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Home >> TII EDIT
Privilege in Paradise
By D P Sengupta
Aug 21, 2019

SWITZERLAND based Glencore Group is one of world's largest mining and agricultural conglomerate having operations across the world. However, it earned world-wide notoriety after the International Consortium of International Journalists (ICIJ) published the Paradise Papers (in November, 2017) containing data from the Bermuda based law firm Appleby that was leaked to two German journalists by a whistle-blower and who in turn shared the same with the ICIJ. It transpired that Glencore was one of the biggest clients of Appleby, in whose Bermuda office it had a so-called 'Glencore room' to demonstrate that it had 'robust physical footprint 'in the tax haven while the room, apparently had only a filing cabinet, a computer, a telephone, a fax machine and a checkbook and occasionally turned into a party space. (See- "Room of secrets reveals Glencore's Mysteries"- ICIJ)

In the wake of the leaks, most of the reports about Glencore's operations were about its activities in the Democratic Republic of Congo and exploitations of mines there. But there was also an Australian angle that involved reducing Glencore's Australian tax liabilities through related party transactions involving high interest payments.

News reports indicate that in 2014, the group's Australian revenue was over 23 billion in while it paid tax of only 55 million $ using cross-currency interest rate swap at inflated rates thereby shifting profits out of Australia.

According to Investopedia, in a cross country swap, two parties exchange interest and principal of a loan in one currency for the interest and loan of another currency. Companies use such swaps to get favourable loan rate in foreign currencies than they would have got if they borrowed directly in that currency. However, in related party situations, such instruments have the potential of being misused to shift profits to tax favoured jurisdictions.

The Paradise papers consisting of various minutes, presentations and other documents, apparently showed that following a restructuring code named 'Project Everest', the group shifted about 30 billion dollars out of Australia. Although the exact documents are not readily available, what is interesting and consists the subject matter of discussion in the present article is what followed after the disclosure. It has been reported that the structure adopted by the group was already under scrutiny of the Australian tax authorities and the paradise papers obviously would help the ATO to better establish their case. In such circumstances, the Glencore group tried to prevent the ATO to use the materials against it. The plea adopted was novel in the sense that it relied on the client attorney privilege that is followed in Australia and other common law jurisdictions.

In that effort, and according to court papers, Glencore narrated the following sequence of events:

In 1995, the Glencore had engaged Appleby (Bermuda) Limited to provide legal advice to them from time to time and in 2014, one King & Wood Mallesons (KWM) engaged Appleby to provide legal advice in relation to "Project Everest". By November 2017, the ATO had obtained the "Paradise Papers", which included copies of documents held by Appleby created for the sole or dominant purpose of Appleby providing legal advice.

On 23rd November, 2017, there was a meeting between the taxpayer and the ATO officials, wherein the ATO acknowledged that it had some documents relating to Project Everest, whereupon the taxpayer claimed that these documents were subject to legal professional privilege. On 6th December, 2017, the law firm that had engaged Appleby wrote to the ATO asking the ATO to return the documents and to give an undertaking that these documents will not be relied upon. The ATO refused to do so whereupon, the law firm then asked the ATO to provide a list of the documents in its possession. On 4th June, 2018, the ATO again refused to do so. Thereupon, on the 20th September, 2018, the taxpayer filed a writ before the High Court of Australia. Although there were no interveners, the Association of Corporate Counsel and its Australian chapter, the Australian Corporate Lawyers Association, applied for leave to make submissions as amicus curiae.

On 14th August 2019, the High Court of Australia rendered its judgement in Glencore International AG v Commissioner of Taxation, [2019] HCA 26.

The main issue raised by the taxpayer was whether the law of legal professional privilege (LPP) operate merely defensively as a means for resisting disclosure, or does it also provide a positive right entitling the holder of the privilege to claim a remedy, specifically an injunction restraining use of privileged material and requiring delivery up of privileged documents and copies thereof. In other words, is LPP only a shield or can it be used as a sword?

The taxpayer argued that there are precedents recognizing legal professional privilege as a fundamental common law right that is actionable and therefore it sought an injunction. Although there was no direct precedence on the subject, the taxpayer contended that the scope of the privilege should reflect the policy of the law upon which it is based. The rationale for legal professional privilege is the furtherance of the administration of justice through the fostering of trust and candour in the relationship between lawyer and client. It should be understood to have its basis in the rule of law and that the recognition of an actionable right to restrain the use of and recover privileged documents advances this policy.

On the other hand, the ATO argued that the boundaries of legal professional privilege have been carefully drawn over a long period, and reflect a balance between competing public interests. The taxpayer's plea to give LPP an expanded and hitherto unrecognized operation as a cause of action is premised on the incorrect assumption that any development that would advance the public interest served by LPP should occur. It was argued that it is settled law that LPP confers immunity from the compulsory production of privileged documents, and nothing more. In particular, LPP does not, and has never, conferred upon a privilege-holder an entitlement to injunctive relief to restrain the use of privileged documents.

The ATO's alternative argument was that Section 166 imposes a statutory duty on the Commissioner to make an assessment by reference to all information in his or her possession. The duty arises even in respect of material the Commissioner knows to be privileged or subject to a claim for breach of confidence.

Section 166 of the Australian Income Tax Act states as follows:

"From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner must make an assessment of:

(a) the amount of the taxable income (or that there is no taxable income) of any taxpayer; and

(b) the amount of the tax payable thereon (or that no tax is payable); and

(c) the total of the taxpayer's tax offset refunds (or that the taxpayer can get no such refunds)."

In the event, the High Court agreed with the ATO and dismissed the proceedings with costs. In the process the High Court of Australia also deliberated on the origin and importance of such privileges and also examined the various precedents cited by the parties both from Australia and other common law and even civil law countries.

Surveying the case laws, the High Court held that Legal professional privilege has been described as a right which is fundamental to persons and to the Australian legal system. It has also been described as "a practical guarantee of fundamental, constitutional or human rights". The HC observed that such descriptions point to the importance of the privilege; that it is not merely an aspect of curial procedure or a mere rule of evidence but a substantive right founded upon a matter of public interest.

However, from the precedents, the High Court could not discern that the "right" spoken of in connection with the privilege is an actionable right. "If one asks what this "right "gives to a person, the answer could be stated as "a right to resist the compulsory disclosure of information" or "the right to decline to disclose or to allow to be disclosed the confidential communication or document in question".

The High Court pointed out the rationale of the privileges is that the rule promotes the public interest because it "assists and enhances the administration of justice by facilitating the representation of clients by legal advisers". By keeping secret their communications, the client is encouraged to retain a lawyer and to make full and frank disclosure of all relevant circumstances to the lawyer.

The HC also cautioned about giving paramountcy afforded to such privilege giving an example that an accused person could be denied access to documents which might assist his or her defense. Accordingly, the privilege "should be confined within strict limits".

The Court also pointed out that the relief sought by Glencore posed further difficulties in that the information that is the subject of the claimed privilege is now in the public domain and the ATO is duty bound to assess income on the basis of all information in its possession. The Court therefore held: "On the present state of the law, once privileged communications have been disclosed, resort must be had to equity for protection respecting the use of that material. Although the policy upon which legal professional privilege is founded is not irrelevant to the exercise of that jurisdiction, the juridical basis for relief in equity is confidentiality."

India is now getting a lot of information about the taxpayers from various sources and from such leaks that are also shared or are available in the public domain. The tax department will be remiss in its duty if it does not make use of such information, of course, after strictly following the legal procedure and in accordance with the well settled principles of natural justice. There have been reported cases where some tribunals have upheld the reopening of cases in the wake of information received from Germany in respect of bank accounts in Liechtenstein. (See Hasmukh I Gandhi v DCIT - 2017-TII-214-ITAT-Mum-INTL

One does not as yet know what is the result in some cases in the wake of Panama Leaks or Paradise leaks where client -attorney privilege may be involved. Such privilege is mainly contained in Section 126 of the Evidence Act, which states as follows:

"No barrister, attorney, pleader or vakil, shall at any time be permitted, unless with his client's express consent to disclose any communication made to him in the course and for the purpose of his employment as such barrister, pleader, attorney or vakil, by or on behalf of his client, or to state the contents or condition of any document with which he has become acquainted in the course and for the purpose of his professional employment or to disclose any advice given by him to his client in the course and for the purpose of such employment.

Provided that nothing in this section shall protect from disclosure:

1. Any communication made in furtherance of any illegal purpose,

2. Any fact observed by any barrister, pleader, attorney or vakil, in the course of his employment as such showing that any crime or fraud has been committed since the commencement of his employment.

It is immaterial whether the attention of such barrister, pleader, attorney or vakil was or was not directed to such fact by or on behalf of his client.

Explanation - The obligation stated in this section continues after the employment has ceased. (…)"

A cursory reading of the provision indicates that it is restricted to only legal professionals and not to Chartered Accountants. Besides, the privilege exists only in respect of the acts of such legal professionals when they are acting in the course of and for the purpose of his/her employment as lawyers etc. And the prohibition is against such fiduciaries to disclose information. In the event, should such an issue arises in future, the judgment of the High Court of Australia may provide some clarity.

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