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26 January 2018
The system of tax information exchange in the British Virgin Islands is largely modelled on international principles developed by the Organisation for Economic Cooperation and Development (OECD). The competent authority responsible for dealing with tax information exchange is the International Tax Authority (ITA).
There are two types of tax information exchange:
The best known examples of automatic exchange globally are FATCA and the CRS.
Under FATCA, BVI financial institutions must annually and automatically collect and report certain limited forms of tax and financial data on the accounts that they hold for US persons (typically US citizens and permanent residents). The information collected is reported to the ITA which then reports to the US Internal Revenue Service.
Whereas FATCA deals with reporting on US persons, the CRS mandates a similar form of reporting on a global pool of taxpayers. CRS reporting relates to those financial institutions and taxpayers based in participating CRS jurisdictions. In 2018 102 countries and territories will participate in CRS reporting, which occurs in respect of the preceding tax year. In line with the UK and majority EU position, all UK overseas territories and crown dependencies – including the British Virgin Islands – became early adopters of the CRS. This means that 2016 was the first tax year to be reported on (by mid-2017). In contrast, 'late adopter' jurisdictions (eg, Hong Kong and Switzerland) have deferred CRS reporting for a year, meaning that 2017 will be the first tax year reported on (by mid-2018).
Determining whether a BVI company or other person must report under FATCA or the CRS can be a complex task and is beyond the scope of this update. In addition, there are strict anti-avoidance provisions associated with AEOI regimes and parties are generally expected to comply with the spirit of the legislation without seeking to circumvent requirements. Professional legal advice should be obtained on these issues at the outset and before setting up new businesses or structures based in FATCA or CRS reporting jurisdictions.
The AEOI regime requires financial institutions to exchange formulistic and anodyne data about the accounts of foreign taxpayers on their books. In contrast, the on-request regime deals with specific and potentially in-depth investigations into the affairs of named and designated taxpayers with offshore or international holdings. Such investigations typically occur following data-leaks involving international financial centres.
There are two arrangements for this sort of exchange of information:
TIEAs and DTCs
The British Virgin Islands is party to 28 TIEAs with various third countries and territories.(1) It is also party to one DTC with Switzerland. Despite the fact that the British Virgin Islands is not a sovereign nation, the United Kingdom has delegated significant authority to the local government to negotiate and conclude treaties internationally. In practice, the BVI government has taken up this challenge fastidiously and has been an OECD White List jurisdiction since August 2009.
Domestically, all TIEAs and new DTCs are brought into force through subsidiary legislation issued under the Mutual Legal Assistance (Tax Matters) Act 2003. The act is the framework legislation that governs the exchange of tax information generally.
Under this system and subject to various safeguards, a foreign country which is party to a TIEA with the British Virgin Islands may request documents and information relevant to the tax affairs of domestic taxpayers from the BVI competent authorities. Following receipt, the BVI authorities (ie, the ITA) would channel acceptable requests through to private persons subject to BVI jurisdiction in the form of notices issued under the Mutual Legal Assistance (Tax Matters) Act. In practice, BVI-based individuals and companies are likely to be within the territorial scope of this regime.
The Multilateral Convention was developed by the OECD and the European Council as a way of streamlining the need for countries to agree on the exchange of information through costly and time-intensive bilateral treaty negotiations which culminate in a TIEA or DTC. There are 112 jurisdictions participating in the Multilateral Convention, including 15 jurisdictions covered by territorial extension, of which the British Virgin Islands is one.(2)
The Multilateral Convention was extended to the British Virgin Islands by the UK government and became applicable on March 1 2014. Similar to TIEAs, the Multilateral Convention is implemented through subsidiary legislation issued under the Mutual Legal Assistance (Tax Matters) Act. As such, exchange of information under the Multilateral Convention operates domestically in the British Virgin Islands in a similar way to TIEA requests and notices procedure.
Legislative and judicial safeguards
Although the British Virgin Islands is a participating jurisdiction in the Multilateral Convention and numerous TIEAs, the BVI competent authorities must abide by rules of law applicable to them under constitutional arrangements and court-based jurisprudence (from cases both in the British Virgin Islands and elsewhere in the United Kingdom's common law orbit). These rules relate principally to a private individual's rights under local law, as well as under safeguards contained in various exchange of tax information regimes.
In light of recent judicial pronouncements, directors, trustees and other similar fiduciaries of BVI companies may have a duty to guard against fishing requests and other possible abuses of process under the exchange of information regime.(3)
Similarly, when issuing notices which demand that private persons disclose confidential information to the authorities, the ITA must ensure that constitutional rules of procedural fairness and due process are followed. In high-level terms, such ITA notices should contain enough basic and contextual information to enable the recipient to determine the basis on which the originating (overseas) request may have been made. The private person also has a right to determine whether the notice and request have been validly made and are in compliance with the applicable exchange of information framework (ie, to be in position to understand whether the request is a fishing exercise).
The basic and contextual details may include:
Failure to comply with an exchange of information obligation may constitute a criminal offence punishable (on indictment) with a maximum fine of US$100,000, up to five years' imprisonment or both.
Parties receiving a notice to produce information under one of the exchange of information regimes should aim to balance various competing interests. On the one hand, they should carefully consider whether they are subject to a duty of confidentiality in respect of the information subject to disclosure and, if so, whether the request is a mere fishing exercise.
On the other hand, there is a legal duty to comply with valid notices and the BVI regime contains strict anti-tipping off obligations on the recipients of notices (these obligations are similar to those seen in anti-money laundering regimes and mean that recipients are prohibited from discussing the matter with any third party, excluding legal counsel).
Prudence dictates that anyone in receipt of a request or notice under an exchange of information regime should immediately contact their professional legal advisers.
For further information on this topic please contact Aki Corsoni-Husain at Harneys Aristodemou Loizides Yiolitis LLC's Limassol office by telephone (+357 25 820020) or email (email@example.com). Alternatively, contact Mirza Manraj at Harneys' Hong Kong office by telephone (+852 5806 7800) or email (firstname.lastname@example.org). The Harneys website can be accessed at www.harneys.com.
(1) Aruba, Australia, Canada, China, Curacao, Czech Republic, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Guernsey, Iceland, India, Ireland, the Isle of Man, Japan, Netherlands, New Zealand, Norway, Poland, Portugal, Saint Maarten, South Korea, Sweden, the United Kingdom and the United States.
(2) The identity and implementation status of countries participating in the Multilateral Convention are available here.
(3) Quiver Inc v International Tax Authority and Friar Tuck v International Tax Authority (Claims BVIHC201510339 and 340). For a summary of this case please see here.
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