International exchange of information

Taxpayers do not always know that a tax audit was prompted by international exchange of information, nor are they always aware of what information has been exchanged. We know the rules and can help you check whether they have been followed. Taxpayers who are asked to provide information in a third-party investigation so that the tax authorities can exchange this information with others will also want to make sure that their rights are protected.

International exchange of information

In the Netherlands, the statutory framework for the international exchange of information is created by the International Assistance (Levying of Taxes) Act, which addresses the rights and obligations governing the international exchange of information. Information is permitted to be shared further to a specific tax information exchange request.

In the past, the Dutch tax authorities have also made group requests when they asked a Swiss bank for information about its Dutch account holders. The lawfulness of a tax information exchange request can generally be contested in a court in the country of which the request was made.

Over the past few years, there has been a sharp increase in tax information exchange requests regarding an individual’s or entity’s tax residency. In many cases, these requests go beyond what is permitted. Also, they do not always paint a fair picture of the body of facts. That is why it is always a good idea to ask to see the tax information exchange request. Our attorneys know all about your rights and obligations in matters concerning the international exchange of information and can tell you about the pros and cons of litigating your case.

Automated exchange of information

Besides being exchanged on request, information can also be shared spontaneously or even automatically. Financial institutions from many different countries exchange information in the context of the Common Reporting Standard (CRS). Their exchanges regularly mark the start of a tax audit. The mandatory automatic exchange of information in relation to reportable cross-border arrangements is provided for in DAC6. This EU directive has been transposed into the Dutch International Assistance (Levying of Taxes) Act.

Legal protection

The international exchange of information mostly takes place behind the scenes. This makes it difficult to check whether all relevant conditions are being met. One of these conditions is that the requested information must potentially have a bearing on the levying of taxes. Another is that the information must be exchanged in line with treaty provisions, such as the principle of exhaustion. Any request that is made of another State has to be based on correct information; no fishing expeditions are allowed. To make sure that the exchange of information meets the relevant requirements, the procedure between States must be verifiable. A number of countries, including Switzerland, give taxpayers access to the information before it is exchanged.

Once a tax assessment has been imposed, a taxpayer will want to know what information the assessment was based on. The documents that were obtained as part of international exchange of information qualify as documents relating to the case; as such, they are to be made available to the taxpayer during the objection procedure. In addition, communication between States can be relevant to the collection of taxes. Based on this communication, it can be ascertained whether the principle of exhaustion was observed and whether the request was proportionate or served an improper purpose (or: détournement de pouvoir).

Access to a court

Before 2014, taxpayers were notified of the fact that their tax information would be shared with a foreign authority. This notification was open to objection. Since 2014, taxpayers have no longer been notified and the avenue for filing an objection has been cut off. That said, requests for information that were submitted by a foreign authority before 2014 are still open to objection. Also, the European Court of Justice ruled, on 6 October 2020, that EU Member States are required to give information holders the opportunity to appeal the exchange of tax information (information order). The Court opined that information holders are to have access to an effective remedy. The Netherlands is required to meet this obligation(see also our blog: De WIB op de wip (in Dutch)”.

A number of countries do allow taxpayers to take the tax authorities to court over the legitimacy of a tax information exchange request. In the Netherlands, taxpayers are expected to use the objection procedure against the tax assessment to check whether their rights and those of third parties were protected in the international exchange of information.

Fines

The Dutch International Assistance (Levying of Taxes) Act requires intermediaries and taxpayers to cooperate in investigations that may be relevant to the international exchange of information. Any failure to meet tax obligations completely, correctly or by the deadline due to wilful misconduct or gross negligence on the part of the intermediary or the taxpayer potentially constitutes an offence that is subject to an administrative fine. Any breach of the mandatory disclosure rules for cross-border arrangements (DAC6) is subject to a fine of the sixth category under the Dutch Criminal Code, which can currently run up to € 900,000. Intermediaries that wilfully fail to meet the disclosure requirements are subject to criminal prosecution. Failure to implement other DAC provisions is subject to considerable fines and penalties as well.

Any breach of the mandatory disclosure rules for cross-border arrangements (DAC6) is subject to a fine of the sixth category under the Dutch Criminal Code, which can currently run up to € 900,000. Intermediaries that wilfully fail to meet the disclosure requirements are subject to criminal prosecution. Failure to implement other DAC provisions is subject to considerable fines and penalties as well.

At Hertoghs advocaten, we know the ins and outs of your rights and obligations in relation to the international exchange of information. We would be happy to check for you whether and, if so, which, information has been shared with foreign tax authorities. Please do not hesitate to contact us to find out more. We are here to help.