The Directive 2011/16/EU, of 15th February, on administrative cooperation in the field of taxation, was finally transposed in Portugal through Decree-Law no. 61/2013, of 10th May, that entered into force in Portugal on the next day.

The above mentioned Decree-Law revoked the Decree-Law no. 127/90 of 17th April that had transposed in Portugal the Directive 77/799/CEE of 19th December 1977, both clearly outdated.

From all the mechanisms to increase administrative cooperation provided by the EU regime, the exchange of information is the most relevant.

The EU Directive of 2011 establishes more clear and developed rules and provides more effective instruments to prevent international tax fraud and evasion. It also introduces: 1) a wider scope, 2) inclusion of information possessed by banking and financial institutions, 3) a mandatory automatic exchange of information, 4) establishment of deadlines for the provision of information and 5) feedback and the use of standardized forms and communication channels.

So far, Portugal only signed bilateral agreements with 15 States (the majority of them tax havens) and Protocols with 3 Portuguese speaking countries (Brazil, Mozambique and Cape Verde), all of them under the authority of OECD legal instruments.

As a key note, this article will focus on the analysis of the European exchange of information regime, recently implemented in Portugal, and its comparison to other legal and international instruments in what concerns exchange of information for tax purposes.

EUROPEAN FRAMEWORK

First of all, regarding scope, all taxes are included for the exception of VAT, custom duties, excise duties included in other administrative cooperation legislation, social security contributions and fees and charges from public services.

One of the most important aspects to bear in mind in exchanging information under the European regime is that the information must have “foreseeable relevance” (in the 70’s Directive it had to be “necessary”). This means that, besides the fact that the scope is now much wider, the Member States shall exchange information concerning particular cases and identified taxpayers and they are not at liberty to engage in “fishing expeditions”. The same standard applies at the OECD level, as we’ll see shortly. One discussion that takes place is if two Member States can override the “fishing expeditions” standard by means of a TIEA, i.e., if a Convention or Agreement signed by two Member States on the basis of their contractual autonomy must comply with the EU/OECD standards or if such Convention or Agreement may foresee a wider scope in this matter.

Another special feature of the European exchange of information regime is the feedback clause above mentioned, meaning that whenever a Member State provides information, that Member State is entitled to receive feedback of the results derived from the use of the information provided. The feedback must be sent within 3 months or 1 month period after the outcome of the use of the requested information is known, according to the type of exchange of information mechanism used. 

A Member State can’t decline to provide information on the grounds that it has no domestic interest in it. Also, a Member State is not allowed to refuse information solely because is held, namely, by a bank or other financial institution. In any case, confidentiality is respected and the information communicated is treated as secret and can only be used for the purposes provided for in the legislation.

It’s important to note that the Portuguese Decree-Law no. 61/2013 is more protective with regards to taxpayer’s rights than the EU Directive: the taxpayer of whom the information concerns is notified by the Portuguese Tax Authorities that a request of information regarding him has been made. The taxpayer is given the right to argue why the information should not be provided. However, this does not apply to the following cases: a) mandatory automatic information exchange, b) whenever the request has urgent nature; c) the notification might undermine investigations on tax fraud and evasion and as long as the requesting authority mentions all these elements, and d) in case the information is already available in the Tax Authorities database. These exceptions were inspired by paragraph 14.1. of the Commentaries to Article 26 of the OECD Model Convention.

There are three types of information exchange:

  1. On request: it is made by the requesting authority to the requested authority in a specific case. The requested authority must act as it would when acting on its own initiative or at the request of another authority in its own Member State. The requesting authority may ask for the carrying out of specific administrative enquiries. They will only be carried out if considered necessary by the requested authority; however any refusal must be reasoned. The information must be provided within 6 months from the date of receipt of the request and within 2 months if the information is already in possession of the requested authority. In specific cases the two authorities may agree on different time limits. The requested authority may notify the requesting authority of possible gaps or loopholes in the request within 1 month period from the receipt of request and may also ask it to ameliorate the request and provide complementary information. In this case, all relevant deadlines are interrupted until the complementary information is provided.
  2. Mandatory automatic: systematic communication of predefined information at pre-established regular intervals regarding residents in other Member States. The communication of information shall take place at least once a year, within six months following the end of the tax year of the Member State during which the information became available. The mandatory automatic exchange is only allowed for the following categories of income: a) income from employment, b) director’s fees, c) life insurance products not covered by other Union legal instruments on exchange of information and other similar measures, d) pensions and e) ownership of and income from immovable property. This type of information exchange will only entry into force in January, 1 2015 (but reporting to tax information from January 1, 2014). And by January, 2017 it is the Commission’s goal to include also income from royalties, dividends and capital gains. Besides this, Member States can foresee extra categories of income in their bilateral or multilateral information exchange agreements.
  3. Spontaneous: non-systematic communication, at any moment and without prior request in any of the following circumstances: a) grounded fear of loss of revenue in a Member State, b) a person liable to tax obtains a reduction in or an exemption from tax in one Member State which would give rise to an increase in tax or to liability to tax in the other Member State, c) business dealings between a person liable to tax in one Member State and a person liable to tax in the other Member State are conducted through one or more countries in such a way that a saving in tax may result in one or the other Member State or in both, d) grounded supposition that a saving of tax may result from artificial transfers of profits within groups of enterprises, and e) in case information forwarded to one Member State by the competent authority of the other Member State has enabled information to be obtained which may be relevant in assessing liability to tax in the latter Member State. Finally, the communication of the information shall be forwarded no later than one month after it becomes available.

There are some limitations to the supply of information. Member States can refuse to provide information in the following cases (in any case, the refusal must be reasoned):

  1. The requesting Member State did not yet exhausted the usual sources of information (i.e., domestic sources);
  2. Breach or infringement of domestic law;
  3. The requesting authority is unable, for legal reasons, to reciprocate similar information;
  4. Disclosure of commercial, industrial or professional secret.

Regarding relations between Member States and Third Countries there are three very important aspects to be considered:

  1. If a Third Country provides foreseeably relevant information to a Member State, the latter can convey such information to other Member States, as long as the Information Exchange Agreement between the Member State and the Third Country allows it.
  2. A Member State that received information from another Member State can provide a third Member State with such information if the Member State provider of the information does not object to that in 10 business days.  A Member State can also provide such information to a Third Country if: a) the Member State that provided the information gives its consent and b) the third country commits itself to provide the cooperation required to gather evidence of the irregular or illegal nature of transactions which appear to contravene or constitute an abuse of tax legislation.
  3. Where a Member State provides a wider cooperation to a third country than that provided for under the European regime, that Member State may not refuse to provide such wider cooperation to any other Member State and it has to extend the most favorable regime also to any Member State.

Finally, we highlight that the EU regime contains only minimal standards, thus Member States are free to establish wider cooperation between themselves by means of national legislation and/or bilateral or multilateral agreements.

OECD FRAMEWORK

Entering the second stage of our analysis, we have the comparison with other international legal instruments. For this matter, we have, above all, Article 26 of the OECD Model Convention and the Convention on Mutual Administrative Assistance in Tax Matters (1988). Portugal is a contracting party to both Conventions.

The standard adopted by Article 26, no. 1 is alsoforeseeable relevance”, thus “fishing expeditions” are also prohibited. And before making a request, the Contracting States must also previously exhaust domestic sources. A Contracting State can’t neither refuse information on the basis that it has no domestic interest in it nor on the basis that the information is held by a bank, other financial institution, etc., because the information is treated with secrecy and confidentiality (article 26, no. 2).

Paragraph 9 of the Commentaries to Article 26 foresees the same exchange methods as the EU regime: 1) on request, 2) automatically and 3) spontaneously. But Contracting States are free to choose other methods. 

Article 20, no. 1 of the Convention on Mutual Administrative Assistance in Tax Matters also foresees the feedback clause.

Article 21, no. 1 of the Convention provides for a much wider cast of refusals than that provided by the EU system. In common with the EU system we have the following refusals: a) contrariness to public order; b) legal inability to provide the information; c) disclosure of commercial, industrial or professional secret; d) prior exhaustion of domestic sources. By application of the Convention, the supply of information can also be refused in the following cases: a) when it implies taking legislation derogatory measures; b) the Contracting State tax system is contrary to the tax principles commonly accepted; and c) there is discrimination towards a national from the requested State in comparison to a national of the requesting State in identical circumstances.

Regarding the refusal a): “when it implies taking legislation derogatory measures”, by 2010, a Protocol that amended the Convention clarified that no. 4 of article 21 - that foresees that a State cannot refuse to provide information on the grounds that it is held by a bank or other financial institution – prevails over the above mentioned refusal. Essentially, in any case can bank secrecy be an enough argument to refuse the supply of information.

RELATION BETWEEN THE EU AND THE OECD FRAMEWORKS

The Protocol of 2010 that amended the Convention states in paragraph 15 that “the Parties in the Convention, which are also Member States, are free to apply the Convention’s provisions whenever they provide for a wider cooperation than that provided by the European legal instruments”.

CONFIDENTIALITY ISSUES

Articles 12 of Portuguese Decree-Law no. 61/2013, 16 of the EU Directive, 26, no. 2 of the MC-OECD and 22 of the Convention are dedicated to secrecy and confidentiality of the information exchanged.

Essentially, their aim is to provide a minimum protection of taxpayers’ rights.

Altogether, they foresee that the information exchanged is to be treated as secret and confidential, under the same conditions tax information is protected by the national legislation of the Member State that received the information. Additionally, at the OECD level, Commentaries (paragraph 216) to article 22 of the Convention, amended by the Protocol of 2010, stipulate that the Party receiving information must treat it as it would treat other tax information under its domestic law and as well under the level of protection in force in the Party that supplied the information. These provisions also foresee strict rules concerning which persons or entities are entitled to access the information, for what purposes can they use it and with which entities they are authorized to share it.