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Focus: New international tax convention widens reciprocal enforcement

17 October 2012

In brief: The Commissioner of Taxation's authority to recover tax claims from foreign jurisdictions and to pursue tax claims in Australia on behalf of foreign states will soon cover a much larger number of foreign jurisdictions. Partner Larry Magid (view CV), Lawyer Claire Nicholson and Vacation Clerk Jonathon Hoe look at the implications of the Federal Government's ratification of the OECD Convention on Mutual Administrative Assistance in Tax Matters.

How does it affect you?

  • From 1 December 2012, the Commissioner of Taxation (the Commissioner) will be empowered and obliged to exchange information with, to seek or assist in the recovery of tax claims and to serve documents or assist in the service of documents in and from, a much larger number of foreign jurisdictions than under current bilateral agreements.
  • The number of countries in which the Commissioner can seek to recover tax claims, or to which he can provide assistance to recover tax claims in Australia, will increase from five to 37.
  • The Commissioner's rights and obligations regarding the exchange of information will apply to an additional 14 countries.
  • The powers and obligations under the OECD Convention on Mutual Administrative Assistance in Tax Matters (the Convention) are very similar to existing powers under some of Australia's bilateral tax agreements.

Background

On 1 December 2012, the Convention will come into force in Australia. While the Commissioner currently has the power to exchange information and recover tax claims under domestic law1 and through a number of bilateral international agreements,2 the Convention is multilateral and extends those powers to a far greater number of jurisdictions. To date, 38 countries have signed the Convention, although not all have ratified it. A list of countries that have signed the Convention and further information can be found on the OECD website. The Convention also provides for the service of documents relating to tax claims, although this seems to add little to the wide-ranging powers of service of extrajudicial and judicial documents that already exist.3

The Convention provides the Commissioner with the power to seek, and the obligation to provide, administrative assistance in the exchange of taxpayer information (Articles 4-10), the recovery of tax debts, including conservancy measures (Articles 11-16), and the service of documents (Article 17).4

Including countries that have previously signed bilateral agreements with Australia and the Convention, there are now 37 countries in which Australia may seek, or to which Australia must provide, assistance in the recovery of a tax claim, and an additional 14 countries with which the Commissioner may now exchange information.

What taxes does the convention apply to?

The types of taxes covered by the Convention are set out in Article 2 in extremely broad terms, and cover taxes such as income and capital gains tax, superannuation, GST, taxes on property usage and ownership, excise and 'any other taxes'. Customs duties are specifically excluded, but interest, administrative fines and incidental costs of recovery are included.5

What are the Commissioner's powers and obligations?

The Commissioner's powers and obligations regarding exchange of information and recovery of foreign tax claims are very similar to the exchange of information articles and the assistance in recovery articles in existing bilateral agreements, with some differences, which are noted below. However, it is not intended that the Convention limits, or is limited by, any other international agreement that Australia has entered into or enters into in the future.6 For example, if the conditions on seeking recovery of tax claims under the Convention are more restrictive than under a bilateral agreement, or vice versa, the Commissioner is free to choose to utilise the less restrictive agreement.

Exchange of information

The articles in the Convention relating to the exchange of information enable exchange of information on request (Article 5), automatically by pre-arranged mutual agreement (Article 6), and spontaneously (Article 7).

Although these articles are drafted differently from the recommended Article 26 – Exchange of Information (Article 26) in the Model Tax Convention on Income and Capital, the commentaries on both express very similar interpretations and application. Having said that, not all of Australia's bilateral agreements contain the recommended text of Article 26, and it is possible that, in some cases, the powers and obligations relating to exchange of information under the Convention might be widened in respect of some existing treaty partner countries. Further, the Convention expressly includes the possibility of simultaneous tax examinations (Article 8) and tax examinations abroad (Article 7).

Recovery of tax claims

Article 11 of the Convention provides the Commissioner with the power to seek enforcement of Australian tax debts in foreign jurisdictions but it also imposes an obligation on the Commissioner to assist in the enforcement in Australia of tax claims of parties to the Convention. This is achieved by the Commissioner recovering the tax claim as if it were his own through his own domestic enforcement procedures.7 It is unlikely that any new domestic laws will need to be enacted, as Division 263 of the Taxation Administration Act 1953 (Cth), which currently applies to the recovery articles in Australia's bilateral agreements, is drafted broadly enough and is capable of being utilised to carry out the Commissioner's obligations under the Convention regarding recovery.8 In basic terms, Division 263 enables the foreign tax claim to become a tax-related liability under section 255-1 of the Taxation Administration Act and recoverable by the Commissioner by virtue of s255-5.

In order for a party to seek recovery, the tax claim must be the subject of 'an instrument permitting enforcement' and be uncontested.9 The bilateral agreements use the terminology that the 'revenue claim' is 'enforceable under the laws of that State' and is 'owed by a person who... cannot, under the laws of that State, prevent its collection'. A comparison of the commentary on Article 27 of the Model Tax Convention on Income and Capital – Assistance in the Collection of Taxes (Article 27) (which is the article that the recovery articles in the bilateral agreements are based on) and the Revised Explanatory Report on the Convention indicate that, despite the difference in terminology, the effect of the articles is intended to be very similar.10

It appears that 'an instrument permitting enforcement' in Australia would be an assessment11 and, in that respect, the Commissioner could not seek recovery of a 'tax claim' from a foreign jurisdiction unless there was an assessment.

In relation to the requirement that the tax claim is not one that is contested, if a taxpayer is in dispute with the Commissioner about the tax claim, it appears that the Commissioner cannot seek enforcement until the dispute is finally resolved.12 However, it is unclear whether the Commissioner must wait until the time for objecting to an assessment has passed before seeking recovery from a foreign jurisdiction. This would seem to be the case, but for the stipulation in paragraph 2 of Article 11 that the parties can agree to ignore the requirement that the tax claim be one that is not contested; or for, non residents, is one that can no longer be contested.

There is a difference in this aspect between the bilateral agreements and the Convention. According to the commentary on Article 27, the phrase 'a person who... cannot, under the laws of that State, prevent its collection' pertains to the situation where a taxpayer can defer the payment of tax while rights of appeal exist. In that respect, the bilateral agreements enable the Commissioner to seek recovery immediately after an assessment has been issued, while it is arguable that the Convention requires that the tax claim is not contested or the time period for contesting the tax claim has passed. Although the parties can choose to ignore the requirement that the tax claim is uncontested, it seems that they cannot do so on an ad hoc basis; rather, their intention must be set out in an enforceable international agreement.13

Article 12 enables the Commissioner to seek, and imposes an obligation on him to take, conservancy measures, ie through garnishee or freezing orders (if available), even in cases where the tax claim is contested or is not the subject of an instrument permitting enforcement.14 However, a party can only rely on Article 12 if it is able to take conservancy measures regarding the tax claim in its own jurisdiction, and the amount of tax must be determined, even if only provisionally.

Restrictions

The same limitations that apply to Article 12 also apply to the recovery of tax claims, exchange of information, and service of documents articles in the Convention and are set out in Article 21. For example, paragraph 2.g of Article 21 provides that a jurisdiction is not obliged to provide assistance to another jurisdiction in the recovery of a tax claim if the applicant state has not exhausted all of its domestic measures, except where recourse to such measures would give rise to disproportionate difficulty.15

The restrictions in Article 21 also apply so that the Commissioner is not obliged to provide assistance to a foreign jurisdiction in a manner that offends Australia's domestic laws or public policy,16 or would affect the rights and safeguards secured to persons by the laws or administrative practices of the Commonwealth.17 Despite that, on face value, the restrictions in Article 21 are intended to safeguard the rights of taxpayers and the sovereignty of the parties, they are not mandatory.18 The consequence of this is that while a foreign jurisdiction might have powers that the Commissioner does not, it is not obliged to provide assistance but, at the same time, it is not obliged to refuse to provide assistance.19 The Commissioner's practice regarding the recovery of tax claims under Australia's bilateral agreements is set out in PSLA 2011/13 Cross border recovery of taxation debts. It will likely need to be updated, to include the Commissioner's view on whether he will seek to recover tax claims that have been contested or are within time to be contested, and how he will deal with conflicting legal systems.

Finally, there are documentary requirements that the applicant state must comply with, which include providing a declaration that the tax claim is not or may not be contested and concerns a tax covered by Article 2 of the Convention, an official copy of the instrument permitting enforcement, and any other document required for recovery or measures of conservancy.20

Applicable taxable periods

Technically, the Convention is limited in application to taxable periods beginning on or after 1 January of the year following the one in which the Convention came into force. In Australia, that date is 1 January 2013. However, paragraph 6 of Article 28 also provides that any two or more parties may mutually agree that the Convention shall have effect for earlier taxable periods.21

Time limit

As there is no time limit on the recovery of tax debts owed to the Commissioner, it would appear that a party may seek enforcement in Australia at any time.22 However, parties are not obliged to provide assistance to a request submitted more than fifteen years from the date of the original instrument permitting enforcement.23 But, again, this is a condition that the parties may choose to ignore.

Reservations

Reservations to the Convention are only able to be made for some types of taxes in paragraph 2 of Article 1, which do not include taxes on income, profits, capital gains and net wealth in paragraph 1 of Article 1. Reservations can also be made for the service of documents. Australia has not made any reservations.

Dispute resolution

Disputes in relation to the existence or amount of the tax claim or the instrument permitting enforcement can only be conducted in the requesting state. The same is true regarding recovery articles in Australia's bilateral treaties.

Summary

The longstanding historical position was that a country would not enforce the tax claims of other jurisdictions, as that was thought to violate public policy as a compromise of sovereignty.24 In more recent times, that has changed radically and taxpayers are now operating in a new era of widespread multilateral cooperation in the investigation and enforcement of tax claims. Australia's adoption of the convention is ample evidence of this.

Footnotes
  1. See eg the Foreign Judgments Act 1991 (Cth), although the recovery of tax debts is limited to recovery from New Zealand and Papua New Guinea.
  2. Although all of the comprehensive tax treaties have provisions for the exchange of information, only a small number enable the reciprocal recovery of tax claims: New Zealand and Norway (Article 27), France and Finland (Article 26), and South Africa (Article 25A). The obligation to provide assistance under these articles is implemented via Division 263 of schedule 1 of the Taxation Administration Act 1953 (Cth). These countries, except New Zealand, which just announced its intention to sign the Convention, are also parties to the Convention.
  3. For a list of countries that Australia has bilateral agreements with relating to service of documents, see Attorney-General's Department, Australia's bilateral treaties with other countries (5 October 2011). Multilateral conventions include the Hague Service Convention and the Vienna Convention on Consular Relations (Article 5(j)), which is implemented through the Consular Privileges and Immunities Act 1972 (Cth) (s5(1)).
  4. Convention; See also National Interest Analysis, Convention on Mutual Administrative Assistance in Tax Matters [2012] ATNIA 2, 28, [7].
  5. Convention art. 2(1) and art. 3(1)(c).
  6. Convention art. 27(1) provides that the Convention does not limit, nor is it limited by, Australia's existing and future international tax assistance agreements.
  7. Convention art. 11(1).
  8. National Interest Analysis, Convention on Mutual Administrative Assistance in Tax Matters, op. cit., [29]-[30].
  9. Convention art 11(2). Where the taxpayer is not a resident of the requested state, the obligation to assist in the recovery of a tax claim does not arise unless the tax claim can no longer be contested.
  10. OECD, Revised Explanatory Report to The Convention on Mutual Administrative Assistance in Tax Matters OECD at [98]-[127].
  11. Ibid [112].
  12. Ibid [113].
  13. Ibid [114].
  14. Convention art. 12.
  15. Convention art. 21(2)(g).
  16. Convention art. 21(2).
  17. Convention art. 21(1).
  18. OECD, above n 10, [183].
  19. Ibid.
  20. Convention art. 13.
  21. OECD, above n 10, [278].
  22. Convention art. 14(2).
  23. Convention art. 14(3).
  24. Government of India v Taylor [1955] AC 491.

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