1)). This does in our view however not hinder the requesting state to request information relating to taxes for which taxing rights have been allocated to the requested state, as this information might still be useful for the former state to determine the amount of tax which is due (or not due).
2.4Temporal Scope
In principle, the information exchange provision which is included in a double tax treaty can only have legal effects from the moment the treaty itself has entered into force.[10] A specific problem can however arise when information is requested on the basis of an applicable treaty concerning facts which have occurred before the treaty entered into force. The OECD Commentary to Art. 26 seems to allow the exchange of information which existed prior to the treaty[11] and this practice has also been upheld in case-law.[12] It is important to note that in case information is requested which concerns facts which have occurred several years ago, both states involved in the exchange procedure should allow such long limitation periods under their domestic laws. If this is not the case, the requested state could refuse to supply the information on the basis of Art. 26(3), as the principle of reciprocity requires that the requested state should not be obliged to provide information which is not obtainable under its own laws; or which cannot be obtained by the requesting state under its own legislation (infra).[13]
We would like to draw attention to the Ben Nevis case, which concerned the application of Art. 27 OECD Model (assistance in the recovery of taxes).[14] The South African tax authorities requested assistance from the UK tax authorities in recovering taxes. The case concerned tax debt dated back to the years 1998, 1999 and 2000. The tax treaty itself only applied as from 2002, and possibility for the assistance in collection (and exchange for information) was only added by a Protocol in 2010. According to the Court, the protocol applied to any requests made after the entry into force of the protocol, irrespective of the years to which the revenue claims relate.[15] In an obiter dictum, one of the judges mentions that the outcome would be similar if the dispute revolved around the exchange of information provision in the protocol.
2.133. Substantive requirements
2.1.13.13.1. Foreseeably relevant
The abovementionedOur analysis clearly shows clearly that the personal and the material scope of article 26 OECD-model has to be consideredisas very broadextensive. NotwithstandingNevertheless, there are two important substantive requirements to be met by a request for information. Firstly, the relevance of the requested information has to be demonstrated by the requesting state. The text of article 26 of the OECD-model of 2003 still contained the phrase: “the competent authorities of the contracting states shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws (...)”. The term “necessary” was not further defined in the OECD-model itself or in the accompanying Commentary. This carries the risk of different interpretations of the term “necessary” by the contracting states. It could also be interpreted in a strict way, which would make it hard to demonstrate it in some cases. For instance, “necessaryity” could mean necessaryity after an audit, necessaryity because the obtained information would lead to a different tax assessment, necessaryitybecausewhen an offence occurred and the extent of the offence is being investigated, or necessaryssity in case an additional assessment has already occurred been issued in the requesting state and further data is requirednecessary.[16]According to VOGEL, GEL states that information is necessary when it is relevantin law to taxation [FD2]by the requesting state and if that contracting state is unable to procure such information by means of own inquiries within its territory.[17] Hereby, bBoth contracting states have d to verify whetherthat thishe necessity requirement iswas fulfilled. Thus, the requesting state hasd to check first if the necessity requirements were met and then the requested state hasd the right to review the request., since the requested state was not obliged to accept the allegations of the requesting state without additional examinations.
The 2005 update of the OECD-model changed the wording of thiseaforementioned substantive requirement for the exchange of information. As fromSince that moment the competent authorities of the contracting states shall exchange information “as is foreseeably relevant for carrying out the provisions of this Convention or to the administration of the domestic laws”. We can find an explanation for the change in wordings in the Commentary of 2005: “Many of the changes that were made to Article 26 were not intended to alter its substance, but instead were made to remove doubts as to its proper interpretation. For instance, the change from ‘necessary’ to ‘foreseeably relevant’ was made to achieve consistency with the Model Agreement on Exchange of Information on Tax Matters and was not intended to alter the effect of the provision”. The Commentary to the OECD-model thus confirmed VOGELs way of thinking that “necessary” already had to be filledinterpreted in a manner that the requested state has the possibility to review whether the requested information would be ‘“relevant’” for carrying out the treatyDTC or to the administration of enforcement of the tax legislation of the requesting state.
The Commentary to the OECD-model thus currently statesd that all foreseeably relevant information should be exchanged. The term ‘“relevant’” was once more not further defined. A part of the doctrine then tried to apply the renvoi-clause in article 3(2) of the OECD-model in order to clarify the meaning of the term.[18] This renvoi-clause mentions that a non-defined term in the treatyDTC may be filled in by the national law of the contracting states. We on the other hand believe that this clause can be useful for the interpretation of a legal term,[19] but cannot offer any help for the clarification of everyday words like ‘“necessary’” or ‘“relevant’”.[20] The latter terms can only be interpreted by the classical interpretation methods, as foreseen in articles 31 and 32 of the Vienna Convention on Law of Treaties: “in good faith, in accordance with their ordinary meaning, in their context and in the light of its object and purpose”.[21] Furthermore, as aforementionedalready mentioned, an additional difficulty lies in the fact that both states have to examine the relevance relevance standardstandard. In the case of the requested state, however, it is not obvious to determine whether the requested information is indeed relevant for the other state. A balancing exercisen assessment has to be made between the rights of the taxpayer and the efficiency of the system procedure for the exchange of information.[22] An overly narrow interpretation of the relevance term would according to us result in an unjustified infringement of the effectiveness of the exchange of information.
The Commentary to the OECD-model 2012 provides some clear examples with regard to the foreseeable relevance of the requested information, such as::
-When applying Article 12, State A, where the beneficiary is resident, asks state B, where the payer is resident, for information concerning the amount of royalty transmitted;
When applying Articles 15 and 23A, State A, where the employee is resident, informs state B, where the employment is exercised for more than 183 days, of the amount exempted from taxation in state A;
-....[23]
Despite these examples, tThe term “foreseeably relevant” and its scope are up to now still not completely clear. A recent decision of the Administrative Court of Luxemburg, concerning the standard of ‘“foreseeable relevance’” shows the struggles in practice.[24] The facts underlying the case seem quite simple. While auditing a French company, the French tax administration had found information which connected the company to two separate Luxembourg bank accounts. These bank accounts were used to make payments to an affiliated company, which was a resident of the British Virgin Islands. According to the request for information by the French tax administration, the company on the British Virgin Islands was presumed to be the holder of the bank accounts[FD3]. However, the French tax administration was still looking for confirmation for this theorytheir allegations. In order to make a correct assessment concerning the deductibility of the payments, the French tax administration asked for information with regard to the ‘“real beneficiary’”[FD4]of the amounts paid by the French company to these bank accounts. The French tax administration asked amongst others other things for the identity of the account holder, the names of all people authorized to make orders and the name of the persons who opened the account. The French tax administration submitted various documents to Luxembourg to support their request for information. The documents, however, only showed payments made by a Dutch company to the company on the British Virgin Islands and a resident of Luxembourg, which was the majority shareholder of the French company. The claimant, who was acting as a fiduciairefor the company on the British Virgin Islands and held the account as a third-party account for several other clients as well, objected to the provision of the information regarding this account on the grounds that much of the requested information was not ‘“foreseeable relevant’” as it would disclose information regarding third parties. Providing the information would, in other words, impact persons, which were not under the tax jurisdiction of France and not (clearly) named in the request for exchange of information, and should thus be denied.
The Court stated that the first condition for a request for exchange of information to fall under the ‘“foreseeable relevance’” standard, was that a request “relates to a precise and specific tax case and is relativerelates[FD5]to a particular taxpayer”. The Court came to the conclusion that the evidence provided by the French tax administration was insufficient to show a relevant connection between the French taxpayer under investigation and the Luxembourgish bank accounts in question. It even seemed to contradict the presented case by the French tax administration, as it showed only proof of payments made by the (presumed) subsidiaries of the French company to the bank accounts held for the company in the British Virgin Islands in Luxembourg. The Court thus concluded that the requested information could not be “foreseeably relevant”.
However, we doubt if such case lawan outcome will still be possible in the (nearby) future. TSince the competent authority of the requested state nowadays can only check the formal legality of the request for information. This will without a doubt have a negative impact on the protection of the legal rights of the taxpayer.
The Commentary to article 26 of the OECD-model also states that the competent authorities of the contracting states could opt for a reformulation of the relevance condition by replacing the clause “foreseeable relevant” by “necessary”, of “relevant”, or even “could be relevant”.[FD6]
2.1.23.1.13.2. Fishing expeditions
The standard of the “foreseeably relevance” of the requested information also prohibits the so-called “fishing expeditions”, requests for information solely for collecting evidence. However, some case law examines both the standard of “relevance” and the standard of the “fishing expeditions”.[25]According to us, this is an incorrect application of the prohibition of “fishing expeditions’. The term “fishing expedition” only gives us an indication for the completion of the relevance standard and cannot be considered as an extra substantive requirement for the exchange of information.[26] This also follows from the fact that the prohibition of “fishing expeditions” is not explicitly mentioned in article 26 OECD-model, but is only described in the Commentary. By putting both terms at the same level, this case-law violates the non-binding force of the Commentary.