Exchange of tax information in the framework of the OECD Convention

The document, designed to establish the exchange of tax information between the relevant services of the countries of the world, namely the OECD Convention on Mutual Administrative Assistance in Tax Matters, was ratified by Russia on November 4, 2014. As is known, the Federation's internal policy today is especially developing in the "deofforization" way. Therefore, the Convention is directly related to the process of expanding the powers of the tax authorities of the Russian Federation.

It is also important that the number of signatories of the document is not limited by the geographical position or status in the international political arena.

The following material reveals the main mechanisms for using the provisions of the Convention with respect to classic offshore jurisdictions, that is, countries where international companies are benefiting from special legislation that exempts offshore firms from paying taxes and submitting financial statements. Among such jurisdictions there are the British Virgin Islands (BVI), Belize, Panama, the Seychelles, etc.

How exactly countries interact in tax matters?

The Convention provides for administrative assistance in the relationships of the parties.

1. Exchange of information when there is a request/enquiry (Article 5). In this case, the key aspect of the request should be specific persons/transactions. Such request can be made in writing or made orally with further written confirmation. Electronic means of communication can also be used to clarify the request.

With regard to the list of request information, it can be noted that, according to the Convention, it is non-exhaustive. Other procedures, including the development of bilateral agreements, are not envisaged. Such simple conditions are supposed to simplify and make it more effective to combat the evasion of offshore companies from paying taxes.

Algorithm of information exchange

The request is sent to the competent authority of the relevant jurisdiction, and it decides to conduct further investigation and provide the requested information to another country. At the same time, the request must be supported by sound evidence that the object of verification can really be involved in the financing of terrorism, the legalization of illegal proceeds and other crimes. And if the competent body decides to initiate an investigation, the registration agent will have to provide all the necessary information with regard to the investigation. If the registration agent refuses to cooperate, administrative or criminal punishment may be applied.

1. Exchange of information under the treaty (automatic), Article 6. Here bilateral agreements between the countries are needed, in which the process of exchange of information and the nature of information that can be transmitted automatically are stipulated. Such a requirement (on the existence of a treaty) makes it currently impossible for an automatic exchange of information between the Russian Federation and classical offshore companies. However, it is unreasonable to exclude the possibility of concluding such agreements in the future.
2. Spontaneous (voluntary, initiative) exchange (Article 7). The information is sent by the country without receiving a request. There is also no need for a bilateral agreement. Situations in which voluntary exchange of information is possible:

• one party sees a threat of tax losses by the other party;
• the taxpayer receives a benefit from one country that reduces or excludes the payment of tax, which may entail an increase in tax in another country;
• transactions between persons paying taxes in two countries are conducted through one / several jurisdictions, resulting in a reduction in tax in one / both countries;
• the first party has reason to believe that there was an artificial redistribution of profits between the participants of the group of companies;
• directed information may be needed to assess tax liabilities in relation to a company (person) in another country.

Initiative exchange between Russia and countries that are classic offshores is possible. But how effective such an exchange will be depends on the actions of the initiating state. At this stage, the exchange of information between the Russian Federation and other jurisdictions occurs within the framework of tax control.

The Convention also defines two types of tax audits (Articles 8, 9):

• simultaneous. They are conducted by two or more countries in their own territories in order to subsequently exchange significant tax information;
• verification abroad. The participation of the tax authorities of one country in the verification in the territory of another state (if there is permission of the latter) is envisaged. Such procedures are often effective in combining measures to eliminate double taxation, identifying aggressive tax planning. The decision to conduct this type of inspection can only be taken by the competent authorities of the respective states.

The Convention also provides for assistance in the implementation of measures to collect taxes payable (Article 11) and assistance in implementing procedures for the delivery of documents (Article 17).

The information for the exchange must be really meaningful, that is, there should be no biased investigations using data not directly related to tax matters.

The Convention also establishes standard restrictions on the transfer of information. For example, the state should not provide data that contradict its legislation, public order, etc. Also, the fact that information is at the disposal of a financial institution, as well as of a nominee or a person who is an agent / attorney, or that information affects the data on the equity shares of the relevant person in the capital, can not be grounds for rejecting the request from the requested state.

The Convention proposes the following model for describing the operation of the above provisions. A natural person who is taxable in State A has opened a bank account in State B. To verify that a person pays income tax, State A requests information about accounts and assets from State B, and such information must be provided.

A State that wishes to accede to the Convention may submit a system of reservations with a view to specifying the extent of its obligations. For example, a list of taxes may be limited or the types of information transmitted can be delineated.

Reservations for the ratification of the Convention by Russia

1. The list of taxes for which administrative assistance to other states can be provided is limited. No assistance is provided for:

   - taxes on income, profits, capital gains, net assets established on behalf of local authorities or administrative-territorial units of another state;

   - mandatory contributions for social protection, which are paid to the government or social protection authorities in accordance with public law;

   - other types of taxes, except for customs duties, which were established by another state. There are:

   a) tax on property that was received as a result of gift or inheritance;

   b) tax on possession/ownership/use of movable property, which does not fall into the category of motor vehicles.

2. There is no assistance in recovering administrative fines for any taxes.
3. Assistance in cases involving criminal prosecution can be provided only within three years.

For the Russian Federation, the Convention takes effect three months after the instrument of ratification has been deposited with the depositary.

As of November 17, 2014, 59 states have become signatories to the Convention. Over time, the expansion of this list is expected.

The Convention should be recognized as an effective tool for the exchange of tax information with various countries, including classic offshore jurisdictions. Soon, probably, more precise provisions of the Convention will be adopted, which will make its practical use more effective.

For any questions of tax planning and optimization, please contact the highly qualified specialists of Law&Trust International.