Exchange of information on tax matters

(Second of two parts)

Similarly, the OECD Commentaries state that rights in a contracting country should not be overridden simply because such rights could operate to prevent or delay effective exchange of information. However, the agreement on exchange of information should at the same time ensure that the rights are not applied in a manner that unduly prevent or delay the effective exchange of information.

This balance of the rights and purpose of the exchange of information is sought to be attained through the enforcement of procedural requirements between the contracting countries in agreements on exchange of information. This takes into consideration the pertinent laws and regulations of the contracting countries to an agreement for the exchange of information and the provisions of the agreement itself.

The general procedural requirement under the proposed amendments to the Tax Code, which is practically the same as the Model Agreement, requires a requesting foreign tax authority to provide the following information to the Philippines: 1) identity of the person under examination; 2) a statement of the information being sought including the nature and the form in which the said foreign tax authority prefers to receive the information; 3) the tax purpose for which the information is being sought; 4) the grounds for believing that the information requested is held in the Philippines or is in the possession or control of a person within the jurisdiction of the Philippines; 5) the name and address of the person believed to be in possession of the requested information; 6) a statement that the request is in conformity with the law and administrative practices of the said foreign tax authority; and such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its laws or in the normal course of administrative practice and that it is in conformity with a convention or      international agreement; and 7) a statement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the information.

Following the OECD Commentaries, the above procedural requirement will supposedly aid in determining whether the information being sought by the foreign tax office is foreseeably relevant to the investigation or prosecution of tax matters. Quite generally, however, the Commentaries state that this standard of foreseeable relevance is intended to provide the widest extent of coverage possible, but without necessarily allowing the tax authorities to engage in fishing expeditions.

Also, with the submission by the requesting foreign tax authority of the information above enumerated, the exchange of information is sought to be enforced without allowing the requesting country to circumvent its own laws on information gathering. This is highlighted by the Model Agreement and the OECD Commentaries in stating that the request for exchange of information must also be in accordance with the laws and administrative requirements of the country requesting the information.

Thus, as stated in the Model Agreement and in the OECD Commentaries, with the submission of these documents by the foreign tax office, the Philippines would determine that the request is in conformity with the law and the administrative practices of the requesting foreign tax authority. It will also be determined that the information requested would be obtainable under the laws or in the normal course of administration of the requesting country if the information were within its jurisdiction. The Model Agreement and the OECD Commentaries are clear on this, that in the event that it is determined that the information requested is not obtainable under the laws of the requesting country, then the Philippines as the country requested shall not be required to obtain or provide the requested information. This rule is intended to prevent the requesting foreign tax authority from circumventing its domestic laws limitations by requesting information from other contracting country.

Presumably, the standards instilled in the OECD Commentaries will be reflected, to some extent, in the finalized formats of the regulations implementing the proposed amendments. At this point, however, only our imaginations remain to be the boundaries of how the amendments will affect us as we wait for the proposals to be finally effected and the implementing rules and regulations put in force.

Among so many questions, one may wonder how the implementation of the proposed amendments equates with the current requisites in initiating tax audits and investigations by the tax authorities. Would the exchange of information call on issuances of letters of authorities, verification or letter notices? Would the exchange of information be as free flowing as the exchanges of data now being practiced by our various government agencies, i.e. cross references of value-added tax and withholding tax data, data from the Bureau of Customs, etc.?

(Jeri Alanz A. Banta is a Manager for Tax Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]).