14 mei 2021 | Tax & Private equity

Exchange of Information in Tax Matters and Fundamental Rights of Taxpayers

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Opgelet: dit artikel werd gepubliceerd op 14/05/2021 en kan daardoor verouderde informatie bevatten.

On 6 October 2020, the European Court of Justice (ECJ) delivered a landmark ruling in Joined Cases C-245/19 and C-246/19 about the fundamental right to an effective remedy in the context of cross-border exchange of information between Member States of the European Union in application of Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (DAC).

Background and Issues: Fundamental Rights in the Era of Exchange of Information

Since the Great Recession, the international exchange of information (EOI) in direct tax matters has evolved considerably. This reflects the growing awareness among tax authorities, journalists, and non-governmental organizations that wealthy individuals and large multinational corporations engage expert advisers to fashion effective tax plans resulting in the payment of little or no taxes worldwide (Lux Leaks, Swiss Leaks, and Panama Papers). Given the pressure of mass media and the indignation of public opinion, the OECD and the EU politically committed for international tax coordination to effectively counter Base Erosion and Profit Shifting (BEPS) in a framework of global tax transparency.

The underlying rationale is simple: national tax authorities collect income taxes based on information received from taxpayers themselves. Where appropriate, they conduct inquiries into the taxpayers’ activities or request information from third parties, such as banks. While this system works reasonably well for taxpayers involved in purely domestic activities and transactions, difficulties arise for resident taxpayers earning some or most of their income in other countries. This fact pattern is viewed as an invitation for tax evasion or avoidance on the one hand, but can also lead to international double taxation on the other, when authorities in two States each claim the primary right to tax. Cross-border cooperation between domestic tax authorities is viewed as a means for ensuring effective taxation for global investors and a means of relieving double taxation.

Two international standards ensure cross-border cooperation: the automatic exchange of information (AEOI) and the exchange of information on request (EOIR). In the annotated cases, the ECJ reviews the EOIR standard, which enables one State to request from another State any foreseeably relevant information.

Within the EU, the provisions of DAC enter into play. Currently, Member States are sharing unprecedented levels of tax information. Between 2013 and 2017, Member States sent between 8.200 and 9.400 requests for information per year, based on DAC.

Indeed, while some Member States provide prior notification to the taxpayer under investigation or guarantee the right to judicial review of an information request under domestic law, others do not. This delicate equation between the protection of public and private interests lies at the heart of the recent decision in the ECJ cases.

Facts of joined Cases C-245/19 and C-246/19

In the context of an investigation of the tax situation of a Spanish tax resident, the Spanish tax authorities sent two requests for information to their Luxembourg counterparts based on DAC and the Luxembourg-Spain Income Tax Treaty.

Since the Luxembourg Tax Authorities did not possess the requested information, they addressed information orders to a Luxembourg based company and a Luxembourg based bank. The company was asked to provide copies of contracts involving the Spanish Taxpayer and the bank was ordered to share information concerning the accounts, account balances, and other financial assets held or beneficially owned by him.

The Company and the Bank (the Adressees), the Taxpayer and other third parties concerned disputed the orders before the Tribunal administratif, which partly annulled them. The Luxembourg tax authorities then lodged an appeal before the Cour administrative. The latter stayed the proceedings and referred two preliminary questions to the ECJ.

The Cour administrative asked whether the Luxembourg legislation that precluded a direct judicial remedy against information orders violated a fundamental right of the parties concerned under Article 47 (right to an effective remedy and to a fair trial) of the Charter of Fundamental Rights of the European Union (Charter), read in parallel with Articles 7 (right to privacy), 8 (right to protection of personal data) and 52(1) (restriction of fundamental rights in specific circumstances).

The Cour administratibe also asked how one should interpret the terms “foreseeably relevant information” within the meaning of Article 5 of DAC, read in conjunction with Article 1(1) thereof.

The Direct or Indirect Right to an Effective Remedy

In the Berlioz case of 2017, the ECJ ruled that, under Article 47 of the Charter, an Addressee of an information order that was fined for non-compliance has the right to challenge the order’s legality when disputing the fine (indirect judicial remedy). However, the ruling did not address the right to an effective remedy where no fine was imposed for a compliance failure (direct judicial remedy).

The ECJ separately evaluated the rights and procedural safeguards available for the Addressees and the Taxpayer:

Rights of the Addressees of information orders. The ECJ explained that Article 47 of the Charter guarantees the right to an effective remedy, without having to infringe any legal rule and await a penalty for such an infringement. The ECJ found that the Luxembourg law applicable to the Addressees provides a remedy only when the Addressee does not comply with the order and receives a fine. Only then can the Addressee challenge the order indirectly, by challenging the penalty. Consequently, the Luxembourg law is incompatible with Article 47 and Article 52(1) of the Charter, read together.

Rights of the Taxpayer under investigation. The ECJ explained that Article 47 of the Charter applies to the Taxpayer, since the disclosure of the Taxpayer’s personal data to a public authority affects the fundamental rights to privacy and protection of personal data respectively guaranteed by Articles 7 and 8 of the Charter. Nevertheless, the ECJ departed from the view of the AG and ruled that the right to an effective remedy does not necessarily mean that the Taxpayer musthave a direct action against information orders. Remedies available before national courts allowing the Taxpayer to obtain, albeit indirectly, an effective review of information orders are sufficient. In the subject cases, the Taxpayer could challenge the tax assessment note established at the end of the Spanish investigation and, in that context, indirectly dispute the information order.

The Foreseeably Relevant Information Test

Pursuant to Article 1 of DAC, Member States are obligated to cooperate with each other with a view to exchanging information that is foreseeably relevant to the administration and enforcement of the domestic tax laws of the Member States.

In Berlioz, the ECJ interpreted the foreseeably relevant standard as enabling the Requested Tax Authorities to obtain any information that seems to it to be justified for the purpose of its investigation. In other words, Requesting Tax Authorities choose the information they need for their investigations, but Requested Tax Authorities can refuse to provide information when the request is manifestly devoid of any foreseeable relevance.

In line with Berlioz, the ECJ ruled that the requested information is not manifestly devoid of foreseeable relevance when

  • The request states (i) the identity of the Addressees of the information order, (ii) the identity of the Taxpayer subject to the investigation giving rise to the information request, and (iii) the period covered by that investigation.
  • The request relates to contracts, invoices, and payments that are defined by personal, temporal, and material criteria establishing their links with (i) the investigation, and (ii) the Taxpayer subject to that investigation, even though not expressly identified in the request.

Relevance for Belgium

When Belgium receives an information request from another Member State, the Belgian Revenue Service collects information in the same way as for domestic tax purposes. In other words, the Service has extensive powers to collect any requested information. They can send written requests to any Taxpayer or third party, consult tax records or databases, and perform on-site visits, with or without prior notice. In contrast, the rights and safeguards of the Taxpayer targeted by a cross-border exchange of information are insufficient during the pre-litigation stage. Over the last decade, they have even diminished under pressure of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes.

For example, Article 333, third limb, of the Belgian Income Tax Code (BITC) no longer requires a prior notification to the person targeted in the event that the three-year tax adjustment period is extended to seven years in the context of a foreign information request. This is different from purely domestic situations, where prior notification is mandatory under penalty of nullity.

Likewise, Article 322, § 4, BITC now treats a foreign request for financial information as an indication of tax evasion. Hence, in contrast with purely domestic investigations, the Belgian Revenue Service can contact a Belgian financial institution directly to obtain the requested information.

In a nutshell, Belgian taxpayers’ rights or safeguards are scarce during the investigation/pre-litigation phase. One of the few remaining possibilities left is to challenge the exchange of information under the appeal procedure applicable to all administrative acts. However, this procedure does not suspend the exchange, unless the judge considers that the Revenue Service is undertaking a fishing expedition, which is quite unlikely. Another possibility, taking into account the aforementioned decision of the Belgian Court of Cassation of 22 May 2015, would be to question the evidence obtained based on the reasoning that it jeopardizes the right of the Taxpayer to a fair trial. Again, this is quite challenging to establish in practice.

For the time being, and in contrast with the Latin maxim “Ubi jus, ibi remedium”, the recent decision of the ECJ shows that where there is a right, not always is there a remedy.

Werner Heyvaert, Lawyer and Tax Partner, AKD Benelux Lawyers, Brussels
Vicky Sheikh Mohammad, Tax Lawyer, AKD Benelux Lawyers, Brussels

A full version of this article was published in Tijdschrift Beleggingsfiscaliteit/ Revue Fiscalité des Placements, no. 14.

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