Master thesis Fiscal Law Exchange of Information

Master thesis Fiscal Law Exchange of Information General Research Question: Does the Dutch legislation concerning the exchange of information in tax matters sufficiently protect the rights of taxpayers in light of the increasing need of the international society concerning exchange of information and how should this legislation (if necessary) be improved? By: Astrid P.W.J. van Eldijk Studentnr. : S471139 Supervisor: drs. C.A.T. Peters

Table of Contents Table of Contents... 2 Chapter 1 Introduction... 6 1.1 Motivation of this master thesis... 6 1.2 General research questions for Rome... 6 1.3 General research question en sub questions of this master thesis... 6 1.4 The financial and economic crisis... 8 1.5 The role of taxation in the financial and economic crisis... 8 1.6 The role of exchange of information in the financial and economic crisis... 9 Chapter 2 Aspects of international law... 11 2.1 Introduction... 11 2.2 The development of International Exchange of Information by the OECD... 11 2.3 Narrow exchange and Extended exchange... 11 2.4 Model Tax Conventions... 12 2.4.1 OECD MC... 12 2.4.1.1 Commentary on the OECD... 13 2.4.1.2 Paragraph 1 of article 26 OECD MC... 14 2.4.1.3 Paragraph 2 of article 26 OECD MC... 14 2.4.1.4 Paragraph 3 of article 26 OECD MC... 15 2.4.1.5 Paragraph 4 of article 26 OECD MC... 16 2.4.1.6 Paragraph 5 of article 26 OECD MC... 17 2.4.1.7 OECD Commentary reservations on the Article 26 MC... 18 2.4.2 US MC... 18 2.4.3 UN MC... 18 2.4.4 Dutch MC... 19 2.5 Other OECD Conventions... 20 2.5.1 OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters 1988 20 2.5.2 OECD Model Agreement on Exchange of Information on Tax Matters of 18 April 2002... 21 2.6 EU Council Directives... 21 2.6.1 EU Council Directive 77/799/EC... 22 2.6.2 New mutual assistance directive of 1 February 2011... 22 2.6.3 EU Council Regulation 1798/2003... 23 2

2.6.4 EU Council Regulation 2073/2004... 23 2.6.5 EU Council Directive 2006/96/EC... 23 2.7 Stratification and ratio of the obligations... 23 2.8 Conclusion... 25 Chapter 3 Dutch law for international assistance for exchange of information... 28 3.1 Introduction... 28 3.2. Taxes covered... 28 3.3 Methods covered... 28 3.3.1 Exchange of information upon a request... 29 3.3.2 Automatic exchange of information... 30 3.3.3 Spontaneous exchange of information... 30 3.3.4 Other ways to exchange information... 31 3.4 Possibilities of denying a request for information... 31 3.5 Secrecy aspects... 32 3.5.1 Attorney Client Privilege... 33 3.6 Legal protection of taxpayers... 33 3.7 Conclusion... 34 Chapter 4 Taxpayer protection in the Netherlands... 37 4.1 Introduction... 37 4.2 The need to protect taxpayers... 37 4.3 Taxpayer protection and the methods of exchanging information... 37 4.3.1 Taxpayer protection by exchange of information upon a request... 38 4.3.2 Taxpayer protection by Automatic exchange of information... 38 4.3.3 Taxpayer protection by the spontaneous exchange of information... 39 4.4 Notification procedure... 39 4.4.1 Appealing a decision to exchange information... 40 4.4.2 In case of urgency... 41 4.5 The Dutch developments in case of exchange of information and taxpayer protection... 42 4.6 Conclusion... 43 Chapter 5 The general principles of the law... 46 5.1 Introduction... 46 5.2 Principle of subsidiarity... 47 5.3 Principle of secrecy... 47 5.4 Principles of reciprocity... 49 3

5.5 Principle of sovereignty... 50 5.6 Principles of transparency... 50 5.6.1 The importance of transparency... 50 5.6.2 Global forum on transparency and exchange of information for tax purposes... 50 5.6.2.1 Goals of the Global Forum... 51 5.6.2.2 The Peer Review group... 51 5.7 Conclusion... 52 Chapter 6 Taxpayer protection in International perspective... 55 6.1 Introduction... 55 6.2 Data protection and Directive EU 95/46 arts. 25-26... 55 6.3 Human Rights art. 8 of the ECHR... 55 6.4 Difference and similarities in exchange of information with other countries... 56 6.4.1 Austria... 56 6.4.1.1 Bilateral double tax convention with Austria... 56 6.4.2 Belgium... 56 6.4.2.1 Bilateral double tax convention with Belgium... 58 6.4.3 France... 58 6.4.3.1 Bilateral double tax convention with France... 59 6.4.4 Germany... 59 6.4.4.1 Bilateral double tax convention with Germany... 60 6.4.5 Hungary... 60 6.4.5.1 Bilateral double tax convention with Hungary... 60 6.4.6 Italy... 60 6.4.6.1 Bilateral double tax convention with Italy... 61 6.4.7 Poland... 61 6.4.7.1 Bilateral double tax convention with Poland... 62 6.4.8 Spain... 62 6.4.8.1 Bilateral double tax convention with Spain... 62 6.4.9 Sweden... 63 6.4.9.1 Bilateral double tax convention with Sweden... 63 6.4.10 United States of America... 64 6.4.10.1 Bilateral double tax convention with the United States of America... 64 6.5 Difference and similarities of taxpayer protection in other countries... 65 6.5.1 Secrecy and confidentiality... 65 4

6.5.2 Privacy... 67 6.5.3 Notification procedure... 68 6.5.4 Appealing a decision... 69 6.5.5 Third party involved... 70 6.6 The result of the EUCOTAX WINTERCOURSE week in Rome... 70 6.7 Conclusion... 75 Chapter 7 Conclusion... 81 Bibliography... 92 5

Chapter 1 Introduction and description of the general and sub themes 1.1 Motivation of this master thesis In September 2010 there was a selection of students who wanted to be a part of the EUCOTAX Wintercourse project. The EUCOTAX Wintercourse is a project which aims to study comparative law in Europe. In cooperation with 10 European universities 1 and the University of Washington the project stimulates a cross-border research of European aspects of tax law. I have successfully taken part in the selection procedure and was chosen to be one of the students for the EUCOTAX Wintercourse project 2010-2011. The general theme of the project this year was the financial and economic crises. More specific the influence of taxation in the economic and financial crisis. 1.2 General research questions for Rome To investigate the role of taxation in the economic and financial crisis the EUCOTAX commission formulated two general research questions. These two general research questions of the Rome project were: 1. What was the role of taxation as a contributor to the causes of the financial and economic crisis? 2. What is the role of taxation in providing remedies for the financial and economic crisis? The EUCOTAX Wintercourse is divided in six subparts. The part I have investigated is the exchange of information and tax procedures, including legal protection of taxpayers (e.g. money laundering, Financial Action Task Force, G-20, Global Forum). 2 In April 2011 I have discussed this theme in Rome. This master thesis is in part a result of the research which I have done in Rome. Besides the conclusions we made in Rome, this thesis will address the taxpayer protection and the principles of law which a government have to take into account. 1.3 General research question en sub questions of this master thesis In this paragraph I will address the research questions of this thesis. First I will start with my general research question. The main question of this thesis is: Does the Dutch legislation concerning the exchange of information in tax matters sufficiently protect the rights of taxpayers in light of the increasing need of the international society concerning exchange of information and how should this legislation (if necessary) be improved? 1 Uppsala Universitet Sweden, Katholieke Universiteit Leuven Belguim, Luiss Universitá Roma Italy, Universidad de Barcelona Spain, Universität Osnabrück Germany, University of Londen United Kingdom, Université Paris France, Wirtschaftsuniversität Wien Austria, Universiteit van Boedapest Hungary, Tilburg University The Netherlands. 2 See for more information my paper: Global Finance and Taxation, financial and economic crisis and the role of taxation. Subtopic 3: Exchange of information and tax procedures, including legal protection of taxpayers. 6

To formulate a good substantiation of answering the general research question I have formulated the following sub questions. These should be answered step by step in my thesis. The structure of this thesis is set up by first describing the International Model Tax Conventions for exchange of information. This is addressed in the second chapter about the aspects of international law. The emphasis of that chapter will be on the OECD model tax convention. Next to this convention there a paragraphs about the model tax conventions of the UN and the US. In the further paragraphs the other OECD conventions and agreements and the council directives. After describing these conventions and agreements I will formulate an answer to the first question: 1. What are the relevant provisions of international tax law concerning the exchange of information? Second, a description of the Dutch law for international assistance for exchange of information. This is addressed in chapter three. In this chapter you will find an analysis of the taxes and methods covered in the Dutch legislation for the exchange of information. The opportunity to deny a request and a brief introduction of secrecy and legal protection are addressed in the last paragraphs of this chapter. After this global overview of the domestic aspects of exchange of information, there is a special chapter for the Dutch taxpayer protection. This can be found in the fourth chapter. There will be more attention for taxpayer protection and secrecy aspects in the Netherlands. The intention is to analyze the current situation of taxpayer protection. This chapter is a follow up of chapter three were I have analyzed the several methods of exchanging information. Chapter four is meant to be a recess with reference to the level of taxpayer protection in case of the different methods of the exchange of information. With this information I would like to answer my second question. 2. What are the relevant aspects of the Dutch legislation concerning the exchange of information in tax matters? In the fifth chapter more attention will be given to the principles of law in accordance to taxpayer protection. This chapter will be the normative framework of this master thesis. To create a legal conclusion for improving taxpayer protection in the Netherlands the general principles of law which a government has to take into account to protect taxpayers in procedures of exchange of information. The intention is to investigate the need for balance between transparency and secrecy. A part of this chapter is the need for transparency in the international procedures of exchange of information. This part of the fifth chapter creates an international overview of importance of transparency and the need to reduce the financial crisis and restrict or prevent a new one. Using this normative framework is important to answer my general research question. 3. What legal principles are important concerning the international need to exchange information on one hand and the protection of taxpayers on the other hand? Does the Dutch legislation meet the requirements of this normative framework? The sixth chapter is the international part related to the methods of exchange of information and the several bottlenecks for taxpayer protection. In this chapter an analysis of the other Wintercourse countries. What kind of tax system do they have and how do they deal with exchange of information. As an extra the bilateral agreement between the Netherlands and the foreign Wintercourse country 7

are treated in this chapter. I have written these paragraphs to insight the relationship and agreements between the Netherlands and the Wintercourse countries. Chapter 6 is written with the intention to learn something of the other Wintercourse countries. Making a comparison of all the used methods to exchange information I will try to point out the bottlenecks and benefits of all these several legislations. 4. What lessons can be learnt from the legislation of the other Wintercourse countries to improve the Dutch exchange of information and taxpayer protection? With the results of this four sub questions in chapter seven I will present the conclusion of this thesis. In this whole thesis, including the conclusion, I will pay some attention to the EUCOTAX Wintercourse general theme Financial and economic crisis. Because of the fact, in this chapter there should be a shift down to the financial and economic crisis. To satisfy the goals of the EUCOTAX Wintercourse and to create a complete master thesis the fifth and last sub question about the financial and economic crisis should be answered partly be answered in the whole thesis and be addressed in the final conclusion. This last sub question is: 5. Do we need to improve the Dutch legislation for exchange of information to prevent a next financial and economic crisis? In other words: Is it possible to prevent a financial and economic crisis if the government changes the tax legislation according to exchange of information? 1.4 The financial and economic crisis I will attempt to put the research question of this study in the context of the financial and economic crisis. In this introduction a paragraph about the beginning of the crisis and the role of taxation in this financial and economic crisis. Accordingly, in the conclusion of this study the recommendations concerning the Dutch legislation will be linked to some general observations concerning the role of exchange of information in tax matters as a remedy against possible financial and economic crises in the future. Exchange of information has become a topic with a very broad scope. An interesting topic such as banking secrecy is therefore only treated in the introduction and conclusion of this study. In addition, no specific attention is paid to the efforts of the international society to deal with tax havens. I suppose there are several aspects that started the financial and economic crisis. Some news authorities suggest one of the factors of the financial and economic crisis is the risky mortgage lending in the United States of America. Since 2007 the housing market of the USA was collapsing with a negative result for the mortgage banks over there. Because of the interrelationship of the financial market it leads to a financial and economic crisis all over the world. The stock markets were under pressure and the share prices decreased. Companies did not get any mortgage for investments en developments in their business. The difficulties of the financial market and the decreasing trust of the financial institutions into the worldwide business resulted in a financial and economic crisis. 1.5 The role of taxation in the financial and economic crisis The Netherlands is a small country in size. In that point of view it has an unimportant role in the world. But because of the fact that The Netherlands has an expanded treaty network, The Netherlands developed their small country as a business location for many multinationals. In a European investigation about Tax competition between countries, the Netherlands is considered one 8

of the most interesting locations to establish a company. It is a place with the lowest fiscal operating costs. Especially for foreign Enterprises emphasizing on production, services, research and development activities, it is attractive to be situated in the Netherlands. The corporate tax, local taxes and wage costs are lower compared to other European countries. There are special tax exemptions and rules for research and development in the Dutch tax system. The Netherlands stimulate R&D with tax compensation in the wage cost. In combination with the so called innovation box these tax facilities make the Netherlands a perfect business location. 3 Besides the measures that stimulate R&D in the Netherlands, the Dutch government implemented other tax measures because of the financial crisis. These other measures are intended to stimulate the economy by improving corporate taxpayers liquidity and reduce administrative burdens. Another important point for the financial and economic crises is the need of transparency and reducing of tax evasion and avoidance. Worldwide investigations showed the need for more transparency. The idea is that more transparency will lead to more fairness in taxation. Each country should reach a clear view of objects to levy tax and the subjects of which it has to collect. Besides this transparency in taxation, it also functions as a tool to decrease tax evasion and avoidance. Less tax criminality leads to more tax revenue. These revenues could be used to reduce the financial and economic crisis. 1.6 The role of exchange of information in the financial and economic crisis The last years the importance of the international exchange of information increased. The legal protection of taxpayers has become more and more important. Cooperation between the taxpayers in the supplying state and the requested state is essential to make the exchange of information cross border possible. The risk in providing information is that data that is collected by tax authorities could be incorrect or interpreted incorrectly by the other state, or the data is used unlawfully. If one or more of these risks will come true the taxpayers good name and reputation is damaged. Even their economic interest could be jeopardized. The protection of individual taxpayers is part of an international discussion about the following two aspects. The quality of the warranty of secrecy of the receiving state in one hand. The other point of view is the necessity and desirability of an information owner to review the exchanged information and, if necessary, object to the decision to exchange the information. 4 To create more transparency and reduce tax evasion and avoidance the last years there has been an increase of bilateral tax information exchange agreements. These are agreements between wellknown tax partners and the so-called tax havens. In chapter two a more extensive clarification of the model tax information exchange agreements will be given. The goal of these agreements is to appoint the revenues of the taxation to the country which is entitled to them. In this thesis the main goal is to investigate the balance between the taxpayer protection and the transparency of the exchange of information. The question to be answered is; Did the economic and financial crisis have an undesirable influence into the taxpayer protection? Is it possible to improve 3 Research published by KPMG, Competitive Alternatives 2010, Special Report: Focus on Tax. V. Kalloe 4 International Exchange of Information and the Protection of Taxpayers, A.C.M. Schenk-Geers, Kluwer, p.3. 9

the Dutch legislation for the exchange of information to reduce or prevent a next financial en economic crisis and, with these changes, will the taxpayer protection being paid enough attention? These developments related to the taxpayer protection, are connected with a theme which is discussed worldwide frequently, the banking secrecy. As I already noticed, I will give this theme of banking secrecy a limited attention in my thesis. Because of the connection of banking secrecy with the exchange of information, transparency, reducing tax evasion and heighten the tax revenue in a time the governments need money to control the crisis, below a brief attention for this theme. One of the effects of the financial and economic crisis is the discussion about banking secrecy. There has been an on-going debate between countries about bank secrecy for years. Allowing the tax authorities to access bank information for tax administration purposes is not contradictory to the confidentiality of the information. Banking secrecy in many countries has deep historical and cultural roots. This secrecy towards government authorities, such as tax authorities has numerous adverse effects domestically as well. It provides an opportunity for taxpayers to hide illegal activities and income from the black economy and to escape taxation under the shield of bank secrecy. Therefore it might alter the intended structure of the tax system, and increase the inequality between the honest taxpayers and the ones who use banking secrecy to hide their income. To effectively carry out their duties, tax administrations must analyse the records of financial transactions of the taxpayer, which requires access to banking information. By not being able to access bank information, tax authorities are forced to use more inefficient and time consuming ways to investigate, which result in higher costs and higher government spending, not to mention the revenue loss. This puts the burden on the honest taxpayers. Conditions that allow the concealment of financial records and transactions, and allow denying access to such information to law enforcement authorities, should therefore be abolished. All OECD countries tax administrations are bound by very strict secrecy rules on how to use taxpayer and banking information. Article 26 of the OECD Model also provides for the confidentiality of information exchanged by authorities on the basis of tax treaties. The global financial and economic crisis has placed great pressure on countries to increase revenues to counteract their growing budget deficits. In this thesis I will research the effects of the changed agreements and conventions in exchange of information to the protection of taxpayers. In Rome we noticed that there is a relationship between the financial and economic crisis and the changing and increasing agreements to exchange information. An important principle in law is the legal protection. An effect of the need to minimize the financial and economic crisis could be a lower level of taxpayer protection. In my theses I will find an answer to the question about a good balance between transparency and protection of the individual taxpayer in times of financial and economic crisis. 10

Chapter 2 Aspects of international law 2.1 Introduction In this second chapter of my thesis I will start with an introduction and comparison of different model tax conventions and other council directive. It starts with the development of International cooperation in exchanging information for tax purposes. After this short historical survey a treatment of the OECD Model Tax Convention with comparison to the US and UN Model Tax Convention will follow. 2.2 The development of International Exchange of Information by the OECD The start of exchange of information in tax matters arises in the OECD. OECD is an abbreviation of The Organization for Economic Co-operation and Development and was founded in 1960 by eighteen European countries plus United States and Canada. 5 At the moment the OECD counts thirty-four members. 6 Besides the founding non-european states, the OECD has seven non-european countries which are a member of the OECD. 7 The main goals of this organization are building a stronger, cleaner and fairer world. 8 The OECD designed a model tax convention containing an article for exchange of information, article 26. The first edition of article 26 of the OECD MC has been published in 1963. It was updated in 1977, 1992 and between 1992-2008. After founding the OECD MC in 1963 the OECD developed a legal framework for co-operating across borders without violating the sovereignty of other countries or the rights of taxpayers. 9 In 1988 the OECD created the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Strasbourg Convention). This Strasbourg Convention includes member countries of the OECD and the Council of Europe. It does not only covers the exchange of information but also to other measures which states are required to take to the taxation of other States. 10 To defend harmful tax competition the OECD created a special Agreement on Exchange of Information on Tax Matters (TIEA) in 2002. This agreement is created for non-oecd countries who confirm their commitment to the OECD. 11 2.3 Narrow exchange and Extended exchange There are two versions of exchange of information. Narrow exchange of information and extended exchange of information. The difference between these two forms of exchange is the range of exchange. Narrow exchange of information will only require states to exchange information where there is a treaty provision. In this case the treaty provision formulates a way of taxation that results 5 www.oecd.org statistics of members and partners: Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxemburg, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and United Kingdom. 16 February 2012 6 www.oecd.org statistics of members and partners. 16 February 2012 7 www.oecd.org statistics of members and partners: Also Australia, Chile, Israel, Japan, Korea, Mexico and New Zealand are members of the OECD. 16 February 2012 8 www.oecd.org statistics of members and partners. 16 February 2012 9 www.oecd.org centre for tax policy and administration, exchange of information, about. 16 February 2012 10 International Exchange of Information and the Protection of Taxpayers, A.C.M. Schenk-Geers, Kluwer, p.64. 11 Established in collaboration between OECD states with committed jurisdictions : Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Mauritius, the Netherlands, Antilles, the Seychelles and San Marino. 11

in another tax amount for the taxpayer then without the use of this treaty provision. Three categories are known in the narrow exchange. 1. Information that is needed to determine if the treaty provisions are fulfilled. 2. Information about the amount of withholding tax which qualifies for a tax credit. 3. Information about the permanent establishment profit which could be exempted. The extended exchange of information expands with the opportunity to exchange information that is needed to apply the domestic law. Applying the treaty is not necessary by extended exchange of information. The motivation of the requesting state for the exchange of information has to be within the question if it is able to tax and to which tax amount. The underlying meaning of this extended exchange of information is to create a wide obligation of exchange of information. 12 2.4 Model Tax Conventions This paragraph is written to describe and analyze the OECD Model Tax Convention and to compare it to two other leading Model Tax Conventions, the UN MC and US MC. In the last subparagraph there is a description of the Dutch Model Tax Convention. For Europe the most important Model Tax Convention is designed by the OECD. Because of that reason I will start with this model in the first subparagraph. In the second part of the first subparagraph there will be special attention for the OECD Commentary. The Model Tax Convention of the US and UN are described and analyzed in the second and third subparagraphs. Separate of the three Model Conventions the Netherlands has also designed its own Model Convention. 13 2.4.1 OECD MC The OECD Model Tax Convention (OECD MC) is designed to be a standard for bilateral tax agreements. It is set up to be guidance for bilateral tax treaties to commit an article to avoid double taxation and to prevent tax evasion or tax avoidance. 14 Because of the fact it is a model, it is not mandatory for countries. 15 Article 26 OECD MC creates an obligation to exchange information that is foreseeable relevant 16 to the correct application of a tax convention as well as for purposes of the administration and enforcement 17 of domestic tax laws of the contracting states. 18 In early versions of the OECD MC paragraph one used the word necessary were it is used now foreseeably relevant. Besides this change it inserts the words to the administration or enforcement in paragraph one. These changes were made to achieve consistency with the Model Agreement on Exchange of Information on Tax Matters. 19 There was no intention to alter the effect of the provision. 20 Exchange of information is not restricted by article 1 and 2. This means that the exchange information could also be about 12 Chapter 2 of Internationale fiscale gegevensuitwisseling, fed fiscale brochures, Mr. L.M.J. Sangster 13 Nederlands standaardverdrag 1987 article 27. 14 Paragraph 3.1 decision 6 April 2006, nr. CPP2006/546M, NTFR 2006/594, Stcrt. 2006, 76, p. 15 e.v. 15 Paragraph 3.1 decision 6 April 2006, nr. CPP2006/546M, NTFR 2006/594, Stcrt. 2006, 76, p. 15 e.v. 16 Addition on 1 June 2004 and approved by Committee on Fiscal Affairs. 17 Addition on 1 June 2004 and approved by Committee on Fiscal Affairs. 18 Information of www.oecd.org: article 26 of the OECD Model Tax Convention on Income and Capital. 19 Designed in 2002, read later on in this thesis about TIEA s for more information about this convention. 20 OECD Commentary of article 26, fourth paragraph, first subparagraph. 12

particulars of non-residents and has a larger view than only taxes referred in article 2 related to the administration or enforcement. 21 The second paragraph of article 26 OECD MC includes a secrecy policy. It makes a connection between the secrecy policy of the individual countries and the treaty countries. Second part of the provision is the restriction of persons who are involved with the exchange information and the restriction of using the information. Only persons or authorities concerned with the assessment or collection of, the enforcement or prosecution should be disclosed with information. The information might only be used for such purposes. 22 Paragraph three of the OECD MC article 26 formulates three grounds for refusal. The duty to exchange information will not be effectuated in case of administrative measures at variance with the laws and administrative practice of that or the other contracting state. 23 Within this provision there is an element of sovereign and reciprocity. 24 Second there will be a refusal in case of supplying information which is not obtainable under the laws or in the normal course of the administration of that or of the other contracting state. 25 The third part of paragraph three of article 26 OECD implies two conditions. First there is a legal base to refuse exchange of information because of the secrecy aspects of business, trade, industrial, commercial or professional matters. Second section is the information of which the disclosure could be in contrary to public policy. 26 Article 26 was updated in July 2005, when paragraphs 4 and 5 were added. These paragraphs have provisions about refusing a request for information because it has no domestic tax interest in the information (paragraph 4) and refusing a request because it is held by a bank or other financial institution (paragraph 5). Paragraph 5 of the OECD is intended to ensure that the limitations of paragraph 3 cannot be used to prevent the exchange of information held by banks and other financial institutions or relatives. 27 Meeting the standard of Article 26 requires only limited exceptions to bank secrecy rules and would not undermine the confidence of citizens in the protection of their privacy. 2.4.1.1 Commentary on the OECD The commentary on the model convention gives two goals of the exchange of information. The first is to give administrative assistance to investigate facts in relation to which the rules of the convention are to be applied. Second, because of the increasing internationalization of economic relations, to satisfy the growing interest in the reciprocal supply of information on the basis of which domestic taxation laws have to be administered. 28 Below there is an overview of the OECD commentary for each paragraphing of articling 26 OECD MC separately. 21 OECD Commentary of article 26, second paragraph of the preliminary remarks. 22 OECD article 26, paragraph 2. 23 OECD article 26, paragraph 3a. 24 OECD Commentary of article 26, fifth paragraph. 25 OECD article 26, paragraph 3b. 26 OECD article 26, paragraph 3c. 27 OECD Commentary of article 26. 28 OECD Commentary of article 26, first paragraph. 13

2.4.1.2 Paragraph 1 of article 26 OECD MC The words foreseeable relevant in the first paragraph are included for two reasons. First for the range to provide to the widest possible extent of exchange of information. Furthermore as a safety aspect to clarify that there is a prohibition to engage in fishing expeditions and a restriction to make a dividing line of information which is relevant or irrelevant to the tax affairs of a given taxpayer. 29 The OECD MC includes different methods of exchange of information. The most usual methods to exchange information are upon a request, automatic and spontaneous. Besides these three methods of exchange of information there can be a simultaneous examination, a tax examination abroad or an industry-wide exchange of information. 30 2.4.1.3 Paragraph 2 of article 26 OECD MC The OECD Commentary of paragraph 2 of article 26 OECD MC makes a connection between reciprocity and confidentiality. There can only be a reciprocal exchange of information when the proper confidentiality is assured. This confidentiality applies to all types and methods of exchanged information of the first paragraph. The secrecy policy is provided by domestic law. The OECD MC has made a connection with the domestic law of the contracting states. Information exchanged between the contracting states has to be kept in secret in the same manner as information obtained under the domestic law. In case of an offence of the secrecy policy the administrative and penal law of the contracting states applies. 31 Paragraph 2 of the OECD MC makes a restriction of persons and authorities who could be concerned into the exchanged information. Only persons and authorities concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes with respect to which information may be exchanged according to the first sentence of paragraph 1, or the oversight of the above. 32 This sentence is not only directed at persons and authorities of the taxation authorities but also at the taxpayer, his proxy or to the witnesses and governmental or judicial authorities charged with decisions of tax law. It is not possible to exchange information with third countries without an express provision in the bilateral treaty between the contracting states which allow such exchange of information. It is forbidden to use information for other purposes than provide in paragraph 2 (for example in case of a non-fiscal crime or to a treaty concerning judicial assistance). An exception is made for certain high priority matters (for example combating money laundering, corruption or financing a terrorism crime). 33 The last sentence of paragraph 2 of the OECD MC is about the use of information in public court or in judicial decisions. If the information has been used in public court or in judicial decisions, from that moment the information can be quoted from the court files or decisions for other purposes even as possible evidence. But the OECD commentary speaks about a limitation of using this information as a quotation or for other purposes. Contracting states are able to make restrictions of using information 29 OECD Commentary of article 26, fifth paragraph. 30 OECD Commentary of article 26, ninth paragraph. 31 OECD Commentary of article 26, eleventh paragraph. 32 OECD article 26, paragraph 2. 33 OECD Commentary of article 26, twelfth paragraph. 14

in this way expressly in their bilateral convention. This is a manner to object to using information in public. 34 2.4.1.4 Paragraph 3 of article 26 OECD MC The third paragraph of article 26 OECD MC contains three limitations of exchanging information. It gives a clarification of the range of exchanged information. The first limitation is: contracting states are not obligated to go beyond its own domestic law and practice to obtain the requested information. 35 The commentary of the OECD points out the possibility to use a notification procedure in the domestic law. This notification procedure could be important to cover the rights of an individual taxpayer or person who provides information. It helps preventing mistakes and facilitates exchange (for example to allow an individual taxpayer to co-operate with the tax authorities in the requesting state). The opposite of a good functioning notification procedure is the risk of frustrating the efforts of the requesting State. A delay of exchanging information because of the notification procedure is not desirable. 36 In case of urgency or if there is a risk of unsuccessful exchange of information the OECD commentary permits an exchange of information except using a notification procedure. Contracting states with a notification procedure should inform treaty partners that they have their own notification procedure and what the consequences of this procedure is in relation to their treaty partners for mutual assistance. 37 The second limitation is: contracting States are not obligated to carry out administrative measures at variance with the laws and administrative practice of their own state. 38 This provision is made to prevent taking advantage of the information system of the other contracting State if it is wider than its own system. In this provision a form of reciprocity is made. The requesting state could otherwise take advance of the large possibilities of obtaining information in the requested state compared to its own competence of obtaining information. The OECD commentary opinion: too rigorous an application of the principle of reciprocity could frustrate effective exchange of information and reciprocity should be interpreted in a broad and pragmatic manner. 39 The variations in practices and procedures of domestic laws are not a good base for denying a request. The leading criterion in accordance to the reciprocity principle is the opportunity to obtain information in the other State. In the situation information is obtainable under the laws of the requested State but unavailable in the requesting State, the requested State may decline a request to exchange information. 40 Paragraph 3 subparagraph b refers to normal course of the administration. These words are intended to restrict the procedures which are needed to obtain information. Only information in possession of the tax authorities or obtainable in the normal of special procedures of the tax authorities can be requested. The leading criterion of permitted procedures is: can tax authorities make similar investigations or examinations for their own purposes? 41 34 OECD Commentary of article 26, thirteenth paragraph. 35 OECD Commentary of article 26, fourteenth paragraph. 36 OECD Commentary of article 26, fourteenth paragraph, first subparagraph. 37 OECD Commentary of article 26, fourteenth paragraph. 38 OECD Commentary of article 26, fifteenth paragraph. 39 OECD Commentary of article 26, fifteenth paragraph. 40 International Exchange of Information and the Protection of Taxpayers, A.C.M. Schenk-Geers, Kluwer, p.181. 41 OECD Commentary of article 26, sixteenth paragraph. 15

The third limitation of paragraph 3 is laid down in the OECD MC because of secrecy aspects. Information about trade, business, industrial, commercial or professional secret or trade process is protected in this subparagraph. It looks like a wide sense of this provision but the OECD commentary makes a restriction. Because of the risk of ineffective exchange of information contracting States have to take into account the interests of the taxpayers before appealing a request. 42 By the decision if the request is really needed to obtain information, there is a form of the principle of proportionality. Implicitly the last subparagraph of paragraph 3 makes a connection between the secrecy policy and the confidentiality of paragraph 2. Information cannot be used for the types of unauthorized purposes against which the trade or other secrecy rules are intended to protect. The connection as already mentioned, is within the deliberations of applying the secrecy rules. 43 The OECD commentary defines the trade or business secret as facts and circumstances that are of considerable economic importance and that can be exploited practically and unauthorized use may lead to serious damage. 44 A conclusion of this commentary could be that not every kind of information about companies is protected by the last subparagraph of paragraph 3. There has to be an economic importance and may lead to serious damage before the exchange of information can be declined. The provision is also intended for third involved persons. 45 The OECD commentary also pays attention to the attorney client privilege. It refers to the confidential communication between attorneys, solicitors or other admitted legal representatives in their role as such and their clients. Not every form of communication is addressed in this provision. Only communication is confidential if it is done in the capacity as attorneys, solicitors or other admitted legal representatives and their clients. This secrecy policy has to be laid down in the domestic law to effectuate in the convention. 46 The last words of paragraph 3 subparagraph c include a limitation of disclosure of information which would be contrary to public policy. 47 The OECD commentary comments to the vital interests of the State itself. Only in extreme cases can this provision be used. Circumstances in which this provision could be important are in case of political, radical or religious persecution or in case of state secrecy. 48 2.4.1.5 Paragraph 4 of article 26 OECD MC Paragraph 4 and 5 were added in 2005. Paragraph 4 is an addition made for the situation the requested information is not relevant for the requested state. Before 2005 the addition of paragraph 4 the purpose of this paragraph was expressed by the practices of the domestic law of the contracting states. The contracting states used their special examining or investigative powers 42 OECD Commentary of article 26, nineteenth paragraph introduction. 43 OECD Commentary of article 26, nineteenth paragraph first subparagraph. 44 OECD Commentary of article 26, nineteenth paragraph second subparagraph. 45 OECD Commentary of article 26, nineteenth paragraph second subparagraph. 46 OECD Commentary of article 26 nineteenth paragraph third subparagraph. 47 OECD article 26, paragraph 3c end of the sentence. 48 OECD Commentary of article 26, nineteenth paragraph fifth subparagraph. 16

provided by levying domestic taxation to collect information for the requested state. The need of such information for domestic purposes was not required. 49 Paragraph 19.7 of the OECD Commentary gives an explanation of the words information gathering measures which are included in the fourth paragraph of article 26 OECD. It means laws and administrative or judicial procedures that enable a Contracting State to obtain and provide the requested information. 50 There is a connection between paragraph 3 and 4 in the second sentence of paragraph 4 of the OECD article 26. It adds a restriction to the limitations of paragraph 3. The argument of a Contracting State that they only collect information which is important for taxation in its domestic laws or practices does not alter the fact that they are obligated to collect requested information. 51 2.4.1.6 Paragraph 5 of article 26 OECD MC Paragraph 5 is also a provision that restricts the limitations of paragraph 3. It is designed for the exchange of information held by banks, other financial institutions, nominees, agents and fiduciaries as well as ownership information. 52 Paragraph 5 overrides the third subparagraph of paragraph 3 of the article 26 OECD MC. This third subparagraph makes a restriction of exchange of information which discloses a secrecy aspect. A refusal of exchange of information based on bank secrecy is not permitted. This addition of paragraph 5 is connected to the development of the Model Agreement on Exchange of Information on Tax Matters. 53 Not only the bank secrecy is restricted in paragraph 5, also the information held by persons acting in an agency or fiduciary capacity. The provision is laid down because of the restriction in exchange of information because of professional secrecy aspects. If domestic law of a Contracting State provides that information held by a fiduciary is restricted to exchange with tax authorities, it will not include that such law can decline the requested information in international perspective. The commentary gives a definition of a person who acts in a fiduciary capacity, meaning when he or she acts not for his or her own benefit but for the benefit of another person in which the person has a relation to. 54 The restriction of paragraph 5 made to the limitation of paragraph 3 must be based on reasons unrelated to the person s status as a bank, financial institution, agent, fiduciary or nominee, or the fact that the information relates to ownership interests. Confidential communication between attorneys, solicitors and other admitted legal representatives and their clients is a justification for declining exchange of information. 55 49 OECD Commentary of article 26, nineteenth paragraph, sixth subparagraph. See also the report Improving Access to Bank Information for Tax Purposes. 50 OECD Commentary of article 26, nineteenth paragraph, seventh subparagraph. 51 OECD Commentary of article 26, nineteenth paragraph, eighth subparagraph. 52 OECD Commentary of article 26, nineteenth paragraph, tenth subparagraph. 53 OECD Commentary of article 26, nineteenth paragraph, eleventh subparagraph. See also the report Improving Access to Bank Information for Tax Purposes. 54 OECD Commentary of article 26, nineteenth paragraph, twelfth subparagraph. 55 OECD Commentary of article 26, nineteenth paragraph, fourteenth subparagraph. 17

2.4.1.7 OECD Commentary reservations on the Article 26 MC The OECD Commentary has provided a few reservations for Austria, Switzerland, Luxemburg and Belgium to the provisions of article 26 OECD MC. Austria will exchange information held by a bank only when the information is requested in case of criminal investigation by the requesting State concerning the commitment of tax fraud. 56 Switzerland will only exchange information which is necessary for carrying out the provisions of the Convention. There is an exception in case of involving acts of fraud subjected to imprisonment. 57 Luxemburg is permitted to not include paragraph 5 of article 26 OECD MC in its conventions. 58 Belgium is permitted the same as Luxemburg but with the addition: if paragraph 5 is included in the convention and the requested information concludes a specific taxpayer and a specific financial institution the Belgium tax authorities will exchange information held by bank or other financial institutions. 2.4.2 US MC The first paragraph of the US Model Tax Convention (US MC) starts with a definition of exchanged information which may be relevant. 59 The US Model gives a large definition of all possible exchange of information. Furthermore in this paragraph 1 of article 26 the US it uses the lines: of every kind imposed by a contracting State to the extent that the taxation there under is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes. These lines are an addition compared with the OECD MC. The OECD MC concerns to taxes imposed on behalf of the Contracting State. It only determines the authorities who are able to use the information. In the US MC this paragraph is expanded with the extra information that is related with taxation. The most mark able difference between the OECD and US MC in paragraph 2 is the fact that information shall be disclosed only to persons or authorities concerned with the assessment or etc. in the OECD MC and in the US MC information shall be disclosed only to persons or authorities involved with the assessment or etc. This little difference in the use of words could make a big difference in the explanation of both model conventions. The US MC is divided in 8 paragraphs unlike the OECD which is divided in 5 paragraphs. Paragraph 3, 4 and 5 of both model conventions are almost equal to each other. The sixth, seventh and eighth paragraph of the US MC are additions about the form of the provision of information, the insurance that relief which is granted by the convention from taxation imposed by that other State does not inure to the benefit of persons not entitled there to and the opportunity to enter the requesting State for investigation in the requested State. 2.4.3 UN MC The UN Model Tax Convention (UN MC) is also designed to be a standard for bilateral tax agreements. Paragraph 1 of the article 26 start with another definition of exchanged information. The model covers exchange of information which is necessary for carrying out the provisions of the convention. 60 This is a restrict description of used information. The UN MC has a special phrase in 56 OECD Commentary of article 26, twenty-third paragraphs. 57 OECD Commentary of article 26, twenty-fourth paragraphs. 58 OECD Commentary of article 26, twenty-fifth paragraph. 59 Article 26, first paragraph US Model Tax Convention. 60 Article 26, first paragraph UN Model Tax Convention. 18

the first paragraph in particular for the prevention of fraud or evasion of such taxes. The UN MC includes an extra phrase at the end of the first paragraph. This model combines paragraph 1 and 2 of the OECD MC and US MC, but after that it implements the next phrase: The competent authorities shall, though consultation, develop appropriate conditions, methods and techniques concerning the matters in respect of which such exchange of information shall be made, including, where appropriate, exchanges of information regarding tax avoidance. The second and last paragraph of the UN MC is almost equal to the OECD and US MC paragraph 3. The only word that is different is the third provision of this paragraph: To supply information which would disclose. The OECD and US uses the words: To supply information that would disclose. The paragraphs with provisions about refusing a request for information because it has no domestic tax interest in the information and refusing a request because it is held by a bank or other financial institution are not included in the UN MC. The last update of the UN MC was in 2001. 2.4.4 Dutch MC This Dutch Model Convention was laid down for the first time in 1987. Below a description of the similarities and discrepancies of the Dutch Model Convention with the International Model Conventions is made. Paragraph 1 of the Model Conventions for the exchange of information all starts with another definition of exchanged information. The OESO covers foreseeable relevant, the UN necessary and the US speaks of may be relevant. The most restricted definition is made by the UN. Conventions based on this model restrict exchange of information only to necessary of information. The Dutch Model Convention correspondents the most with this UN Model Convention. It only exchanges information if it is necessary. Further in paragraph 1 of article 26 the OECD includes to the administration or enforcement, of every kind and description imposed on behalf and or of their political subdivisions or local authorities in the model. The UN laid down a special phrase in particular for the prevention of fraud or evasion of such taxes. The US use the lines: of every kind imposed by a contracting State to the extent that the taxation there under is not contrary to the Convention, including information relating to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, such taxes. You can conclude that the intentions of the three models are all different. The Dutch Model Convention does not have any special criteria of which intention the model is made for. The UN model implicated an extra phrase at the end of the first paragraph. This model combined paragraph 1 and 2 of the OECD and US Models, but after that it implement the next phrase: The competent authorities shall, though consultation, develop appropriate conditions, methods and techniques concerning the matters in respect of which such exchange of information shall be made, including, where appropriate, exchanges of information regarding tax avoidance. The Dutch Model Convention is similar to the secrecy policy of the three models but in a restricted version. The addition in secrecy in for example the UN Model has, is not included in the Dutch Model Convention. The provisions in the model Conventions and Dutch Model Convention concerning the explanation are all the same. The UN Model and Dutch Model Convention are laid down in two paragraphs. This in contrasts with the OECD and US Model which put several extra paragraphs in the article of exchange of information. You may determine that the UN and Dutch Models have the most similarities and are more limited than the OECD and US Model Conventions. The OECD implements 19