Court case reveals Jersey "out of step" with OECD standards

Monday 22 May 2023

Jersey is currently unable to comply with OECD standards on tax information exchange, the government has admitted as it moved to close a legislative loophole exposed by a Royal Court case.

It said Jersey was "out of step" with the international standard of "foreseeable relevance", putting at risk the island's "compliant" rating in peer reviews conducted by the OECD Global Forum.

Earlier this month, External Relations Assistant Minister Ian Gorst signed a ministerial decision lodging a proposition – which the States Assembly will be asked to approve in early July – to tighten regulations on information exchange. Currently, they could delay, or even prevent, the exchange of information with tax authorities in countries with which Jersey has agreements, the government has admitted.

These shortcomings were exposed in a court case last year in which two exchange notices issued by the Comptroller of Revenue were set aside in a successful judicial review.

Peder Erik Prahl and Triton Administration (Jersey) Limited challenged the notices issued under Jersey's exchange agreement with Sweden on the grounds that the Comptroller had failed to establish that they were 'foreseeably relevant' to the Swedish authority's legitimate inquiries on tax liability.

The criterion of foreseeable relevance is central to the principle of information exchange. It is intended to ensure that other jurisdictions can make legitimate tax inquiries, while protecting individuals and organisations from what the Royal Court has previously described as "fishing expeditions".

In the challenge last year, lawyers for the applicants argued that the Comptroller had failed to make proper inquiries in response to objections raised that Mr Prahl was not resident in Sweden at the material time.

Giving judgment last year, Royal Court Commissioner Sir Michael Birt said: "In short, the Jersey competent authority completely failed to make the enquiry [concerning residency] which it should have... The JCA never asked the right question and therefore it never got a focused answer to that question in response... It was the duty of the JCA to establish whether this was so or whether the information upon which it had relied hitherto was still accurate."

Sir Michael went on to conclude that the Comptroller had acted unreasonably, and he therefore quashed the information exchange notices.

In the report accompanying the proposition which the States are asked to approve in July, the government acknowledges that the judgment left the island "unable to comply with the OECD international standard for exchanging information on request with third countries".

"Unless this matter is addressed, the issue will likely invite further challenges by taxpayers (and their associates). This would either prevent outright (or, at the very least, delay) the international exchange of information. Legislation is, therefore, the only means of achieving the necessary change in law to ensure that Jersey can comply with the international standard," the government report states.

Under the proposed changes, the regulations would specifically reference the OECD's Model Tax Convention, making it clear that tax residency does not have to have been finally determined by a third country before an information request to help establish tax liability in that country.

They would "over-rule" the current position in law established by the Royal Court's 2022 judgment, the government explains.