On 27 October 2009 the governments of Australia and the Cook Islands entered into a Tax Information Exchange Agreement (TIEA) and a supplementary “Additional Benefits Agreement”. This TIEA which is based on the model agreement developed by “OECD Global Forum Working Group on Effective Exchange of Information” generally promotes co-operation in tax matters through exchange of information.

The TIEA provides for both governments to assist one another through the exchange of information that is “foreseeably relevant” ⁽¹⁾ to the administration and enforcement of either party’s domestic tax laws. For example, if an Australian resident taxpayer is under investigation in Australia and the Australian Tax Office (ATO) has reason to believe that relevant information regarding an offshore investment is held by a bank in the Cook Islands, the Australian Commissioner of Taxation can request that the Cook Islands Collector of Inland Revenue produce certain information.

The Cook Islands has now signed two TIEAs in 2009 (Australia and New Zealand) and has also made progress on TIEAs with Mexico, Korea, Ireland and Italy (amongst others).

Is it just information held by banks and financial institutions that can be exchanged?

No. Both governments have the ability to dig deeper into information regarding the ownership structures of companies, partnerships, trusts, foundations and generally ownership information on all such persons in an ownership chain (unless that information is not in the “possession or control”⁽²⁾ of a person/s who is within the territorial jurisdiction of the relevant country).

One effect of this TIEA effectively is that it seeks to circumvent any secrecy or confidentiality provisions which up until now have made it difficult for external regulators to obtain financial and ownership information regarding Australian taxpayers.

When do these changes come into effect?

Once both countries action all necessary domestic procedures, this TIEA will have effect:

1. for criminal matters – from 1 July 2010; and
2. for all other covered tax matters from 1 July 2010, but only in relation to taxable periods from 1 July 2010 onwards or tax liabilities that otherwise arise on or after this date.

Why are the Cook Islands and other Pacific Island countries implementing the OECD international tax standard through TIEAs?

One key reason discussed recently in the media is to avoid any negative impacts that may arise if the G20 or members of the international community place countermeasures on slow to move jurisdictions from March 2010.⁽³⁾

A more positive motivation is to improve the attractiveness of offshore financial centres. Whilst some of the Cook Islands’ neighbours are slower to embrace the potential benefits of OECD “White List” status, the Cook Islands Government can be seen to be effectively strengthening regional business relations with Australia and New Zealand by entering each TIEA.

What does this mean for the future of offshore financial centres?

There is no doubt that TIEA’s will limit the continued use of some types of ownership structures utilised and financial activity undertaken in offshore financial centres, including the Cook Islands. However the transparency and legitimacy created by TIEA’s are likely to open new doors of commercial activity and build on foreign investor confidence.

This new era of transparency does not prevent offshore financial centres from competing on legitimate commercial grounds. For example, as the Cook Islands’ Minister of Finance recently highlighted, the Cook Islands’ offshore financial centre is already renowned internationally for its body of trust law and structures enabling wealth protection rather than just offering tax advantages.⁽⁴⁾ The Government has also taken a proactive approach to the financial services industry by enacting the Financial Services Development Act 2009. This Act establishes a board tasked with encouraging, promoting and developing the financial services industry in a responsible and economically sustainable manner. This is perhaps a model for progress that neighboring Pacific counties will consider as they work their own way through these issues.

The Cook Islands eagerness to enter into TIEA’s is indicative of its fundamental shift towards transparency not only within the financial services industry but also generally within government. In a country seeking sustainable economic development, the impact this shift could make should not be underestimated.

For example the Cook Island’s Government enacted the Official Information Act 2009 which came into force in February. This Act enables public access to government information and decision making which will be likely to have positive implications for foreign investors who may require information on, for example, regulations, the award of licenses and permits and tender and procurement procedure⁽⁵⁾ which could in turn attract foreign investment and economic growth.

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

PLN News December 2009