International Tax Investigations in the Isle of Man - a Legal Perspective 15 April 2010

1. International Tax Investigations in the Isle of Man - a Legal Perspective 15 April 2010 Presentation to ICSA Tom Maher and Giles Hill Dougherty Quinn Advocates

2. Overview • International Initiatives in Tax Exchange and Investigations • Isle of Man Response to International Initiatives • UK Double Taxation Agreement • Tax Information Exchange Agreements (TIEAs) • Section 21 Criminal Justice Act 1991 • Section 24 Criminal Justice Act 1990 • Bankers Books Evidence Act/Bankruptcy Acts • Directors’ and Trustees’ considerations – avoiding the pitfalls

3. What are the “international initiatives”? • OECD model on exchange of information (“TIEA”) • European Union Savings Directive (“EUSD”) • G20 – list of co-operative jurisdictions (white list etc) • Global Forum – 18 March 2010 - first peer group set up • Move by all of the above to require jurisdictions (notably offshore) to become co-operative jurisdictions in the fight against tax evasion, terrorism and money-laundering • Clear international momentum for exchange of information

4. Isle of Man Response • First TIEA agreed with USA (3 October 2002) – at the forefront • 15 TIEAs by summer 2009 – none since but not IOM fault • Double taxation agreements – UK, Belgium, Estonia and Malta • Other tax agreements e.g. shipping and aircraft agreements with the Nordic countries – commercial benefit for IOM • Active Treasury negotiations with Canada, Netherlands, Italy, Spain • Full list on Treasury website http://www.gov.im/treasury/incometax/sections/practitioners/internationalagreements.xml

5. Isle of Man Response – White List • Isle of Man as an OECD “Partner” • IMF report September 2009:- “The Isle of Man authorities take their responsibilities in the area of international co-operation seriously, [including supervisory co- operation, mutual legal assistance and tax information exchange agreements]” • IMF report is an independent and expert endorsement of the quality of the Isle of Man’s financial services regime • The Isle of Man has a high level of co-operation with international standards and will continue to do so as standards evolve

6. Is Exchange of Information New? • The Isle of Man has had exchange of information with the UK since 6 April 1955. UK double taxation agreement (“DTA”) deals not just with double taxation issues but also with disclosure • Article 10 sets out the process for disclosure and exchange of information

7. UK DTA – Article 10 “The taxation authorities of the United Kingdom and the Island shall exchange such information (being information available under their respective taxation laws) as is necessary for carrying out the provisions of this Arrangement or for the prevention of fraud or the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of this Arrangement. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those concerned with the assessment and collection of the taxes which are the subject of this Arrangement. No information shall be exchanged which would disclose any trade secret or trade process.”

8. Article 10 – How does it work in practice? • Article 10 used regularly over the last 54 years • Cannot be used to get ITD to request a third party to provide information to it (which is where the TIEA comes in) • Applies only to information held physically by ITD • Any information which ITD holds in relation to that tax payer will be disclosed • Information disclosed treated as secret and not to be disclosed to any third party

9. Article 10 – How does it work in practice? • Information disclosed cannot be used by HMRC in any civil or criminal proceedings (including tribunals or appeals) • Information disclosed only used to help with investigation • If information needed for criminal investigation, then HMRC likely to use TIEA or the Criminal Justice Act 1991 (see later) • Two way street – IOM has also used the DTA to request information from HMRC • 2009 TIEA with the UK – ITD may request information from third parties and information disclosed may be used for civil/criminal proceedings

10. TIEAs generally • OECD model – Isle of Man formed part of drafting group (which showed us as being a co-operative jurisdiction willing to embrace change but also ensured that there were no “surprises” in the final form) • Isle of Man adopts the OECD model and has concluded 15 TIEAs – see list of TIEAs on Treasury website • Isle of Man reached the critical standard of 12 TIEAs with OECD countries resulting in it being placed on the White List by G20 • Global Forum move from a quantitative approach to a qualitative approach – September 2009 • Move towards peer reviews. First “peer group” announced April 2010

11. TIEAs – what do they cover • 256 TIEAs signed since G20 April 2009 Summit in London • Isle of Man has not signed any since April 2009 largely due to our trading partners and larger jurisdictions being focused on getting their DTAs compliant with OECD rules – model article 26 • Peer Review – Isle of Man expects joint Phase 1 and 2 review this year

12. TIEAs – what do they cover? • Taxes – pretty much all forms are covered • Accounting / taxable periods (only relevant for US TIEA) • Once agreed, ITD and the relevant country’s authority discuss what is expected in practice • How many requests are received by the ITD? • Article 5(5) [UK/US] Article 4(5) [others] - “safeguards” • Mere existence encourages voluntary disclosure

13. TIEAs with countries other than UK • Prospective – civil / retrospective criminal (except US TIEA which is for taxable period commencing 2004 only for criminal) • Civil / criminal distinction

14. TIEA with the UK departure from previous TIEAs • Retrospective • No distinction between criminal and civil • DTA been in place for 50 years, major trading partner

15. TIEA process – request for information • Requesting party (e.g HMRC) submits a formal request to the requested party (ITD) for information • ITD will review the request and make sure that it complies with the terms of the TIEA (and in particular the safeguards in Article 5) • ITD will then contact the relevant third party (i.e. CSP or bank on the Isle of Man) with a request for voluntary disclosure giving 30 days to comply ITD Request. This is by personal hand delivery from senior member of ITD team • The third party should obtain immediate legal advice and, where appropriate, professional accounting/tax advice too • BEWARE - no compulsion under Isle of Man law to provide information/documentation in response to this letter from ITD

16. TIEA process – request for information • Following 30 day period, ITD will issue a formal Section 105D Notice to the third party compelling it to provide the information requested (usually within 30 days) • This Section 105D Notice provides the third party with a defence to a breach of confidentiality claim by the customer/client • Failure to comply with the Section 105D Notice is an offence • The 30 day time period will be extending only in exceptional cases upon request by the third party • Timely disclosure should be made unless very good reason not to • Taxpayer is sent a copy of the Section 105D Notice (except in certain rare circumstances. Tipping off concerns)

17. TIEA request – practical implications DQ case study • IRS investigation into the settlor of an Isle of Man trust • IOM resident trustee and IOM companies underlying the trust received an ITD Request • Advice sought on trustee’s and directors’ duties, legality of the Request, what information should be disclosed etc • ITD Section 105D Notice issued • Article 5 issues • Carefully review list/category of requested documentation • Relevant periods (US TIEA only)

18. Directors’ and Trustees’ Considerations • Fiduciary Duties (safeguard assets, confidentiality etc) • Compelled by law defence • Disclose only that which compelled to disclose • Inform client of request? • Record Keeping – don’t mix company and trust files up • Reputation with third parties – eg investment houses • Legal costs recoverable?

19. Access to information – other legislation • HMRC could use bankruptcy legislation in the Isle of Man to obtain disclosure of information • Re: Tucker case 1988 – no foreign tax bankruptcies on IOM. However, we will give assistance to foreign revenue for information gathering via a foreign Court request under Bankruptcy Act 1988 • Bankers’ Books Evidence Act 1935 – no procedure for fishing expeditions - Re Blayney & Grace [2001-03] • Note the approach of the Manx judiciary to international co-operation

20. Judicial Approach to Assistance • In the Impex Services Worldwide case, Deemster Doyle touched upon the increasingly global approach in worldwide insolvency matters and stated at paragraph 52: “Here on the Isle of Man, we are all citizens of the Island but we are also citizens of the global community in which we live, work and contribute. We need to recognise our international as well as our local responsibilities. If the English High Court requires assistance then the Manx High Court, if it has jurisdiction and subject to any necessary safeguards, should not, in a proper case, be slow to provide such assistance”

21. Disclosure - EUSD • Isle of Man move to automatic exchange of information with effect from July 2011 • ITD has established a working group in liaising with paying agents to establish a user friendly electronic system to allow the easy transfer of information

22. International Initiatives – the future • The Isle of Man has been a co-operative player on the international scene for many years and will continue to do so • Continuing to sign new TIEAs and DTAs with other jurisdictions • Active participant in the Global Forum and will remain so • Remain a co-operative jurisdiction but at the same time keeping a competitive edge – failure to be co-operative likely to result in counter measures being imposed – e.g. UK and France counter measures

23. Section 21 of The Criminal Justice Act 1991 • A court, tribunal or prosecuting authority applies to the IOM AG for assistance in obtaining evidence in connection with criminal proceedings or a criminal investigation outside of the Isle of Man • The AG may arrange for the evidence to be obtained if he is satisfied that: • an offence under the law of the country in question has been committed or there are reasonable grounds for suspecting that such an offence has been committed; and • proceedings in respect of that offence have been instituted in that country or an investigation into the offence is being carried on there • Upon being satisfied, the Attorney General may ask the High Bailiff to receive the evidence

24. Schedule 2 of The Criminal Justice Act 1991 • Sets out the proceedings before the High Bailiff • A Witness Summons can be issued by the High Bailiff to secure the attendance of witnesses • Evidence on oath may be taken • A person shall not be compelled to give evidence in the proceedings which they could not be compelled to give in criminal proceedings in a Court of Summary Jurisdiction • The evidence received by the High Bailiff shall be furnished to the Attorney General for transmission to the requesting tribunal or authority • Where evidence consists of a document, the original or a copy shall be transmitted • No order for costs shall be made

25. What Does This Mean In Practice? • The AG must be satisfied that criteria met • The AG has a discretion to assist the requesting authority • Service of a Section 21 Witness Summons • No obligation to check validity of the Summons • Collate documents • Prepare a statement • Review documents and statement for privilege • Attend hearing with statement and documents • Documents handed to the AG for on transmission to requesting authority • What happens next? • Costs

26. Sections 24 and 25 of The Criminal Justice Act 1990 • A s.24 Notice has the same end result as a s.21 Summons i.e. the production of information and/or documents to a requesting authority - but the basis and process is slightly different • The AG may issue a Section 24 Notice if he is satisfied that: (i) On reasonable grounds there is a suspected offence involving serious or complex fraud/corruption -wherever committed; and (ii) There is good reason to do so for the purpose of investigating the affairs of any person • A s.24 Notice may be issued by the AG to a person whose affairs are to be investigated orany other person believed to have relevant information/documentation

27. Sections 24 and 25 of The Criminal Justice Act 1990 (continued) • Notice to attend and produce specified documents to the AG • Documents • Use for Statement • Privilege • Failure to comply • Onward disclosure of information

28. What Does This Mean In Practice? • The AG must be satisfied that criteria met • The AG has a discretion to assist the requesting authority • Service of a s.24 Notice • No obligation to check validity of the Summons • Collate documents • Prepare a statement • Review documents and statement for privilege • Attend hearing with statement and documents • Transmission of documents to a competent authority • What happens next?

29. Questions

30. Dougherty Quinn Tom Maher tom@dq.im 01624 632950 Head of Commercial Giles Hill giles@dq.im 01624 632996 Litigation and Dispute Resolution Dougherty Quinn Limited is an incorporated practice in the Isle of Man, company number 119175C. Registered Office: The Chambers, 5 Mount Pleasant, Douglas, Isle of Man, IM1 2PU.  Directors: Tom Maher, Walter Wannenburgh, Mark Dougherty, Giles Hill, Annemarie Hughes.