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Exchange Of Information On Request

EXCHANGE OF INFORMATION ON REQUEST:  THE IMPLEMENTATION OF A SUSTAINABLE EXCHANGE OF INFORMATION SECTION – PART 1.

RC Terblanche (CA)SA; MBA

RC Terblanche is an Exchange of Information Technical Expert and a former Competent Authority for Exchange of Information

1         Introduction to Exchange of Information

1.1        Taxpayer Life Cycle

Tax Information Exchange agreements require jurisdictions (partners) to share information that may be foreseeably relevant in the administration or enforcement of a specified tax.  The agreements are clear that information shall be exchanged and the lack of domestic resources cannot serve as a reason not to exchange information.

The process of exchange of information between jurisdictions has grown significantly and it is necessary in assisting revenue administrations in their administration or enforcement of a taxpayer’s case.  Exchange of information plays a significant role in improving tax compliance on the long-term and it begins with strengthening the organization and management capability of the revenue administration by implementing a sustainable exchange of information system.  Reform of the legal framework is also often required to ensure that the necessary powers, penalty regimes relating to exchange of information is in place.

The effectiveness of exchange of information therefore depends squarely on the Competent Authority’s ability to implement a sustainable exchange of information process.  The Competent Authority must design the process of exchange of information to serve the revenue administration as a whole and the starting point is to understand the nature of exchange of information and how it can benefit the revenue administration.  Exchange of Information, in essence, is a support function to administration and enforcement (compliance) activities in a revenue administration.  Administration and enforcement activities occur throughout the taxpayer’s life cycle – hence it is clear that information that is foreseeable relevant can be exchanged at any stage in a taxpayer’s life cycle  (see Figure 1: Taxpayer Life Cycle).

Figure 1: Taxpayer Life Cycle

1.2        Taxpayer Registration

Exchange of information can occur to determine the status of a taxpayer as a tax resident in either the requested or the requesting state.  Examples may in include a request to establish the date from which the taxpayer is registered any registration documentation that may support the taxpayer’s position.  The movement of a taxpayer in and out of a jurisdiction or how long a person has resided at a particular address can also be part of the evidence required by a revenue official to determine a taxpayer’s tax residence.

1.3        Filing of Tax Returns

Taxpayers submit on a periodic basis return for assessment.  The information submitted in the declarations (or returns) forms the basis of a taxpayer’s assessment.  Where such declarations relate to transactions outside the jurisdiction, it is not uncommon for official to request additional information to verify the accuracy and validity of such declarations.  Uncooperative taxpayers may want to interfere with the process and as such, the revenue official can turn to the exchange of information process to obtain the required information.  Examples can include where a revenue official want to verify the accuracy and validity of a foreign tax credit claimed by a taxpayer and whether such foreign tax was indeed paid.

1.4        Assessment of Tax Liability

Revenue Administrations perform risk identification procedures to select cases for compliance or enforcement actions e.g. audits or investigations. During any stage of the each of the risk identification, audit or investigation process (including tax criminal investigations) revenue officials may require information from a jurisdiction with whom it has an international exchange of information agreement in place.  The nature of information required, and types of documentation required is largely dependent on the type of information that can be obtained under domestic law and what the requested state can obtain under its domestic law and could include (but not limited to) the following[1]:

  • The nature of income in the source country;
  • The income and expenses shown on a tax return;
  • Business records used in the daily operations of a person (legal or natural) such as financial statements, accounting records, management information;
  • Formation documents of an entity and documents about subsequent changes of shareholders/partners;
  • Name and address of the entity at the time of formation and all subsequent name and address changes;
  • Names and addresses of the directors, managers, and other employees of a company for the relevant years, evidence (contracts and bank statements) of their remuneration, social security-payments and information about their occupation regarding any other entities;
  • Banking records including account opening documentation, bank statements, signatories to the account;
1.5        Collection of Tax Liability

Assistance in recovery of a tax debt is a separate arrangement under international legal instruments but any exchange of information under assistance in recovery is governed by the principles of the relevant exchange of information article.  Debt collectors may want to establish if a person is in another jurisdiction to notify the person of an existing debt and could request information on the person’s address, telephone numbers, email addresses etc.  Further information could include the nature and value of any assets (moveable / immoveable) in a jurisdiction.

1.6        Summary

It is not uncommon for revenue officials to assume exchange of information is limited to the divisions charged with the assessment of a taxpayer’s tax liability e.g. transfer pricing team, audit teams or investigations function of an organisation.  If this assumption is maintained, exchange of information will only be limited to certain functions or even to certain individuals in an organisation.

Exchange of information has been designed to serve the need of obtaining information that is in another jurisdiction and the revenue official cannot access such information.  Exchange of information therefore serve the entire organisation.

2         Bibliography

OECD, 2006. PART III: EXCHANGE OF INFORMATION ON REQUEST, s.l.: OECD.

Business Dictionary, 2016. BusinessDictionary.com. [Online]
Available at: http://www.businessdictionary.com/definition
[Accessed 22 03 2016]

[1] (OECD, 2006)