Tax Singapore Client Alert February 2016 Decisions on Exchange of Information Requests in 2015 –Taxpayers Face Increasing Hurdles in Mounting Challenge ABU v Comptroller of Income Tax  2 SLR 420;  SGCA 4 ("ABU") In ABU, the Singapore Court of Appeal clarified the requirements for validity in relation to requests for information from foreign tax authorities under the exchange of information ("EOI") provisions in Avoidance of Double Taxation Agreements ("DTAs"). This case was commenced before the amendments to the statutory regime for EOI under the Income Tax Act ("ITA") which came into effect on 28 November 2013. Prior to these amendments, the Comptroller of Income Tax (the "Comptroller") had to apply to the High Court for a court order under section 105J of the ITA to obtain information protected from unauthorised disclosure under the Banking Act and the Trust Companies Act. Section 105J has since been repealed under the amendments and a court order is no longer required for the Comptroller to obtain such protected information. Facts The Appellant is a Japanese national residing in Japan. The National Tax Agency of Japan ("JNTA") sought to determine whether the Appellant had failed to report distributions received from foreign securities investment funds. Pursuant to Article 26(1) of the DTA between Singapore and Japan, the JNTA sent a letter to the Comptroller requesting for the production of bank statements for certain accounts held by the Appellant, his son and their related entities (the "JNTA's Request"). Given that such information was protected from unauthorised disclosure under the Banking Act, the Comptroller applied for and was granted a court order by the High Court directing the production of the bank statements under the repealed section 105J of the ITA. The Appellant appealed against the High Court's decision. Decision The Court of Appeal dismissed the appeal. By way of background, under the repealed Section 105J, the High Court may make an order directing the production of protected information if it is satisfied that it is justified in the circumstances of the case and it is not contrary to the public interest to do so. In addition, Section 105D of the ITA provides that an EOI request must set out the information prescribed in the Eighth Schedule. Further, consistent with the internationally agreed standard for EOI, Article 26(1) of the Singapore-Japan DTA provides that the requested information must be foreseeably relevant to the carrying out of the DTA or the enforcement of the requesting state’s domestic tax laws. For further information, please contact: Eugene Lim +65 6434 2633 email@example.com Allen Tan +65 6434 2681 firstname.lastname@example.org Dawn Quek +65 6434 2599 email@example.com Peter Tan +65 6434 2669 firstname.lastname@example.org Baker & McKenzie.Wong & Leow 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1, Singapore 018981 www.bakermckenzie.com 2 Client Alert February 2016 In reaching its decision, the Court of Appeal held that the validity of a request for information is to be determined on its face in light of the requirements prescribed by the Eighth Schedule and that the court will not substantively review a request to examine the veracity of the statements contained within. Therefore, if a request meets the Eighth Schedule requirements, the requirement of foreseeable relevance is met and the making of an order would also be treated as justified in the circumstances of the case. In this case, the Court of Appeal held that the court order was justified in the circumstances of the case because the JNTA's Request met the Eighth Schedule requirements. However, the Court of Appeal found that the order issued by the court below was wider than the ambit of the JNTA's Request and therefore amended the order to reflect JNTA's Request. The Court of Appeal also held that Parliament had intended to permit EOI relating to any period. While a request for information can only be made after a DTA has been ratified, the request can relate to information pertaining to an earlier period before the ratification. Comments While section 105J has been repealed, the requirement of foreseeable relevance still remains in the EOI provisions of Singapore's DTAs. This case clarifies that the requirement of foreseeable relevance will be met as long as a request for information meets the requirements prescribed by the Eighth Schedule. In this case, the taxpayer had an opportunity to challenge the production of protected information to the Comptroller because the Comptroller was required to obtain a court order under the repealed Section 105J of the ITA for the production of protected information. Under the present EOI regime, however, the Comptroller no longer requires such a court order to obtain protected information for the purposes of complying with an EOI request. Further, while there is a requirement for the Comptroller to notify the person in relation to whom the protected information is sought, this requirement can be waived under section 105E(4) in certain circumstances (e.g., if this may prejudice the investigations). Also, where the information sought in the EOI request does not consist of protected information, there is no obligation on the Comptroller to notify the taxpayer or seek any court order to comply with the EOI request. As such, while the Comptroller's exercise of power to obtain information and to comply with an EOI request can be subject to judicial review, the taxpayer may face practical difficulties enforcing his right to legal recourse given that he may not even be aware that his information has been sought by or even handed over to a foreign tax authority. This could be of concern, particularly given that the case of ABU shows that it is possible that the Comptroller may act beyond the scope of the EOI request. AXY and others v Comptroller of Income Tax  1 SLR 615;  SGHC 291 AXY is the first reported case since the repeal of section 105J where taxpayers have sought judicial review of the Comptroller's decision on EOI proceedings. Facts The background to AXY was that the National Tax Service of the Republic of Korea had issued an EOI request (the “NTS's Request”) to the Comptroller 3 Client Alert February 2016 for information on certain Korean taxpayers' banking activities in Singapore, specifically, information on bank accounts held by certain Singapore companies in Singapore. NTS's Request was issued after tax investigations had started in Korea against the taxpayers. The Comptroller complied with NTS's Request and issued notices to various banks in Singapore to obtain the requested information. The taxpayers sought leave to apply for judicial review of the Comptroller's decision to issue the notices to the banks on the grounds that the Comptroller had not exercised its discretion independently in complying with NTS's Request. The taxpayers sought specific relief in the form of a prohibition order against the Comptroller from disclosing the banking information obtained, and a quashing order against the notices issued. The specific issue in AXY was on a matter of civil procedure. The taxpayers had applied for discovery against the Comptroller for certain documents for inspection. Discovery is a process in litigation where opposing parties are required to disclose to the other all documents which are, or have been, in his possession, custody or power that are relevant and necessary to the fair disposal of the issues in dispute. Discovery would allow parties to review the evidence relied upon by the opposing party, and prepare its case accordingly. The taxpayers sought discovery of the following documents: (i) the NTS's Request itself, (ii) the correspondence between the Comptroller and the Korean tax authorities, (iii) the notices issued to the banks, (iv) documents relating to the investigations in Korea, (v) the income tax returns of the Singapore companies, and (vi) the documents relating to the internal procedures of the Comptroller's EOI review committee. Decision The judge in AXY allowed the discovery of documents (i), (ii) and (iii), broadly on the grounds that the information contained in these documents related to the Comptroller's decision-making process, and would be relevant in reviewing whether the Comptroller had exercised its discretion independently. The judge did not accept the Comptroller's argument that disclosure of these documents would amount to "tipping off" the Korean taxpayers and frustrating the tax investigations in Korea, on the basis that no objections were raised by the Korean authorities and the investigations had already been reported by the media in Korea. In any case, the judge held that any particularly sensitive information contained in these documents could be redacted to avoid compromising the investigations. The judge, however, rejected the discovery of documents (iv), (v) and (vi). Document (iv) was rejected on the grounds that it related to the factual accuracy of the NTS's Request, which following the reasoning in ABU, the court was not required to substantively review. Document (v) was rejected as it was neither material nor necessary for reviewing whether the Comptroller's decision was irrational, illegal or procedurally improper. Document (vi) was rejected as it related to the Comptroller's internal procedures which may be very sensitive in nature, and in any case the document was not relied upon by 4 Client Alert February 2016 the Comptroller and appeared to be a fishing expedition on the taxpayers' part. Comments This case illustrates the types of documents which the Singapore courts could consider relevant and should be produced in discovery by the Comptroller in judicial review proceedings on EOI matters. A key threshold question which the court will ask itself before granting the discovery of documents in EOI proceedings is whether the disclosure will prejudice investigations commenced by a foreign tax authority. Discovery would not be granted if there is a real concern that it would lead to tipping off the taxpayer and prejudicing foreign investigations. If a taxpayer can cross this threshold question, the court will then go on to apply the general rules of discovery to determine if the documents should be disclosed on the basis that they are relevant and necessary to the fair disposal of the matter. This case should also be considered in light of section 105HA of ITA, which was effective after the proceedings in AXY were initiated. Under Section 105HA, EOI requests made by foreign authorities and related documents will not be subject to discovery in judicial review proceedings if the court is satisfied that the foreign tax authority has requested the Comptroller to keep the document confidential. In other words, section 105HA has introduced an additional restriction on a taxpayer's right to apply for discovery of documents where a foreign tax authority has made a request to the Comptroller for confidentiality. If the taxpayer learns that an EOI request has been made and attempts to mount a claim for judicial review, he may be denied access to confidential documents that could be relevant to his claim without any judicial assessment of whether there is a real concern of tipping off or prejudicing the foreign investigations. This could prejudice the taxpayer's chances of succeeding in his claim for judicial review. It appears that with the current global trend towards increasing automatic exchange of information, the enhancement of collaboration between tax authorities and the effective administration of tax investigations have become the main policy drivers behind the recent legislative changes on EOI matters and the Singapore court's attitude towards such matters. ©2016 Baker & McKenzie. All rights reserved. Baker & McKenzie.Wong & Leow is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. 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