1. The Irish Experience

The role of the newly constituted Offshore Assets Group has been described by Mr. Frank Daly as being "to examine the placing of assets ([both] money and property) abroad by Irish residents for the purposes of evading tax"¹

In reply to a question in the Dail on 8 April of this year the Minister for Finance, Mr. McCreevy, stated that the role of the group is
"to identify the methods and means through which tax is evaded and avoided by transferring assets abroad; to develop appropriate and effective measures to counter this evasion and avoidance; and to develop systems to identify persons who use or have used these means of evasion and avoidance"².

It is of concern to note that Mr. McCreevy's understanding of the Group's role is to counteract not alone evasion but also avoidance. Clearly, all stakeholders are of the view that tax evasion should be stamped out. The main focus of Revenues attention in my view should be devoted to this area. Suffice to say that there needs too be recognition of legitimate tax planning in any tax system. If Revenue are to concentrate its focus on the attack of legitimate tax planning, the experience in many other jurisdictions has shown that significant costs will be incurred in legal proceedings and resources diverted from the key area of concern.

In Mr. Daly's opening statement to the Public Accounts Committee Hearing on 16 October of this year he confirmed that the Group is conducting a number of ongoing investigations into offshore accounts and trust arrangements which had, at that date, yielded €111 million. Of this sum, €100m was derived from tax, interest and penalties paid as a result of an investigation into offshore funds held in trust by Irish residents with Bank of Ireland Trust Company Jersey Ltd. Another €11m was obtained from taxpayers who held offshore funds with subsidiaries of other Irish financial institutions in Jersey and the Isle of Man. Mr Daly stated in respect of both of these sums that that they were "collected... from taxpayers who disclosed offshore funds".

Customers of Bank of Ireland Trust Company Jersey Ltd were advised by the Bank that it was "highly likely" that it would be legally obliged to reveal the existence and details of its trusts if an enquiry was initiated. The Revenue advised the bank that it would pursue an application to the High Court under section 908, unless voluntary disclosure was made by relevant parties. The legal basis for such action is unclear.

Mr. Daly also indicated that the Revenue Commissioners have now turned their attention to a further two Irish financial institutions with offshore subsidiaries and stated that the Revenue "fully intend to extend our enquiries further in the coming months using, where necessary, all our available powers to do so".

The activities of the Offshore Assets Group have not been confined to seeking information from offshore entities. During this year Revenue officials under the direction of the Offshore Assets Group made several unannounced simultaneous visits to business premises of professionals and sought access to information relating to clients of the professionals which did not relate to the fees paid or payable to the professional. Section 905 was cited as authority for this action. This power does not enable information to be requested in relation to an unnamed group of clients of professionals.

2. The UK Experience

2.1 Introduction

The pressures and demands on the tax authorities in the UK are very similar to those in Ireland. Paralleling developments in Ireland, there has been a notable change in policy in recent years with clear evidence of a drive to find all underexploited forms of revenue.

In a report entitled "Tackling Fraud against the Inland Revenue" by the Controller and Auditor General (or the National Audit Office) in the UK, the "major threat of serious fraud" arising from the use of offshore accounts and structures was correctly identified³. 25% of the serious fraud cases pursued by the Special Compliance Office between 1998/99 and 2000/01 involved the use of offshore bank accounts or structures.

In recent months the Inland Revenue have nominated a Liverpool division of the SCO as the Financial Institutions Projects Team (FIPT) charged with uncovering offshore tax evasion.

2.2 Sources of Intelligence

Practices adopted in the UK to prevent the use of offshore accounts and structures to defraud the Inland Revenue have been effective. This is due to a number of factors.

Firstly, the Inland Revenue have developed and improved sources of intelligence through closer working with other agencies and authorities in tax havens.

Secondly, the introduction of new Money Laundering Regulations and other legislation have also opened up new sources of intelligence, which will fundamentally change how tax authorities behave in relation to tax fraud.

2.2.1 Money Laundering Legislation

The UK Proceeds of Crime Act 2002, by establishing a criminal offence of failing to report suspicion of tax evasion, was recognised as leading to further progress in detection. All suspicions of transactions involving money laundering must be reported to the National Criminal Intelligence Service (NCIS). A failure to report such a suspicion or to put in place proper reporting measures constitutes a criminal offence.

The UK Joint Money Laundering Steering Group (JMLSG) cited in its guidelines "the extensive use of offshore accounts, companies or structures in circumstances where the customer's needs do not support such economic requirements" as one of the factors indicating that suspicions of tax evasion should have existed.⁴

The Money Laundering Regulations 2003, implementing the second EU Money Laundering Directive, will significantly increase the volume of disclosures made to the NCIS and thus available for the use of the Inland Revenue.

The European Union Second Money Laundering Directive brings non financial institutions including accountants, external auditors, tax advisers and lawyers within the scope of the money laundering provisions, further increasing the likelihood of disclosure and detection. All UK firms must now put in place procedures to detect and report suspicions of tax evasion, and the absence of such procedures will constitute a criminal offence in itself.

Even prior to the implementation of this Directive it has been held in a recent UK High Court ruling by Dame Elizabeth Butler-Sloss that solicitors are bound to report any tax evasion by their clients to the Inland Revenue or they would face prosecution under the Proceeds of Crime Act 2002⁵. The same principle should bind accountants and all other financial advisers.

2.2.2 Increased Communication and Flow of Information

Close working and good communication between the NCIS and the Revenue greatly increases the incidence of reports of tax evasion by financial institutions. Such data sharing is firmly part of UK government policy and the Cabinet Office paper "Recovering the Proceeds of Crime"⁶ detailed the extent of the data passed on by the NCIS to the Inland Revenue.⁷

Similarly section 350 Financial Services and Markets Act 2000 provides for information sharing between the Financial Services Authority and the Inland Revenue.

Professional commentators in the UK believe that this development renders the methods normally used whereby the Inland Revenue investigates tax evaders after having used its information powers to obtain details from the financial institution, a thing of the past.⁸

Financial institutions will ensure that their systems have ensured that all suspicions of tax evasion have already been reported in compliance with the law, as otherwise they will risk being subject to investigation and being found guilty of a criminal offence. There will be a greatly increased flow of information to the tax authorities.

The National Audit Office Report recommended that "The Revenue must continue to work closely with the banking and credit card industry, and professional representative bodies, to tackle the problems associated with offshore accounts and structures, and realise the full benefits of new reporting requirements".⁹

In the US the Internal Revenue Service (IRS) has had significant success in obtaining information on tax haven based credit card accounts through its similar approach of working closely with the banking and credit card industry and professional bodies to tackle fraud using offshore accounts and structures. The information which the IRS has received leads it to believe that as many as two million US citizens may have debit or credit accounts with offshore accounts, in contrast to the 170,000 taxpayers who admitted that they had offshore accounts in 2000.

2.2.3 Public Awareness

Furthermore, the report by the National Audit Office emphasised the importance of increasing public awareness in order to maximise the deterrent effect of the Revenues compliance activities in the area of investigation and prosecution of serious fraud.

By heightening the perception that the likelihood of detection is high, the Inland Revenue aim to encourage voluntary disclosure.

It is widely believed by commentators in the UK that, while time and resources should be spent on the detection and investigation of fraud, for the Revenue to be truly successful in tackling fraud a "hearts and minds exercise" must be won through deterrent publicity¹⁰. In simple terms, only preventative measures can bring an end to such fraud.

3.The Impact of Recent Irish Legislative Changes - Increased sources of Intelligence for the Revenue

The impact of new domestic legislation and exchange of information internationally, as detailed below, will facilitate third party disclosure mechanisms to Revenue, thereby improving their information base in a similar fashion to the UK. These developments coupled with the introduction of the Escort system by Revenue in 2004 are most likely to have a positive impact on compliance levels. The Revenue is also operating in an improved commercial environment for compliance and needs to be poised to take advantage. The additional risks and burdens created for professionals arising from the introduction of this new legislation should not be underestimated.

3.1 New Legislation

3.1.1 Money Laundering Legislation

The money laundering legislation that has been relied on successfully by the Revenue in the UK differs little from analogous legislation in Ireland. Section 31 of the Criminal Justice Act 1994 renders tax evasion an illegal activity and a reportable matter under the money laundering provisions.¹¹

The second EU Money Laundering Directive¹² has been implemented in Ireland by Statutory Instruments 242 and 416 of 2003 under the 1994 Act. The list of designated bodies who have money laundering reporting responsibilities, which had included banks, building societies, life assurance companies and other financial institutions, has been extended to include accountants, auditors, tax advisers, auctioneers and estate agents with effect from 15 September 2003.

The new Money Laundering legislation creates three new areas where these bodies can be found in breach of the law. The legislation imposes liability for failure to put proper procedures in place to identify clients, for failure to report suspicions of certain transactions to the appropriate authorities and for notifying a client that a report concerning him or her has been made. There are also proposals in the draft Statutory Instrument 417 of 2003 to broaden the scope of reporting required by the legislation.¹³

However, it would appear that unlike the Inland Revenue in the UK and the Internal Revenue Service in the US, the Revenue in Ireland do not have automatic access to this information.

While Article 6 of the first Money Laundering Directive granted the option to allow information disclosed to be used by the authorities for other purposes, Ireland did not elect to take this option in implementing the Directive by way of the Criminal Justice Act 1994. Presumably the legislature had good reason for this course of action. It will be interesting to see whether this will disadvantage the Revenue and, if so, how this can be remedied.

The efficacy of this route is enhanced by section 57(7), which prevents the banker's duty of confidentiality from proving an obstacle to an investigation by providing that a disclosure made in good faith in the course of making a report is not to be regarded as a breach of statutory or common law duty of confidentiality.

3.1.2 Company Law Enforcement Act 2001

Reporting obligations were also introduced under the Company Law Enforcement Act 2001. Section 74(e) of the Act imposes an obligation to notify the Director of Corporate Enforcement where they "form the opinion that there are reasonable grounds for believing that the company or an officer or agent of it has committed an indictable offence under the Companies Acts".

Under this provision auditors are obliged to report information obtained "in the course of, and by virtue of, their carrying out an audit on the accounts of the company", regardless of any other professional or legal duty which an auditor has by virtue of his/her appointment as an auditor of a company. Relevant information obtained by the Director of Corporate Enforcement pursuant to the exercise of his company law powers will be disclosed to the Revenue by virtue of Section 21 Companies Act 1990, which provides for information exchange by the Office of the Director of Corporate Enforcement to assist the Revenue in its legal duties such as the investigation of tax evasion.

3.1.3 Criminal Law (Theft and Fraud Offences) Act 2001

Even wider reporting obligations arise under the Criminal Law (Theft and Fraud Offences) Act 2001. Section 59 of the Act imposes an obligation on a wide class of persons to notify the Garda where any of the offences outlined in the Act come to such a person?s notice. The relevant offences include making gain or causing loss through deception, false accounting and active or passive corruption affecting the EU?s financial interests. Reporting requirements under this Act also operate notwithstanding any professional obligations of privilege or confidentiality.

3.1.4 Irish Financial Services Regulatory Act 2003

The Irish Financial Services Regulatory Services Act 2003 provides for the passing on of information by the Financial Services Regulatory Authority to the Revenue in respect of criminal offences such as tax evasion by an entity under the IFSRA?s supervision.Under the Criminal Justice Act 1994 the IFSRA is also one of the bodies, which has a duty to report money laundering and tax evasion to the Garda Bureau of Fraud Investigation.

3.1.5 Companies (Auditing and Accounting) Bill 2003

Section 43 of the Bill, which completed its second stage in the Dail on 5 November, requires company directors to deliver an annual statement confirming compliance with tax law, Companies Acts and other legislation. This must focus the minds of all concerned in relation to any potential breaches of tax law.

3.2 Other Sources of Intelligence: Exchange of Information Powers

As seen in examining the approach of the SCO in the UK, mutual assistance and the exchange of information between the Revenue and the tax authorities of other jurisdictions provide the most effective and complete means of detecting evasion through offshore accounts.

3.2.1 Article 26 of the OECD Model Tax Convention

Article 26 of the OECD Model Tax Convention permits the tax authorities of contracting states to exchange information "to the widest possible extent"¹⁴. A contracting state is under an obligation to obtain information for the purposes of transferring it to another state even where there is no question of tax liability in the state obtaining the information, as confirmed in the US Supreme Court case of U.S. v A.L. Burbank &Co¹⁵. Information may be provided on request but certain categories of information can also be exchanged on a regular basis without request and tax authorities can provide information spontaneously where they consider that another tax authority may find it useful.

While there is no obligation to supply secret information, as detailed in Article 26(2)(c), this exemption is given a very narrow definition in the Commentary which states that "Before invoking this provision, a Contracting State should carefully weigh if the interests of the taxpayer really justify its application". The terms business secrets or professional secrets have been given a narrow meaning in the courts of contracting states, and are taken to refer only to information which has an economic value to third parties. Thus in a German case in 1987¹⁶ a German bank were not allowed to refuse to supply information requested by the Australian taxation authorities on the basis of a claim that this would breach professional secrecy.

The Revenue can thus legitimately seek information in relation to the foreign bank accounts of specific named individuals under Article 26, irrespective of the professional obligation of secrecy.

3.2.2 Mutual Assistance Directive

Within the EU the Mutual Assistance Directive¹⁷ and Regulation 218/92 provide that the assistance of other tax and customs administrations can be sought in regard to the provision of information and provide for the initiation of joint action in some instances. Similar to Article 26, requests for information must be made in relation to specific named individuals.

3.2.3 Tax Information Exchange Agreements

Exchange of information and mutual assistance in the collection of taxes will be further enhanced in Revenue's favour following the completion of Tax Information Exchange Agreements which, it is understood, are currently under negotiation with the Isle of Man, Jersey and the Cayman Islands.

3.2.4 EU Savings Directive

The draft EU legislation on savings tax which member states are required to legislate for by 1 January 2004 (even though the directive is not yet passed) will further promote information flows. All the EU member states, with the exception of Austria, Luxembourg and Belgium, have agreed to share information about non-resident account holders. The other three countries have instead committed to deduct withholding tax on non-resident accounts or to pass their details on to the tax authorities in the customers country of residence. Even the Channel Islands and the Isle of Man have intimated that they will adopt a withholding tax regime and Switzerland is thought to be considering similar action.¹⁸

The effectiveness of the EU Savings Directive in promoting the exchange of information between tax authorities on offshore tax savings will be greatly assisted by the OECD Report on Bank Secrecy. In this report OECD member countries, including Luxembourg and Switzerland, gave firm commitments to reduce the effects of the confidentiality rights enjoyed by banks and other financial institutions.

The Savings Directive combined with a commitment to reduce the confidential nature of the banker-client relationship provide the Revenue Commissioners in this country with a much greater opportunity to tackle evasion through offshore accounts than the unilateral attacks on the confidentiality of bank records of Irish financial institutions that have been in the news in the last few weeks.

4. A Proposal for a Better Way Forward

The Revenue historically has never been better placed to take advantage of flows of information from the panoply of new domestic legislation and additional exchange of information agreements internationally.

In carrying out further investigations Revenue need to bear in mind the following issues for tax practitioners and taxpayers alike to ensure that tax evasion is tackled effectively by Revenue but in a manner which is fair and effective for all taxpayers.

• Revenue powers do not permit a "trawling exercise" - Information gathering powers should only be used in a specific and focused manner.
• The legal basis for use of Revenue powers must be transparent in all cases.
• Revenue should publish guidelines for calculation of arrears of tax in relation to offshore assets similar to BNR1 guidelines.
• Closure of Revenue investigation is given to taxpayer where there is no tax liability.
• Re-investigation of the same taxpayer for similar account periods only in "exceptional circumstances" and a genuine effort to be made to minimise costs.
• Collaborative approach between Revenue advisers and business regarding complex issues in relation to offshore assets.
• Proactive approach for promulgating a "hearts and minds" change to tax compliance.
• Enhancing Perception of Revenue as "a fair and effective administrator" by ensuring "fair treatment for all taxpayers".