William Byrnes' Tax, Wealth, and Risk Intelligence

Over the past weeks, we have opened the exploration of issues addressing business and legal service outsourcing, new trends in wealth management, the history and taxation of charities, anti money laundering regulations, compliance training, and even The Obama administrations’ proposed international tax rule changes.  Many topics have been left hanging for which further researched exploration is warranted.

However this week, because of the continuing interest in Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders, over the coming weeks we will explore Information Exchange and Cross Border Assistance with Tax Collection.

Keep your emails coming about suggestion for this blog, and your comments.  I have been keeping up with answering each of you within a day or two.  Prof. William Byrnes (wbyrnes@tjsl.edu)

Cross-Border Information Exchange and Mutual Assistance (with regard to Tax) 

To uncover and analyze the issues of cross-border tax information exchange and also the mutual assistance with regard to tax collection by one jurisdiction on behalf of another one, we must at a minimum over the next few weeks examine the following:

(1) the behaviour of the OECD and its members toward the micro economy jurisdictions versus the OECD’s treatment amongst it own members and other economically significantly trade partners;

(2) the EU Savings Directive and other related EU Directives;

(3) the US proposal to automatically report to EU State’s bank interest of their residents;

(4) the tax application of the mutual assistance and extradition treaty between the US and EU;

(5) the geo-politics of tax information exchange agreements (TIEAs) such as positive inducements made and broken by the US to the Caribbean, and the inverse being recent threats made by the OECD to the international financial centers;

(6) other international initiatives for the provision of tax information, such as the FATF and Offshore Group of Banking Supervisors (OGBS) partnership and finally,

(7) the procedural process and practicalities of seeking tax information pursuant to an international agreement, be it a full tax treaty, a limited agreement only applying to exchange of information, another type of bi-lateral or multi-lateral instrument, or just simply domestic legislation. 

Tax Information Exchange Background

We will need to consult the following exemplary documents (amongst many others) over my coming blogticles, being: 

• OECD Model DTA – Tax Information Exchange (Art. 26 & 27)
• OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
• Convention on Mutual Administrative Assistance in Tax Matters (OECD & Council of Europe)
• UN Model DTA – Tax Information Exchange (Art. 26)
• OECD Model Tax Information Exchange Agreement (TIEA)
• EU Directive on Exchange of Information
• EU Directive on Mutual Assistance for the Recovery of Claims
• EU Savings Directive
• Mutual Legal Assistance Treaties (MLATs) and US-EU MLATs
• Improving Access to Bank Information for Tax Purposes
• Financial action task force (FATF)
• Offshore Group of Banking Supervisors Best Practices (OGBS)

Exchange Pursuant to the OECD Conventions

OECD MODEL DTA – Tax Information Exchange (Art. 26 & 27)

Article 26, Exchange of Information, of the 2003 OECD Model Convention reads: 

The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. …  Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in the first sentence. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

 The 2003 OECD Model, pursuant to its Commentary to the article, allows the following methods of information disclosure[1]

• By request
• Automatically
• Spontaneously
• Simultaneous examination of same taxpayer between the two States
• Allowing requesting foreign Revenue examination of taxpayer in requested State
• Industry-wide exchange of tax information without identifying specific taxpayers
• Other methods to be developed between the States

The 2003 Model established limitations on the request of information:[2]

• Requested State is not obliged to go beyond its own or the Requesting State’s capacity pursuant to its internal laws in providing information or taking administrative actions.
• Requested State should not invoke tax secrecy as a shield.
• Requested State is not obliged to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process.
• Requested State is not obliged to supply information regarding its own vital interests or contrary to public policy (Ordre Public).

 Article 27 of the 2003 Model addresses assistance in the collection of taxes, stating:

     1. The Contracting States shall lend assistance to each other in the collection of revenue claims. …

     2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

     3. … That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

The limitations remain the same as under Article 26 but also include that the Requesting State must have exhausted reasonable efforts of collection and conservancy pursuant to its domestic law.  Also, the Requested State’s obligation is limited if its administrative burden would exceed the tax collected for the Requesting State.

2003 OECD Model Agreement for Tax Information Exchange (TIEA)

The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.  The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.

The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.”  The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.   

The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”

Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes.  But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws.  However, the TIEA is specific that each Party is obliged to provide:

“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;

b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”

Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:

“(a) the identity of the person under examination or investigation;

(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;

(c) the tax purpose for which the information is sought;

(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;

(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;

(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”

Next Blogticle

In our next blogticle we will next turn to the 1988 Convention On Mutual Administrative Assistance In Tax Matters and continue form there.  In case you are wondering what this Convention is and why it is relevant, it came into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US,  providing for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.

In the Tax Treaties course starting September 14, Prof. Marshall Langer will be undertaking an in-depth analysis f these instruments and issues raised above. 

---

[1] Commentary to Article 26, paragraph 1 sections 9. and 9.1, OECD Model Tax Convention, 2003.

[2] Commentary to Article 26, paragraph 2 sections 14, 15 and 16, OECD Model Tax Convention, 2003.