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Shavone Bazarkewich
Blake, Cassels & Graydon, Toronto
shavone.bazarkewich@blakes.com

 

Report on a session held by the IBA Taxes Committee at the New Era of Taxation Conference

 

Thursday 7—Friday 8 November 2019

Session Chairs

Daniel Luchsinger  Covington & Burling, Washington DC

Steve Suarez  Borden Ladner Gervais, Toronto

 

Speakers

Antonietta Alfano Maisto e Associati, Rome

Chloé Delion CMS Francis Lefebvre, Paris

Pâmela Gottardini Mattos Filho Advogados, São Paulo

Jaime Salmeron Repsol, The Hague

Mark Tonkovich Blake Cassels & Graydon, Toronto

Luciana Martina Virgile Marval O’Farrell & Mairal, Buenos Aires

 

Introduction

The panel discussed the evolving scope of privilege and confidentiality given the global increase in tax administrators’ focus on detection through audit, investigation and reporting. A jurisdictional comparison of privilege and confidentiality was provided and analysed in light of recent developments.

Steve Suarez began by explaining that the panel would cover four main topic areas: how tax authorities gather information; the types information that privilege generally applies to; limitations and waiver of privilege with a focus on how privilege can be maintained; and what tax authorities do with the information they gather and the types of taxpayer protections that may be in place to protect gathered information.

Information gathering

Brazil

Pâmela Gottardini began by explaining that Brazilian taxpayers have strong constitutional rights protecting personal information and that the Brazilian Federal Court has an established history of upholding data protection and inviolability of intimacy. However, there are legislative exceptions to these protections.

Gottardini explained that all three levels of government in Brazil (federal, state and municipal) have the ability to undertake inspection procedures and data gathering. Each state and municipality has its own tax authority competence and with more than 5,000 municipalities, it is quite a complex system. While tax authorities have the ability to gather taxpayer information, they cannot disclose this information unless there is a ‘public interest’ in doing so. In practice, there is a general assumption by Brazilian tax authorities that taxpayers act in ‘bad faith’ and attempt to avoid their tax liabilities (through fraud, tax evasion or criminal representations). This is often used to establish that there is a public interest in sharing a taxpayer’s information among tax authorities of governmental entities, to ensure that tax liabilities are satisfied. This shows that there is a wide degree of discretion in the public interest test and Gottardini indicated that the degree of discretion only seems to be increasing.

There was a question from the panel as to whether discretion is something that can be negotiated or if it is prosecutorial. Gottardini explained that tax authorities use electronic systems to store taxpayer information and as a result tax authorities can easily access information from other Brazilian tax authorities to compare, for example, the federal and state returns of an individual as well as to access credit card information, which is then compared with the revenues disclosed to tax authorities through the filing of tax reporting obligations. As a result, it is difficult for taxpayers to understand how their information is being used and shared.

There have been a number of litigated disputes involving tax authorities’ requests for access to taxpayers’ bank account information, with a trend towards courts favouring the tax authorities over taxpayers. In the past, there was requirement that an administrative or inspection procedure be ongoing in order to require a bank to disclose taxpayer information; however, more recently, arguments that there has been sham transactions, tax evasion or criminal representations have been persuasive in Brazilian courts and have succeeded in requiring banks to provide taxpayer information to tax authorities even without an ongoing administrative or inspection procedure.

While there are clear laws, including constitutional protections, to protect taxpayer information, there is a wide degree of discretion. Exceptions to these laws and protections may apply wherever the tax authorities can argue that it is in the public interest to access and share taxpayer information. Understanding the interplay between Brazil’s laws protecting taxpayer information and the public interest exception is important.

Italy

Antonietta Alfano focused on the broad powers of the Italian tax police to gather information. Italy has two tax authorities, the tax police and the revenue agency. While only the revenue agency has the power to issue tax assessments, each tax authority is entitled to audit taxpayers.

The tax authorities gather information from tax returns and other information that taxpayers are required to submit, but the majority of taxpayer information is gathered during audits. The tax authorities do not need to provide prior notice before arriving at a taxpayer’s place of business and are entitled to access everything that is physically on the premises when they arrive. They may also download any and all electronic files accessible from the taxpayer’s computers that are on the premises. Legal advice, including conversations with lawyers, is not protected. The tax authorities will collect accounting and tax books as well as any non-accounting documents or request that these be provided. In addition, the tax authorities can conduct interviews with employees on site, without legal counsel. When interviews are conducted, employees often overemphasise their role or misstate important facts, which can cause complications later on. The notes from interviews are not released until the tax audit report has been served. At this point, it can be very difficult to overcome any inaccuracies.

The tax authorities can also access information from third parties (for example, accounting and tax documents kept at an accountant’s offices) and can request information from a taxpayer’s suppliers, customers, banks or other financial institutions.

Information collected during a tax audit of a specific taxpayer can be used to begin an audit on another taxpayer, so there is very little protection of information. Alfano explained that unread emails and other correspondence is protected. However, if an employee provides consent (or upon an ad hoc authorisation by the Public Prosecutor), the tax authorities may access this as well.

Argentina

Similarly to Brazil, Argentina has three levels of government (federal, provincial and municipal), each of which has its own tax authority that is entitled to establish and collect taxes. Each tax authority has its own requirements for accessing information, but unlike Brazil, the tax authorities are not coordinated, so taxpayers are often required to provide the same information to each tax authority. This creates a heavy and complex compliance burden for taxpayers.

Luciana Martina Virgile explained that, at the federal level, there are various means by which taxpayer information can be obtained:

Information provided by the taxpayer

• Mandatory: information that must be submitted to tax authorities includes tax returns and other information required under specific reporting obligation regimes, such as those regarding cross-border matters and repatriation.

• Voluntary: information provided through filings for tax relief is voluntarily provided. However, tax relief is seldom applied for because it is rarely obtained by taxpayers.

Information provided by a third party:

• All government agencies, as well as private third parties such as banks, insurance brokers and stockbrokers, may be required to provide certain taxpayer information to tax authorities.

Information provided by other countries

• Argentina has a network of agreements with several jurisdictions for the exchange of taxpayer information and has been working to improve this network. An agreement is in place with the United States, but this does not require the automatic exchange of information. Rather, taxpayer information is only exchanged on request. 

Tax audit:

• Tax audits begin in Argentina with a notification to the applicable taxpayer. Tax authorities are obliged to inform the taxpayer which taxes and tax periods are under audit and, while the tax authorities can be aggressive, the audit process is usually quite well regulated.

Argentina does not have a mandatory disclosure regime similar to, for example, Base Erosion and Profit Shifting (BEPS) Action 12, and any such regime would be difficult to implement in Argentina because there are strong, protected, constitutional rights against self-incrimination.

Privilege in Argentina is generally respected by the tax authorities and lawyers are not asked to disclose information about clients to tax authorities. Beyond not being obliged to provide this information, lawyers are not permitted to discuss client information with tax authorities. Accountants also benefit from privilege protection.

Tax authorities are able to access taxpayer accounting records and can undertake on-site searches, but any such search must be done under a warrant obtained in court and any information improperly gathered cannot be used as evidence against a taxpayer.

In summary, while tax authorities have several means to collect taxpayer information, they are subject to many regulations which are generally respected. The tax authorities acknowledge that communication with lawyers is generally protected and there is little controversy regarding this.

France

In France, tax authorities are able to communicate with administrative organisations (for example, the social security administration) to request taxpayer information, but the right to communicate is integrated within the Tax Code, so there are clearly defined rules in terms of what information can be asked for. Fishing expeditions are not permitted: France’s tax authorities need to focus on and ask for information about a specific taxpayer.

Chloé Delion explained that in the past five to ten years there have been increasing tax-avoidance issues with hidden permanent establishments. Tax raids have therefore become more common as an information-gathering tool. Tax raids are regulated and the tax authorities are not permitted to access (and use) documents prepared by or communications with lawyers, unlike in Italy.

Recently, a voluntary disclosure programme was created in an effort to encourage compliance and disclosure. Taxpayers can disclose, for example, that they have a permanent establishment in France and may benefit from reduced penalties under this programme that they would not otherwise receive. The programme is a political strategy to encourage soft compliance, even though the tax authorities seem to be becoming more aggressive.

Canada

Mark Tonkovich discussed the extensive information gathering powers of Canada’s tax authorities. For example, they can enter any place of business in Canada to inspect documents, books and records and can demand that documents be provided even without physically going to a place of business, though any informational-gathering exercise must be done for the purpose of enforcing the rules of a tax statute. The tax authorities also sometimes engage in more traditional tax raids, but such raids are usually reserved for criminal matters.

Various programmes and international agreements assist the Canada Revenue Agency (CRA)(the federal taxation authority) in gathering information. Approximately five years ago, the CRA introduced a system whereby monetary rewards are offered for information about offshore tax avoidance. This has proved to be a popular programme, with what appears to be a lot of information coming in, but it is unclear how accurate or helpful that information has actually been. In addition, the CRA can demand foreign-based information from entities outside Canada in respect of a Canadian taxpayer and, while the Canadian taxpayer is responsible for ensuring that the information is CRA can go to obtain information about a taxpayer’s corporate group, especially when that group includes international entities, is a developing area. Finally, Canada is party to various tax treaties and tax exchange agreements as well as the Multilateral Instrument, so there is a robust basis in Canada for international information gathering and exchange.

While the CRA has wide information-gathering powers, there are also clear, well established and developed limits on these powers. In particular, if information is privileged, it cannot be compelled (though the CRA often tests these rules and taxpayers need to be careful to maintain privilege). As discussed, information gathering by the CRA needs to be undertaken for a proper purpose in order to enforce the rules of a tax statute and there is a prohibition on taxpayers being required to audit themselves. Tonkovich indicated that the principle against self audit is being tested, for example, by tax authorities asking to see working papers or other documents that taxpayers have prepared for planning or financial-reporting purposes and that set out pressure points in the taxpayer’s planning and structuring.

United States

In the US, the Internal Revenue Service (IRS) (the federal tax authority), acts within prescribed rules. If there is an audit, a typical procedure is followed: for example, a meeting of the taxpayer with the examination team; a discussion of the issues and years that are subject to audit; and specific requests for relevant information. Sometimes the IRS may employ raids or aggressive tactics, but this is generally reserved for unusual circumstances. Daniel Luchsinger provided an example of a client suddenly moving substantially all of their employees from one jurisdiction to another so that employment insurance contributions, withholding tax and others were suddenly reduced from hundreds of millions of dollars to nil as the type of situation that might result in aggressive information-gathering tactics by the IRS.

Spain

The concept of privilege exists in Spain, but Jaime Salmerón indicated that Spain’s tax authorities have very broad information-gathering powers, which they frequently use. While fishing expeditions are not permitted and information gathering needs to be in respect of a specific taxpayer, the scope of information that can be requested is very broad. There are broad, generic requirements for requesting information from third parties, for example, from banks.

Salmerón stated that he works in the highly regulated oil and gas industry. After years of ongoing discussions with the Spanish tax authority to improve trust and dealings between the tax authority and his company, it was decided that the company would provide the tax authority with an annual report declaring transactions with uncertain tax analysis. The report explains transactions that were undertaken as well as the rationale for doing so and is provided together with the company’s tax return. Salmerón indicated that because oil and gas is highly regulated this may be a solution to a unique issue, but it is has nevertheless worked well.

The extent to which advice provided by and communications with in-house lawyers in Spain remains privileged is unclear and depends on how the information is used. Often, this cannot be predicted at the time the information is provided or the communication takes place. For example, if the advice or communication is discussed among a board of directors, there is the possibility that it will not be privileged: it could therefore be necessary to disclose the advice or communication to the tax authorities. This is a developing area and the argument that advice and communications should be protected is being advanced by legal professionals. 

Operative privilege

Canada

Suarez noted that Canada has very robust privilege protections. While there are several interrelated concepts of privilege, there are two main versions, each of which operates under different rules.

The first version is solicitor--client privilege, which protects communications between lawyers and clients as well as documents prepared by a lawyer. To be protected, these communications must have been intended to be confidential and must be for the purposes of giving or seeking legal advice. This type of privilege is intended to permit someone to approach a lawyer and receive legal advice, and to permit lawyers to provide advice, in each case knowing that information exchanged will be confidential, so that communications can be candid and issues can be openly discussed. The duration of solicitor--client privilege is indefinite unless the information is disseminated to a third party that is not protected by privilege or privilege is otherwise waived.

The second version is litigation privilege. This type of privilege only extends to communications made or documents prepared in the course or in anticipation of litigation and that are made or prepared for the dominant purpose of preparing for litigation. Litigation privilege is intended to allow someone involved in litigation to properly prepare, investigate and build their case, knowing that communications and documents will be privileged. The duration of this privilege only extends to the time when the applicable litigation ends, but the scope of litigation privilege is broader than solicitor-client privilege because documents and communications of third parties can be protected as well.

Tonkovich then explained that in certain circumstances privilege may be waived. In the context of solicitor--client privilege, the principle consideration for maintaining privilege is that the communication or document must not be shared outside of the solicitor--client relationship. If this occurs, subject to specific exceptions described below, the waiver of privilege is not just for the limited purpose for which the document was provided to a third party, but is a complete and absolute waiver for the whole world.

There are some exceptions to this general rule, where privileged communications or documents can be provided to third parties without a complete waiver. For example, privileged communications and documents can be provided to a third party without waiving privilege where the third party is acting as an agent, or as someone whose involvement is functionally necessary to the solicitor--client relationship. To be considered a necessary intermediary for these purposes, the provision of privileged information to the third party must be necessary for the lawyer to properly provide legal services (for example, a third party acting as a translator).

Tonkovich was asked whether a person being brought in as a translator would need to be retained by the lawyer or if they could be retained by the client. Tonkovich responded that practitioners hold different views on this, but it must be demonstrated that the third party is necessary for the lawyer to properly provide legal advice. As long as this is clearly recorded, the third party can be retained by either party. It will be important to document (ideally in writing) that the third party is necessary to the solicitor-client relationship, what their duties and responsibilities are and to whom communications will be made.

A waiver can also be made for a limited purpose, for example, where a person is legally required to provide privileged information to a third party. There is a recognition that sometimes privileged documents are legally required to be provided to third parties, for example to auditors, and it is in the interests of public policy that provision of such information be made candidly. As a result, such disclosure will not result in a waiver of privilege over the disclosed information as against the whole world. In addition, where two or more parties stand in common interest to each other (for example, in the context of litigation), privileged information can be shared among the parties without waiving the protection as against the rest of the world.

Tonkovich was asked whether waiver is subject to the same rules and principles under both solicitor--client and litigation privilege and, if there is a waiver in respect of a document, whether that waiver is only in respect of that particular document, or may be extended. Tonkovich explained that waiver under both types of privilege is essentially the same as both require confidentiality. If there is provision of privileged information outside the particular parties and the confidential purposes that are protected by the particular privilege, the privilege will have generally been waived. Furthermore, if privilege in respect of a single document is waived (for example, because it has been provided to the Canadian tax authorities) then it is possible that there has been a waiver beyond that specific document. The Canadian courts will apply a fairness test when considering this issue: if the courts determine that a person has ‘cherry-picked’ the provision of a single or certain documents to the tax authorities and it would not be fair to limit the waiver of privilege to the specific document or documents so disclosed, then such waiver may be considered to have been made in respect of additional information.

Finally, Tonkovich was asked for additional information about the concept of financial statement waiver when privileged information in financial statements is compelled by law to be provided to auditors. Tonkovich said that the core basis for maintaining privilege in this circumstance is that such disclosure was required by law (or that such limited disclosure is otherwise recognised as serving a valid public policy purpose). Those considerations should always be kept in mind before granting third parties access to privileged material. There are many instances where external auditors will ask to see legal opinions prepared in respect of certain transactions or speak to the applicable lawyer prior to signing off on financial statements. To maximise the possibility that privilege will survive such disclosure, it is important to be careful and to only provide to the auditors as much as they need to complete their professional duties. It may also be helpful to retain written documentation of the auditor’s requests and the reason for the request.

United States

Luchsinger stated that attorney--client privilege is respected in the US. However, in-house lawyers need to be careful to properly document when they are acting in a legal capacity in order to claim and maintain privilege. Communications and documents prepared by in-house lawyers acting in a business capacity will not be protected by privilege.

A key difference between the US and Canada is that over the past 15 years or so provisions in the federal tax code have been enacted to extend the same privilege protections to accountants as apply to lawyers, though there are certain exceptions. Tonkovich explained that from a Canadian perspective there is limited case law on foreign privilege and so taxpayers that may be subject to both Canadian and US law should be careful to ensure that providing documents to US accountants does not cause a waiver of privilege in Canada, since each jurisdiction has its own independent rules in respect of privilege.

The work product doctrine is another type of privilege that is designed to permit lawyers to prepare clients’ cases for litigation. This privilege is only extended to documents and tangible things prepared for or in anticipation of litigation, but may include material prepared by non-lawyers. There are two types of work product:

• ordinary work product (factual information, reports, witness statements); and

• opinion work product (legal theories, opinions, conclusions or other documents that include the thoughts and opinions of the party preparing the document).

Courts can compel the disclosure of ordinary work product upon a showing by the party seeking disclosure of substantial need and undue hardship, but disclosure of opinion work product can only be compelled upon a showing by the party seeking disclosure of ‘extreme hardship’. It is often important to incorporate thoughts, opinions and conclusions into work product documents to ensure they are categorised as opinion work product and benefit from the higher standard of needing to demonstrate extreme hardship before disclosure can be compelled.

Waiver occurs in different circumstances under both attorney--client privilege and work product privilege. Waiver of attorney--client privilege occurs when privileged information is disclosed to third parties and may cause waiver not only of the document that has been disclosed, but of other communications and information relating to the same subject (subject--matter waiver). Waiver of work product privilege occurs only where a privileged document is disclosed to an adversary or other third party if disclosure to the third party significantly increases the likelihood that an adversary will also obtain the document. Waiver of work product privilege does not result in subject--matter waiver; rather, the waiver is only of the specific document or information disclosed. For this reason, claiming work product privilege is often the back stop that prevents a more general subject--matter waiver where there has been a disclosure.

France

In France all attorney--client information and materials are privileged (emails, meeting notes, memorandums etc). A specific notation that such materials are privileged is not required. However, the scope of attorney--client privilege does not extend to internal client communications, in-house work products or communications with external advisors other than lawyers (for example, accountants or notaries).

If the French tax authorities acquire privileged information, they may not use it unless the applicable taxpayer specifically and intentionally waives their privilege. Delion mentioned a case decided by the French administrative Supreme Court, whereby a French tax inspector based an assessment on a privileged document and argued that privilege had been waived because the document had been provided to him by the taxpayer during the applicable tax audit. The Supreme Court disagreed and held that an explicit waiver of privilege was required. The intention to waive privilege must be deliberate and clear.

Delion also discussed the recent Directive on Administrative Cooperation (DAC 6) which introduces a reporting obligation on ‘intermediaries’ of cross-border arrangements that demonstrate potential ‘aggressive tax planning’, affecting at least one EU Member State. Lawyers acting as intermediaries within the meaning of DAC 6 are subject to the disclosure obligations, but are also required to uphold attorney--client privilege which can put them in a difficult position with respect to competing obligations.

Delion was asked whether DAC 6 requires lawyers to make positive disclosures about transactions that they are working on and explained that this is a key issue that is being worked through. If a lawyer is acting as an intermediary for purposes of DAC 6, the lawyer has a duty to disclose the potentially aggressive scheme on a no-names basis. This is intended to work in harmony with attorney--client privilege since the client’s name is not revealed. However, this process is subject to controversy among lawyers.

Delion also mentioned that there has recently been a focus on aggressive tax planning and fraud. Lawyers can be potentially held liable for assessments against taxpayers that are found to have committed tax fraud, if it can be demonstrated that the lawyer participated in such fraud. As a result, where a lawyer suspects a client to be engaged in potentially aggressive tax planning or fraud, the lawyer will generally document that they have not been involved in such planning or fraud so that they themselves cannot be subject to joint liability.

Brazil

In relation to the potential liability of tax lawyers for fraudulent activities of their clients, Gottardini discussed a case in which a tax assessment was filed against a certain corporation as a result of fraud and abusive tax planning and the corporation’s tax lawyers were included as liable. The assessment of liability against the corporation’s tax lawyers relied on findings that the tax lawyers were factually acting as the company itself and making corporate decisions, rather than merely providing advice and opinions.

Multijurisdictional audits

A question was posed to the panel asking if anyone has had experience with multijurisdictional audits.

Alfano noted that Italy has implemented EU directives and a number of agreements with respect to the multijurisdictional exchange of information and can use information and data received from foreign tax authorities against Italian taxpayers. However, information considered to constitute (or be related to) industrial, commercial or professional secrets will not be provided to foreign tax authorities.

Tonkovich noted that while Canada participates in multijurisdictional exchanges of information, it is a criminal offence under Canadian law for the tax authority to use the taxpayer information it holds outside of specific, permitted purposes. Canada’s tax authority has been involved in simultaneous and joint audits with the IRS and is very committed to the multijurisdictional exchange of information. Canadian taxpayers do not have a judicially-recognised right to receive a notification that their information will be shared with a foreign tax authority, though sometimes this can be requested. While this is an area with limited rules, it is still developing.

Salmerón responded that similarly the Spanish tax authority is consistently asking taxpayers to be transparent, but this is not reciprocated and it is difficult for taxpayers to know how the Spanish tax authority is using taxpayer information. Recently, the Spanish Minister of Finance made a public statement that the largest Spanish companies pay tax at a rate of just six per cent on average and a public list was made of entities owing more than €1m in tax. In principle, the Spanish tax authority should have an obligation of confidentiality with respect to this information, but its public disclosure has led to public doubt about how the information provided to tax authorities will be used.

 

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