The Taxman Cometh - Issues to Consider when Served by the Comptroller of Taxes in Jersey with a Notice to Produce Tax Information

Over the 12 months prior to the COVID-19 pandemic we advised on a number of matters where tax information was sought from Jersey based service providers in respect of notices served under Tax Information Exchange Agreements (TIEA) or the Convention on Mutual Administrative Assistance in Tax Matters (CMAA). Whilst TIEAs are bilateral agreements between Jersey and specific countries, the CMAA provides similar provisions under which tax authorities in Jersey can be asked to obtain and provide to a requesting authority, tax information on a particular individual.

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Over the 12 months prior to the Covid-19 pandemic we advised on a number of matters where tax information was sought from Jersey based service providers in respect of notices served under Tax Information Exchange Agreements (TIEA) or the Convention on Mutual Administrative Assistance in Tax Matters (CMAA). Whilst TIEAs are bilateral agreements between Jersey and specific countries, the CMAA provides similar provisions under which tax authorities in Jersey can be asked to obtain and provide to a requesting authority, tax information on a particular individual.

Requests can come from any of the countries with which the States of Jersey has agreed a TIEA or which is party to the CMAA. The advent of CRS has undoubtedly led to a number of countries’ tax authorities coming into possession of reported information on bank accounts or interests in trusts, which has led to an increase in requests from tax authorities in countries that might historically have been unaware of the extent of offshore interests held by their tax residents.

We anticipate that, with Governments around the world funding schemes to alleviate the economic impact of the pandemic and with tax revenues falling due to contracting economies, it is likely that the Comptroller of Taxes in Jersey will receive an increasing number of requests for information from counterparts to TIEAs and fellow signatories to the CMAA looking for information. With Jersey being party to over 30 TIEAs and more than 60 countries signatories to the CMAA, the potential for requests is wide.

Invariably requests will be followed by notices issued to the local financial service providers (typically trust companies and banks), whose compliance with CRS reporting obligations will have provided the overseas tax man with a pointer towards potential sources of tax revenue. Whilst notices to produce tax information may be served directly upon the taxpayers by the Comptroller, for those in international finance centres such as Jersey, it will typically be the financial service provider who will be served with a third party notice seeking information on the individuals for whom they hold or administer assets.

We provides guidance below on particular issues to which a Jersey based financial service provider in receipt of such a third party notice, or individual taxpayer, should be alive. We would, however, note at the outset that general guidance is no substitute for legal advice, which it will be prudent to obtain as soon as notice is served, particularly given the very tight timescales that apply.

Don’t delay in preparing the response

A recipient of a notice should give the notice immediate attention – under the applicable Jersey Regulations, the timescales to comply with and challenge a notice are both very tight: notices can require compliance within 15 days of being given; and, similarly, any Court challenge against the notice can only be made by way of judicial review proceedings against the Comptroller (in respect of its decision to issue a notice on the basis of a request received under a TIEA or the CMAA), and an application to the Court for permission to bring such proceedings must be filed within no more than 14 days of the notice being received.

Complying with the notice will inevitably take time, given the need to consider the scope of the information requested (which can cover a number of years) and to collate whatever is responsive to the notice. Similarly, engaging with the Comptroller and (assuming it is not possible to persuade the Comptroller of any shortcomings in the notice) then preparing the necessary application to seek permission to commence judicial review proceedings will take a number of days, not least due to the need to provide a detailed affidavit in support.

Even if the recipient of a notice from the Comptroller (or the taxpayer to which the notice relates) wishes to challenge it in Court, the obligation on the recipient to provide the requested information to the Comptroller within the stipulated time-frame remains in full force. The filing of an application for permission to seek judicial review does, however, preserve the status quo because it prevents the Comptroller from forwarding the requested information to the foreign tax authority, until after the application for judicial review has been determined (or withdrawn).

If an application for permission to apply for judicial review is not brought timeously (within 14 days of the notice being received by the applicant, which in the case of the taxpayer is likely to be a date sometime after the financial service provider receives the original notice) the ability to obtain leave to bring the application out of time is yet to be tested before the Royal Court. Therefore, the imperative is to meet the deadlines provided in the Regulations. A further imperative on the third party service provider to comply with a notice is the potential sanction of up to 12 months imprisonment and a fine for failing to comply with a notice within the stipulated time periods.

Assess what tax information must be provided

While the regime under the applicable Regulations requires a swift response, recipients of notices should nevertheless assess carefully the scope of what is sought. This is not only to ensure adequate compliance (in the face of possible criminal liability for failing to do so) but to ensure that information that is provided is properly responsive to the notice.

Time periods in respect of which information is sought can be important. A notice should ideally limit the information to be collected by reference to a date range. For civil tax matters, in broad terms information cannot be sought that predates the date the TIEA took effect or the CMAA was adopted and in force in the requesting country. That does not apply in criminal tax matters.

‘Tax information’ that a person could be required to produce is widely defined to include information within an individual’s knowledge or belief; or recorded in any format in their possession, custody or control. Such a wide definition will likely offer little scope for a financial service provider to argue that documents held by it, even in complex trust or corporate structures, would not be caught but that should not be taken for granted.

While each TIEA and the CMAA must be considered on its terms, generally the requesting country must prove that the information sought is “foreseeably relevant” to the assessment or collection of taxes covered by the particular TIEA or the relevant scope of the CMAA as adopted (or associated criminal investigations and enforcement). 

The Comptroller should already have reviewed the terms of the request and be satisfied (without any particular scrutiny of foreign law) that there is a sound basis for serving the corresponding notice. Although there is a presumption of regularity with regard to the Comptroller’s actions at that stage, there is no substitute for a careful assessment of the notice and its specifics.

Assess any grounds for judicial review

In order to challenge a notice an applicant must establish that the Comptroller’s decision to accede to a request (under a TIEA or the CMAA) and issue a notice was illegal, irrational, unreasonable or procedurally improper. A notice need not be accompanied by an explanation of the Comptroller’s rationale for issuing it and even if a party subsequently commences judicial review proceedings the Comptroller will still not generally be required to disclose the letter of request from the foreign authority merely to enable the applicant to determine whether it complied with the relevant TIEA.

That said, if an applicant is granted leave to apply for judicial review, the Comptroller will be considered to be subject to a duty of candour to provide the Court with sufficient facts and reasoning underlying the decision to issue the notice; and, while the starting point is that the foreign authority’s request need not be provided, the Court could order disclosure if appropriate or require the Comptroller to provide sufficient reasons for its decision.

Bringing an application for leave to bring judicial review proceedings will therefore present challenges where the obligation on the Comptroller to expressly justify its decision by reference to the underlying request is by no means straightforward. However, it is important to engage early in correspondence with the Comptroller to raise any appropriate concerns and seek clarifications in relation to the scope of the notice or factual issues that could be relevant. This may cause a change of position on the part of the Comptroller or convince the Comptroller to raise queries with the requesting tax authority. Even if the Comptroller refuses to provide any further detail regarding why the tax information is deemed foreseeably relevant, this can of itself provide grist to the mill in the application for leave.

Conclusion

Foreign tax authorities are receiving ever greater volumes of information regarding individual taxpayers who hold assets and interests in other jurisdictions. The nature of reporting through, for example, the CRS system will potentially give rise to more questions than answers. We foresee that, particularly once tax authorities’ operations take on a more normal footing and the need to raise revenue becomes ever more acute, opportunities to obtain information on taxpayers through TIEAs and the CMAA will be readily taken.

In such circumstances, service providers who receive a notice from the Comptroller to provide tax information, will need to act promptly and in a compliant manner to avoid the risk of sanction. Whilst balancing that risk against other duties owed must not be overlooked, a service provider will not incur any civil or criminal liability by reason of disclosing information in compliance with a lawful notice served by the Comptroller.

That is not to say that questions should not be asked and legitimate challenges put to the Comptroller. Even if, ultimately, it is the taxpayer that might be most motivated to seek to bring an application for judicial review, that taxpayer will likely expect its professional service providers to ensure that there is transparency in the approach to responding to the notice (provided the third party notice served on the trustee does not expressly prohibit disclosure) and due rigour is applied to considering what should be disclosed.

The Regulations in Jersey provide little room for manoeuvre and impose tight deadlines to work to. However, whilst there is a presumption of regularity on the part of the Comptroller that is not to say that a well thought out and carefully prepared challenge should not be brought, in order to uphold the rights of a taxpayer who is subjected to the overreaching efforts of an overzealous local tax authority, and ensure that decision makers are held to account.