Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Archive for the ‘information exchange’ Category

EU & US Sign “Umbrella” agreement to protect personal data transferred by law-enforcement authorities for detecting criminal offences, like tax evasion, & terrorism

Posted by William Byrnes on June 9, 2016


The EU-U.S. Ministerial Meeting on Justice and Home Affairs, hosted by the Netherlands Presidency of the Council of the European Union, took place in Amsterdam.  This meeting is EU Commission

Signing of the “Umbrella” agreement represented a major step forward in EU-U.S. relations.  The agreement sets high standards for the protection of personal data transferred by law-enforcement authorities.  It also strengthens legal certainty and enhances the rights of citizens which in turn will facilitate EU-U.S. cooperation to combat crime, including terrorism.  The EU and the U.S. are committed to work together in the implementation of this agreement to ensure that it benefits both citizens and law enforcement cooperation.  The next step will be to seek approval by the European Parliament.

During the ministerial meeting, the delegations focused on ways to address the migration crisis, on their respective visa policies, and on information sharing in the context of security, on counterterrorism policies and terrorist financing, on money laundering, data protection and on practical cooperation to tackle transnational organised crime.  The exchange of views covered issues including the protection of refugees, global resettlement efforts, effective border management and dismantling organised criminal migrant smuggling networks.

The EU and the U.S. first discussed ways to address global migration by developing safe, regular and orderly migration processes whilst ensuring international protection for those who need it.  The discussion focused on opportunities to mutually reinforce and coordinate their actions in this respect while also establishing high security standards.  They agreed that the current migration and refugee challenges require global solutions through increased international cooperation and regional action.  In this respect they reaffirmed their commitment to work together in the lead-up to the upcoming United Nations General Assembly high level meeting addressing large movements of refugees and migrants and to the U.S. hosted Leader-Level Refugee Summit, to be held in September 2016 in New York.

The EU and U.S. exchanged views on visa issues and the respective legal frameworks.  They agreed to maintain their constructive dialogue at all levels to achieve mutually beneficial solutions.

The EU and the U.S. discussed initiatives to improve counterterrorism efforts, including border security, screening of travellers and information sharing, as well as cooperation to better identify terrorist and foreign fighter travel.  They also agreed to reinforce their dialogue on chemical, biological, radioactive and nuclear material and on its possible use by terrorist networks.  They discussed legislative initiatives to improve information sharing, and to streamline efforts to combat terrorist financing and money laundering.

They also discussed a five year review of the 2010 EU-U.S. Mutual Legal Assistance Treaty, a key mechanism for transatlantic criminal justice cooperation.  The EU and the U.S. confirmed that the treaty is working effectively and identified areas for further practical improvement.  The U.S. and the EU committed to implementing those recommendations.  These recommendations include enhancing training and specialisation of practitioners, improving the way joint investigation teams work together, using technology to avoid delays, and making it easier to track criminal proceeds by identifying bank accounts.  Facilitating access to electronic evidence is a particular concern of the review, and the participants committed to improving their practices through which they obtain such evidence.

Following up to the commitment made at the EU–U.S. Summit in March 2014, the EU and the U.S. reiterated their desire to tackle jointly the issue of transnational child sex offenders, acknowledging the operational conclusions of an EU–U.S. expert meeting held in September 2015.  The EU and the U.S. recognized the importance of improving operational cooperation to protect children from transnational sex offenders.

Concluding the discussions, Europol and the U.S. jointly presented the results of a successful EU–U.S. operation that brought together law enforcement authorities from across Europe and the US to dismantle an important drug trafficking network and seize the proceeds of their crimes.

The EU and the U.S. committed to continuing their regular dialogue and to hold another ministerial meeting in the second half of 2016.

Posted in Financial Crimes, information exchange | Tagged: , , | Leave a Comment »

UK Amnesty Not Leading to Disclosure of Tax Evasion in Channels. Is It “Much To Do About Nothing” ?

Posted by William Byrnes on July 22, 2015


In 2011, HMRC forecast that it would receive “billions” from the Swiss Disclosure HM_Treasury_logo.svgFacility.  In 2012, HMRC stated that this number would be 5 billion sterling, and another 3 billion sterling from the LDF.  This implies that a couple hundred thousand United Kingdom tax residents are non tax compliant by not disclosing income and income-producing assets overseas, in offshore countries.  As of that report of data up to 2012, 50,000 taxpayers had come forward through all offshore disclosure facilities, generating one billion in tax, interest, and tax penalties, thus on average 20,000 sterling per disclosure.

My tables and figures are available at International Financial Law Prof Blog.

The offshore noncompliance problem in the context of all non-tax compliance, and all taxpayers, requires first asking how many individual taxpayers file in the UK? see International Financial Law Prof Blog.

Posted in Compliance, information exchange | Tagged: , , , , | Leave a Comment »

Public Disclosure of All Beneficial Owners of BVI and Cayman Corporations?

Posted by William Byrnes on March 31, 2015


read about this development at International Financial Law Prof Blog.

image from www.lexisnexis.comThe International Financial Law Professor Blogger William Byrnes is the author of Money Laundering, Asset Forfeiture and Recovery, and Compliance- A Global Guide is an eBook designed to provide the compliance officer, BSA counsel, and government agent with accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources.  Special topic chapters will assist the compliance officer design and maintain effective risk management programs.  Over 100 country and topic experts from financial institutions, government agencies, law, audit and risk management firms have contributed analysis to develop this practical compliance guide.

Posted in FATCA, information exchange | Tagged: , , , | Leave a Comment »

EU Commission Releases Proposals To Repeal Tax Savings Directive, Instead Impose FATCA Automatic Tax Exchange & Disclosure of All Tax Rulings Within 3 Months of Issuance

Posted by William Byrnes on March 18, 2015


EU CommissionThe European Commission presented a package of tax transparency measures as part of its ambitious agenda to tackle corporate tax avoidance and harmful tax competition in the EU.

A key element of this Tax Transparency Package is a proposal to introduce the automatic exchange of information between Member States on their tax rulings.

Corporate tax avoidance is thought to deprive EU Member States’ public budgets of billions of euros a year. It also undermines fair burden-sharing among tax-payers and fair competition between businesses. Companies rely on the complexity of tax rules and the lack of cooperation between Member States to shift profits and minimise their taxes. Therefore, boosting transparency and cooperation is vital in the battle against aggressive tax planning and abusive tax practices.

The Tax Transparency Package aims to ensure that Member States are equipped with the information they need to protect their tax bases and effectively target companies that try to escape paying their fair share of taxes.

Transparency on Tax Rulings

The central component of the Transparency Package is a legislative proposal to improve cooperation between Member States in terms on their cross-border tax rulings and it aims to mark the start of a new era of transparency.

Currently, Member States share very little information with one another about their tax rulings. It is at the discretion of the Member State to decide whether a tax ruling might be relevant to another EU country. As a result, Member States are often unaware of cross-border tax rulings issued elsewhere in the EU which may impact their own tax bases. The lack of transparency on tax rulings is being exploited by certain companies in order to artificially reduce their tax contribution.

To redress this situation, the Commission proposes to remove this margin for discretion and interpretation. Member States will now be required to automatically exchange information on their tax rulings. The Commission proposes to set a strict timeline: every three months, national tax authorities will have to send a short report to all other Member States on all cross-border tax rulings that they have issued. Member States will then be able to ask for more detailed information on a particular ruling.

The automatic exchange of information on tax rulings will enable Member States to detect certain abusive tax practices by companies and take the necessary action in response. Moreover, it should also encourage healthier tax competition, as tax authorities will be less likely to offer selective tax treatment to companies once this is open to scrutiny by their peers.

Other Tax Transparency initiatives                                                        

The Package also contains a communication outlining a number of other initiatives to advance the tax transparency agenda in the EU. These are:

  • Assessing possible new transparency requirements for multinationals

The Commission will examine the feasibility of new transparency requirements for companies, such as the public disclosure of certain tax information by multinationals. The objectives, benefits and risks of any such initiative need to be carefully considered. Therefore, the Commission will assess the impact of possible additional transparency requirements to help inform a decision at a later stage.

  • Reviewing the Code of Conduct on Business Taxation

The Code of Conduct on Business Taxation is one of the EU’s main tools for ensuring fair corporate tax competition. It sets out the criteria that determine whether a tax regime is harmful or not and it requires Member States to abolish any harmful tax measures that go against the Code. Member States meet regularly to assess their compliance with the Code. But over the past years, the Code has become less effective in addressing harmful tax regimes as its criteria do not take into account more sophisticated corporate tax avoidance schemes. The Commission will therefore work with Member States to review the Code of Conduct as well as the mandate of the Code of Conduct Group in order to make it more effective in ensuring fair and transparent tax competition within the EU.

  • Quantifying the scale of tax evasion and avoidance

The Commission, along with Eurostat, will work with Member States to see how a reliable estimate of the level of tax evasion and avoidance can be reached. There is growing evidence that evasion and avoidance are pervasive and cause significant revenue losses. However, a precise quantification of the scale and impact of these problems has not been determined up to now. Reliable statistics of the scale and impact of these problems would help to better target policy measures against them.

  • Repealing the Savings Tax Directive

The Commission is proposing to repeal the Savings Tax Directive, as this text has since been overtaken by more ambitious EU legislation, which requires the widest scope of automatic information exchange on financial accounts, including savings related income (IP/13/530). Repealing the Saving Tax Directive will create a streamlined framework for the automatic exchange of financial information and will prevent any legal uncertainty or extra administration for tax authorities and businesses.

Next Steps

The two legislative proposals of this package will be submitted to the European Parliament for consultation and to the Council for adoption. Member States should agree on the Tax Rulings proposal by the end of 2015, so that it can enter into force on 1 January 2016. Given that the European Council in December 2014 called on the Commission to make this proposal, full political commitment on reaching a timely agreement should be expected.

The next milestone will be an Action Plan on Corporate Taxation which will be presented before the summer. This second Action Plan will focus on measures to make corporate taxation fairer and more efficient within the Single Market, including a re-launch of the Common Consolidated Corporate Tax Base (CCCTB) and ideas for integrating new OECD/G20 actions to combat base erosion and profit shifting (BEPS) at EU level.

More information

The Communication

The Proposal on automatic exchange of information

Memo/15/4609

Website

book coverLexis Guide to FATCA Compliance – 2015 Edition 

1,200 pages of analysis of the compliance challenges, over 54 chapters by 70 FATCA contributing experts from over 30 countries.  Besides in-depth, practical analysis, the 2015 edition includes examples, charts, time lines, links to source documents, and compliance analysis pursuant to the IGA and local regulations for many U.S. trading partners and financial centers.   The Lexis Guide to FATCA Compliance, designed from interviews with over 100 financial institutions and professional firms, is a primary reference source for financial institutions and service providers, advisors and government departments.  No filler of forms and regs – it’s all beef !  See Lexis’ order site and request a copy of the forthcoming 2015 edition – http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp?pageName=relatedProducts&prodId=prod19190327

A free download of the first chapter of the 2nd edition is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671

Posted in information exchange | Tagged: , , | Leave a Comment »

Welcome this week from University of Amsterdam Centre for Tax Law

Posted by William Byrnes on January 19, 2015


Logo_uva1 Welcome from Amsterdam !  Each year the Amsterdam Centre for Tax Law (of the University of Amsterdam Law Faculty) organizes its Winter Course on International Tax Law.

This year theme is “Tax treaty application“.  The Winter Course on International Tax Law focuses on the practical problems of tax treaty application. It aims at bringing the participants’ knowledge up-to-date with recent OECD developments, major issues on tax treaty interpretation, as well as relevant case-law on tax treaties around the world.

Prof. Dennis Weber, Director of the ACTL,  has assembled a leading program faculty including Prof. Peter Watel(UvA) (who lectured me at a UvA tax student 23 year ago); Prof. Hein Vermeulen (UvA/PwC);  Prof. Stef van Weeghel (UvA/PwC); Prof. Bruno De Silva (UvA); Prof. Otto Marres (UvA/KPMG); Prof. Joanna Wheeler(IBFD/UvA); Jasper Arendse (Directorate of International Affairs Dutch Ministry of Finance); Melinda Brown (OECD); and myself, Prof. William Byrnes.

My topic examines the protocols, mechanisms and expanding scope of information exchange via bilateral and multilateral agreements.  FATCA, OECD CRS and Global Initiatives, EU Expanded Savings Directive EOI, TIEAs fall within this topic, as well as tax certification forms and validation, data collection, discernment and distribution.

The Amsterdam Centre for Tax Law (ACTL) is the tax law research centre of the University of Amsterdam. ACTL members conduct research into various subjects of tax law, with a strong emphasis on Corporate Taxation, International Tax Law and European Tax Law.

Posted in Courses, FATCA, information exchange, international taxation | Tagged: | Leave a Comment »

Has Treasury Changed Its Position Regarding Capital Flight Resulting from FATCA?

Posted by William Byrnes on July 5, 2014


free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

In 2013, I participated in a constitutional law conference regarding international agreements, held in Siberia, Russia.  My invited role was to discuss FATCA’s IGAs basis in US domestic law and international law policy, and comparatively discuss IGAs in the context of various EU countries.  Some of those slides are available in my broader FATCA lecture at the University of Amsterdam International Tax Program Winter Session at http://www.slideshare.net/williambyrnes1/uv-a-winter-2014-fatca-and-eoi

In light of my academic interest in this subject matter, today I came across two pertinent blog posts that I share below, wherein Treasury justifies its policy based upon the potential for capital flight, followed by the Treasury opposite stance to the Court just months before in Florida Bankers Assn v Treasury.  Below I post some of my lecture comments from 2010 regarding FATCA and capital flight.

Does Treasury have new information / data that it did not previously have, leading to its change of stance?  Should we (voters with an interest in a stable financial system) be concerned?  I am being facetious because Treasury (the IRS) does from time to time, in tax cases on an identical issue, advance opposing arguments (I have heard even in front of the same judge), depending on what outcome it wants from the taxpayer.  After all, in law school, we teach our students to argue for both sides on every issue.

Treasury Argues Capital Flight Requires FATCA IGAs With Other Countries 

Professor Jack Townsend’s Blog wherein he posts a letter from Treasury’s Asst. Secretary for Legislative Affairs to a Congressman (Bill Posey) wherein Treasury states its authority to create and enter into IGAs with other nations and their dependencies:  http://federaltaxcrimes.blogspot.com/2014/07/irs-letter-to-congressman-defending-its.html

Treasury’s stated authority is: “Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).”

Professor Townsend (Houston) includes in the comments to the letter a rebuttal by Professor Allison Christians (McGill) “None of these sources of law contain any authorization to enter into or implement the IGAs.  It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its “plenary executive authority”.  As such the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II.” See Professor Christians full response at http://taxpol.blogspot.com.au/2014/07/irs-claims-statutory-authority-for.html

The above highlight is interesting enough mind you.  But I must point out another aspect of the Treasury justification for IGAs.  Treasury states that: “Suspending further negotiation of IGAs would negatively affect the United States’ ability to enforce the provisions of FATCA without the imposition of substantial withholding tax. … This could result in harm to the interests of the United States because it could prompt divestment from U.S. investments by affected financial institutions.” (emphasis added)

Treasury Argues Capital Flight Is Not a FATCA Concern

But Treasury argued quite the opposite in its recent, successful defense against the Florida and Texas Bankers Associations in Florida Bankers Assn v Treasury.

Quoting the Court:

“The IRS admits that it does not know exactly how much money non-resident aliens have deposited in U.S. banks. …

Instead of using exact data, the IRS estimated, based on a mountain of existing information from the Treasury Department, that non-resident alien deposits in U.S. banks amounted to no more than $400 billion. …

… The IRS was unconcerned because it had determined that very little of this mo.ney would be affected – namely, because these regulations would not deter any rational actor other than a tax fraud from using U.S. banks.

4. Capital Flight

At the heart of the Bankers Associations’ argument – albeit buried somewhat in their brief – is the contention that the regulations should not have been issued given the negative impact they may have on banks. Plaintiffs claim that the IRS “disregarded” a flood of comments arguing that the new regulations would cause non-residents to withdraw their deposits en masse and thereby trigger substantial and harmful capital flight. The IRS, however, did not ignore those comments; indeed, it dedicated a majority of the preamble to addressing concerns about capital flight.

… As a result of those protections, the Government concluded that the “regulations should not significantly impact the investment and savings decisions of the vast majority of non-residents.”

Plaintiffs raise one additional, related issue: They claim that the IRS ignored the massive capital flight that took place after the Canadian reporting requirements became effective in January 2000.  The IRS, by contrast, contends that the alleged Canadian capital flight is a fiction: While the amount of Canadian interest-bearing deposits may have dipped after the reporting requirements were issued, they climbed back up shortly after that.”

See the full article at https://profwilliambyrnes.com/2014/02/25/court-upholds-irs-regulations-for-foreign-taxpayer-interest-reporting-by-us-banks/

Comments from my 2010 lecture on tax elasticity of deposits

Tax Elasticity Of Deposits

In the 2002 article International Tax Co-operation and Capital Mobility, prepared for an ECLAC report, from analysing data from the Bank for International Settlements (“BIS”) on international bank deposits, Valpy Fitzgerald found “that non-bank depositors are very sensitive to domestic wealth taxes and interest reporting, as well as to interest rates, which implies that tax evasion is a determinant of such deposits….”[1]  Non-bank depositors are persons that instead invest in alternative international portfolios and financial instruments.

Estimating How Much Latin American Tax Evasion are US Banks Involved With?

Some Miami based commentators, like the renown author Professor Marshall Langer, estimated that at least $300B of capital outflow will occur from the USA pursuant to its exchange of tax information with Brazil and other Latin American countries, like Argentina and Venezuela.  Based on their discussions with South Florida real estate firms, information exchange will lead to a withdrawal of Latin American interest in its real estate market.  (Note that since 2010, we now know that US information collection will not look through company entities as is required by FATCA from FFIs, and because most real estate for estate tax purposes is held via corporate structures, it will not capture information on most real estate investment.)  

Three historical benchmarks regarding the imposition of withholding tax on interest illustrate the immediate and substantial correlation that an increase in tax on interest has on capital flight.  The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the creation of the London Euro-dollar market;[2] (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks;[3] and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy[4].  The effect was so substantial that the tax was repealed only four months after imposition.

The Establishment of London as an International Financial Center

The 1999 IMF Report on Offshore Banking concluded that the US experienced immediate and significant capital outflows in 1964 and 1965 resulting from the imposition of a withholding tax on interest.  Literature identifies the establishment of London as a global financial centre as a result of the capital flight from the US because of its imposition of Interest Equalisation Tax (IET) of 1964.[5]  The take off of the embryonic London eurodollar market resulted from the imposition of the IET.[6]  IET made it unattractive for foreign firms to issue bonds in the US.  Syndicated bonds issued outside the US rose from US$135 million in 1963 to US$696 million in 1964.[7]    In 1964-65, the imposition of withholding tax in Germany, France, and The Netherlands, created the euromark, eurofranc and euroguilder markets respectively.[8]

The Establishment of Miami as an International Financial Center

Conversely, when in 1984 the US enacted an exemption for portfolio interest from withholding tax, Latin America experienced a capital flight of $300 billion to the US.[9]  A substantial portion of these funds were derived from Brazil.  In fact, some pundits have suggested that Miami as a financial center resulted not from the billions generated from the laundering of drug proceeds which had a tendency to flow outward, but from the hundreds of billions generated from Latin inward capital, nearly all unreported to the governments of origination.

The Establishment of Luxembourg as an International Financial Center

In January of 1989, West Germany imposed a 10% withholding tax on savings and investments.  In April it was repealed, effective July 1st, because the immediate cost to German Banks had already reached DM1.1 billion.[10]  The capital flight was so substantial that it caused a decrease in the value of the Deutsche mark, thereby increasing inflation and forcing up interest rates.  According to the Financial Times, uncertainty about application of the tax, coupled with the stock crash in 1987, had caused a number of foreign investment houses to slow down or postpone their investment plans in Germany.  A substantial amount of capital went to Luxembourg, as well as Switzerland and Lichtenstein.

Switzerland’s Fisc May Come Out Ahead

Perhaps ironically given the nature of the UBS situation currently unfolding, a Trade Based Money Laundering study by three prominent economists and AML experts focused also on measuring tax evasion uncovered that overvalued Swiss imports and undervalued Swiss exports resulted in capital outflows from Switzerland to the United States in the amount of $31 billion within a five year time span of 1995-2000.[11]  That is, pursuant to this transfer pricing study, the Swiss federal and cantonal revenue authorities are a substantial loser to capital flight to the USA.  The comparable impact of the lost tax revenue to the much smaller nation of Switzerland upon this transfer pricing tax avoidance (and perhaps trade-based money laundering) may be significantly greater than that of the USA from its lost revenue on UBS account holders.  Certainly, both competent authorities will have plenty of work on their hands addressing the vast amount of information that needs to be exchanged to stop the bleeding from both countries’ fiscs.

 

[1] International Tax Cooperation and Capital Mobility, Valpy Fitzgerald, 77 CEPAL Review 67 (August 2002) p.72.

[2] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?

[3] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).

[4] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.

[5] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?

[6] 1999 IMF Offshore Banking Report  p.16.

[7] 1999 IMF Offshore Banking Report  p.16-17.

[8] 1999 IMF Offshore Banking Report  p.17.

[9] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).

[10] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.

[11] Maria E. de Boyrie, Simon J. Pak and John S. Zdanowicz The Impact Of Switzerland’s Money Laundering Law On Capital Flows Through Abnormal Pricing In International Trade Applied 15 Financial Economics 217–230 (Rutledge 2005).

 

book coverPractical Compliance Aspects of FATCA and GATCA

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA), see Lexis Guide to FATCA Compliance, 2nd Edition just published!

 

 

 

Posted in FATCA, information exchange | Tagged: , , , , , , | 2 Comments »

66th country signs OECD Convention on Tax Information Exchange

Posted by William Byrnes on July 4, 2014


free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

The OECD announced yesterday that Gabon became the 66th country to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Gabon is the seventh African country to sign the Convention since it was opened for signature to all countries in June 2011.  (previous article on tax information exchange)

“Already a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes since October 2012, Gabon’s commitment today plays an important role for regional co-operation in tax matters and demonstrates effective action towards greater exchange of information”, said Pascal Saint-Amans. “We hope it will act as an encouragement to other African and developing countries to also join this important area of international co-operation in the fight for a fairer and more transparent international tax system”.

The Convention provides for all forms of mutual assistance: exchange on request, spontaneous exchange, tax examinations abroad, simultaneous tax examinations and assistance in tax collection , while protecting taxpayers’ rights. It also provides the option to undertake automatic exchange, requiring an agreement between the Parties interested in adopting this form of assistance.

Automatic Exchange of Information for Tax Purposes

47 countries and major financial centers on May 6, 2014 committed to automatic exchange of information between their jurisdictions, announced the OECD.  All 34 OECD member countries, as well as Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa  endorsed the Declaration on Automatic Exchange of Information in Tax Matters that was released at the May 6-7, 2014 Meeting of the OECD at a Ministerial Level.

The Declaration commits countries to implement a new single global standard on automatic exchange of information (“CRS” or “GATCA”).  The OECD stated that it will deliver a detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.

Common Reporting and Due Diligence Standards (“CRS”)

February 13 the OECD released the Standard for Automatic Exchange of Financial Account Information Common Reporting Standard.  The Draft Commentaries for the CRS, developed by the Working Party No. 10 on Exchange of Information and Tax Compliance, and discussed at its May 26-28, 2014 meeting, are expected to be released very shortly, in July.

The CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. Part I of the report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.

What are the main differences between the CRS (“GATCA”) and FATCA?

The CRS is also informally called “GATCA”, referring to the “globalization” of FATCA.

The CRS consists of a fully reciprocal automatic exchange system from which US specificities have been removed. For instance, it is based on residence and unlike FATCA does not refer to citizenship. Terms, concepts and approaches have been standardized allowing countries to use the system without having to negotiate individual Annexes.

Unlike FATCA the CRS does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. The CRS also provides for a simplified indicia search for such accounts. Finally, it has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in the automatic exchange under the standard.

Single Global Standard for Automatic Exchange (“GATCA”)

Under GATCA jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Part I of this report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.

The Report sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

To prevent taxpayers from circumventing the CRS it is specifically designed with a broad scope across three dimensions:

  1. The financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets.
  2. The financial institutions that are required to report under the CRS do not only include banks and custodians but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.
  3. Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the individuals that ultimately control these entities.

The CRS also describes the due diligence procedures that must be followed by financial institutions to identify reportable accounts.

If CRS and IGAs are Universally Adopted, Then Why is the Multilateral Convention on Mutual Administrative Assistance in Tax Matters Necessary?

Both the CRS model, which is currently being developed by the OECD with G20 countries, and the IGAs are based on the automatic exchange of information from the tax administration of one country to the tax administration of the residence country.  As with other forms of exchange of information, a legal basis is needed to carry out automatic exchange. While bilateral treaties such as those based on Article 26 of the OECD Model Tax Convention would permit such exchanges, it may be more efficient to implement a single global standard through a multilateral instrument.  See OECD Information Brief

Global Forum Peer Reviews and Monitoring Of Automatic Exchange

G20 governments have mandated the OECD-hosted Global Forum on Transparency and Exchange of Information for Tax Purposes to monitor and review implementation of the standard.  More than 60 countries and jurisdictions of the 121 Global Forum members have now committed to early adoption of the standard, and additional members are expected to join this group in the coming months. See the link for Country Peer Reviews and the Global Forum list of ratings chart.

book coverPractical Compliance Aspects of FATCA and GATCA

Over 600 pages of in-depth analysis of the practical compliance aspects of financial service business providing for exchange of information of information about foreign residents with their national competent authority or with the IRS (FATCA), see Lexis Guide to FATCA Compliance, 2nd Edition just published!

34 chapters by 50 experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance requirements (Chapters 17–34), including  information exchange protocols and systems.

Posted in FATCA, information exchange, OECD | Tagged: , , , , , , , | Leave a Comment »

Analysis of 2014 final forms W-8BEN, W8BEN-E and W-8IMY

Posted by William Byrnes on May 14, 2014


free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

The Form W-8BEN has been split into two forms.  The new 2014 Form W-8BEN (revision date 2014) is for use solely by foreign individuals, whereas the new Form W-8BEN-E is for use by entities for 2014 (revision date 2014) to provide US withholding agents.  The newest version of Form W-8BEN-E must be used by all entities that are beneficial owners of a payment, or of another entity that is the beneficial owner.

The IRS released the new 2014 Form W-8BEN-E (2-2014) that coincides with FATCA and QI entity classification reporting requirements, and on April 30, 2014 the IRS followed up with the new Form W-8IMY (“Form W-8IMY”), formally replacing its 2006 predecessor W-8IMY.

Form W-8IMY is submitted generally by a payment recipient (the “filer”) with non-beneficial owner status, i.e. an intermediary.  Such intermediary can be a U.S. branch, a qualified intermediary, a non-qualified intermediary, foreign partnership, foreign grantor or a foreign simple trust.  Form W-8IMY requires a tax identification number.  The new Form W-8IMY has 28 parts whereas the previous August 2013 FATCA draft W-8IMY only contained 26.  The new 2014 Form W-8IMY is vastly different from the seven-part 2006 predecessor form.

Below is a summary for the 2014 W-8BENW-8BEN-E  and of W-8IMY.  The Form W8BEN instructions >link is here< but the Form W-8BEN-E Instructions have not been completed by the IRS yet.  The W-8BEN-E instructions, when released, will address a hybrid entity’s claims for treaty benefits and chapter 4 certifications.

(For an in-depth compliance analysis of the new form W-8BEN-E  and the other required withholding forms drafted by the see LexisNexis® Guide to FATCA Compliance Chapter 11 Withholding And Qualified Intermediary, § 11.08 Applicable Withholding Forms, [4] Analysis of Form W-8BEN-E.  For a detailed analysis of Form W-8IMY see Chapter 11 Withholding And Qualified Intermediary, § 11.08 Applicable Withholding Forms, [5] Analysis of Form W-8IMY.)  A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

W-8BEN

Foreign individuals (non-resident aliens – NRAs) must use Form W-8BEN to document their foreign status and claim any applicable treaty benefits for chapter 3 purposes, including a foreign individual that is the single member of an entity that is disregarded for U.S. tax purposes.

The NRA must give the Form W-8BEN to the withholding agent or payer if he/she is the beneficial owner of an amount subject to withholding, or if he/she an account holder of an FFI then to the FFI to document his/her status as a nonresident alien.  Note that a sole member of a “disregarded” entity is considered the beneficial owner of income received by the disregarded entity, and thus the sole member must provide a W-8BEN.

If the income or account is jointly owned by more than one persons, the income or account will be treated by the withholding agent as owned by a foreign person that is a beneficial owner of a payment only if Forms W-8BEN or W-8BEN-E are provided by EVERY owner of the account.  If the withholding agent or financial institution receives a Form W-9 from any of the joint owners, then the payment must be treated as made to a U.S. person and the account treated as a U.S. account.

If any information on the Form W-8BEN becomes incorrect because of a change in circumstances, then the NRA must provide within 30 days of the change of circumstances the withholding agent, payer, or FFI with a new W-8BEN.   By example, if an NRA has a change of address to an address in the United States, then this change is a change in circumstances that requires contacting the withholding agent or FFI within 30 days.  Generally, a change of address within the same foreign country or to another foreign country is not a change in circumstances.   However, if Form W-8BEN is used to claim treaty benefits of a country based on a residence in that country and the NRA changes address to outside that country, then it is a change in circumstances requiring notification within 30 days to the withholding agent or FFI.

A NRA (nonresident alien individual) is any individual who is not a citizen or resident alien of the United States.  An foreign person (‘alien”) meeting either the “green card test” or the “substantial presence test” for the calendar year is a resident alien. Any person not meeting either of these two tests is a nonresident alien individual.   Additionally, an alien individual who is a bona fide resident of Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa is a nonresident alien individual.

Taxpayer Identification Numbers

Line 5 requires a taxpayer identification number, which is the US social security number (SSN), or if not eligible to receive a SSN, then an individual taxpayer identification number (ITIN).  The SSN may be applied for www.socialsecurity.gov/online/ss-5.html.  An ITIN may be applied for by filing Form W-7 with the  IRS.  To claim  certain treaty benefits, either line 5 must be completed with an SSN or ITIN, or line 6 must include a foreign  tax identification number (foreign TIN).

US Exchange of Tax Information with Foreign Countries

Line 6 of Form W-8BEN requires a foreign tax identifying number ( foreign TIN) issued by a foreign jurisdiction of residence when an NRA documents him or herself with respect to a financial account held at a U.S. office of a financial institution.  However, if the foreign jurisdiction does not issue TINs or has not provided the NRA a TIN yet, then the NRA must enter a date of birth in line 8.

W-8BEN-E

The W-8BEN-E form has thirty parts, whereas the draft W-8BEN-E form only had twenty-seven, and the former W8BEN in use since 2006 has just four parts.  All filers of the new W-8BEN-E must complete Parts I and XXIX.

Part I of the W-8BEN-E requires general information, the QI status, and the FATCA classification of the filer.  Question 4 of Part I requests the QI status. If the filer is a disregarded entity, partnership, simple trust, or grantor trust, then the filer must complete Part III if the entity is claiming benefits under a U.S. tax treaty.  Question 5 requests the FATCA classification of the filer.  The classification indicated determines which one of the Parts IV through XXVIII must be completed.

Part XXIX requires certification, under penalty of perjury, by the payee or a person authorized to sign on the payee’s behalf.  This part of the final form also contains the following language that does not appear in the current form: “I agree that I will submit a new form within 30 days if any certification made on this form becomes incorrect.”

Note that if the filer is a passive NFFE, it must complete Part XXVI as well as Part XXX if it has substantial U.S. owners.  For a Passive NFFE, a specified U.S. person is a substantial U.S. owner if the person has more than a 10 percent beneficial interest in the entity.

Completion of the other parts of the final form W-8BEN-E will depend upon the FATCA classification of the filer. The classifications on the newest version Form W-8BEN-E maintain the classification of a Restricted Distributor (previously Part X, but in the final form Part XI) (see the Rev. 2013 version of the W-8BEN-E).  The complete list of Parts follows the list of thirty-one potential FATCA classifications from which the filer must choose one.

31 FATCA Classifications of the W-8BEN-E (must check one box only unless otherwise indicated).

  1. Nonparticipating FFI (including a limited FFI or an FFI related to a Reporting IGA FFI other than a registered deemed-compliant FFI or participating FFI).
  2. Participating FFI.
  3. Reporting Model 1 FFI.
  4. Reporting Model 2 FFI.
  5. Registered deemed-compliant FFI (other than a reporting Model 1 FFI or sponsored FFI that has not obtained a GIIN).
  6. Sponsored FFI that has not obtained a GIIN. Complete Part IV.
  7. Certified deemed-compliant nonregistering local bank. Complete Part V.
  8. Certified deemed-compliant FFI with only low-value accounts. Complete Part VI.
  9. Certified deemed-compliant sponsored, closely held investment vehicle. Complete Part VII.
  10. Certified deemed-compliant limited life debt investment entity. Complete Part VIII.
  11. Certified deemed-compliant investment advisors and investment managers. Complete Part IX.
  12. Owner-documented FFI. Complete Part X.
  13. Restricted distributor. Complete Part XI.
  14. Nonreporting IGA FFI (including an FFI treated as a registered deemed-compliant FFI under an applicable Model 2 IGA). Complete Part XII.
  15. Foreign government, government of a U.S. possession, or foreign central bank of issue. Complete Part XIII.
  16. International organization. Complete Part XIV.
  17. Exempt retirement plans. Complete Part XV.
  18. Entity wholly owned by exempt beneficial owners. Complete Part XVI.
  19. Territory financial institution. Complete Part XVII.
  20. Nonfinancial group entity. Complete Part XVIII.
  21. Excepted nonfinancial start-up company. Complete Part XIX.
  22. Excepted nonfinancial entity in liquidation or bankruptcy. Complete Part XX.
  23. 501(c) organization. Complete Part XXI.
  24. Nonprofit organization. Complete Part XXII.
  25. Publicly traded NFFE or NFFE affiliate of a publicly traded corporation. Complete Part XXIII.
  26. Excepted territory NFFE. Complete Part XXIV.
  27. Active NFFE. Complete Part XXV.
  28. Passive NFFE. Complete Part XXVI.
  29. Excepted inter-affiliate FFI. Complete Part XXVII.
  30. Direct reporting NFFE.
  31. Sponsored direct reporting NFFE. Complete Part XXVIII

 W-8BEN-E’s 30 Parts

Part I Identification of Beneficial Owner
Part II Disregarded Entity or Branch Receiving Payment.
Part III Claim of Tax Treaty Benefits (if applicable). (For chapter 3 purposes only)
Part IV Sponsored FFI That Has Not Obtained a GIIN
Part V Certified Deemed-Compliant Nonregistering Local Bank
Part VI Certified Deemed-Compliant FFI with Only Low-Value Accounts
Part VII Certified Deemed-Compliant Sponsored, Closely Held Investment Vehicle
Part VIII Certified Deemed-Compliant Limited Life Debt Investment Entity
Part IX Certified Deemed-Compliant Investment Advisors and Investment Managers
Part X Owner-Documented FFI
Part XI Restricted Distributor
Part XII Nonreporting IGA FFI
Part XIII Foreign Government, Government of a U.S. Possession, or Foreign Central Bank of Issue
Part XIV International Organization
Part XV Exempt Retirement Plans
Part XVI Entity Wholly Owned by Exempt Beneficial Owners
Part XVII Territory Financial Institution
Part XVIII Excepted Nonfinancial Group Entity
Part XIX Excepted Nonfinancial Start-Up Company
Part XX Excepted Nonfinancial Entity in Liquidation or Bankruptcy
Part XXI 501(c) Organization
Part XXII Non-Profit Organization
Part XXIII Publicly Traded NFFE or NFFE Affiliate of a Publicly Traded Corporation
Part XXIV Excepted Territory NFFE
Part XXV Active NFFE
Part XXVI Passive NFFE
Part XXVII Excepted Inter-Affiliate FFI
Part XXVIII Sponsored Direct Reporting NFFE
Part XXIX Certification
Part XXX Substantial U.S. Owners of Passive NFFE

Form W-8IMY

Part I of the W8-IMY Form adds FATCA classification.   Part I of the form requires general information, the Chapter 3 QI status, and the Chapter 4 FATCA classification of the filer.

Question 4 of Part I requests the QI status:

  • If the filer is a Qualified Intermediary, then the filer must complete Part III Qualified Intermediary.  If the filer is a Nonqualified Intermediary, then the filer must complete Part IV Nonqualified Intermediary.
  • Territory Financial Institutions complete Part V. U.S. Branches complete Part VI.
  • Withholding Foreign Partnership or Withholding Foreign Trusts complete Part VII.
  • Nonwithholding Foreign Partnership, Nonwithholding Foreign Simple Trust, and Nonwithholding foreign grantor trusts must complete Part VIII.

Question 5 requests the FATCA classification of the filer. The classification indicated determines which one of the Parts IX through XXVII must be completed.

Part II of this form is to be completed if the entity is a disregarded entity or a branch receiving payment as an intermediary. Part II only applies to branches of an FFI outside the FFI’s country of residence.

Chapter 3 Status Certifications  Parts III – VIII

Parts III – VIII of this form address the QI Status of the entity. Part III is to be completed if the entity is a QI, and requires the entity to certify that it is a QI and has provided appropriate documentation. Part IV is to be completed if the entity is a Nonqualified Intermediary (NQI), and requires the entity to certify that it is a NQI not acting for its own account.

Part V is to be completed if the entity is a Territory Financial Institution. Part VI is to be completed by a U.S. branch only if the branch certifies on the form that it is the U.S. branch of a U.S. bank or insurance company, and that the payments made are not effectively connected to a U.S. trade or business. Part VII is to be completed if the entity is a Foreign Withholding Partnership (WP) or a Withholding Foreign Trust (WT). Part VIII is to be completed if the entity is either a Nonwithholding Foreign Partnership, Simple Trust, or Grantor Trust.

Chapter 4 Status Certifications Parts IX – XXVI

Parts IX – XXVI of this form address the FATCA Status of the entity. These classifications include the new classification of a Restricted Distributor (Part XVI), but do not include the new classification of a Reporting NFFE.

Statement of Certification

Part XXVIII requires certification, under penalty of perjury, by the payee or a person authorized to sign on the payee’s behalf. Finally, the form contains the following language: “I agree that I will submit a new form within 30 days if any certification made on this form becomes incorrect.”

Structure of New Form Form W-8IMY

  • Part I Identification of Entity
  • Part II Disregarded Entity or Branch Receiving Payment.

Chapter 3 Status Certifications

  • Part III Qualified Intermediary
  • Part IV Nonqualified Intermediary
  • Part V Territory Financial Institution
  • Part VI Certain U.S. Branches
  • Part VII Withholding Foreign Partnership (WP) or Withholding Foreign Trust (WT)
  • Part VIII Nonwithholding Foreign Partnership, Simple Trust, or Grantor Trust

Chapter 4 Status Certifications

  • Part IX Nonparticipating FFI with Exempt Beneficial Owners
  • Part X Sponsored FFI That Has Not Obtained a GIIN
  • Part XI Owner-Documented FFI
  • Part XII Certified Deemed-Compliant Nonregistering Local Bank
  • Part XIII Certified Deemed-Compliant FFI with Only Low-Value Accounts
  • Part XIV Certified Deemed-Compliant Sponsored, Closely Held Investment Vehicle
  • Part XV Certified Deemed-Compliant Limited Life Debt Investment Entity
  • Part XVI Restricted Distributor
  • Part XVII Foreign Central Bank of Issue
  • Part XVIII Nonreporting IGA FFI
  • Part XIX Exempt Retirement Plans
  • Part XX Excepted Nonfinancial Group Entity
  • Part XXI Excepted Nonfinancial Start-Up Company
  • Part XXII Excepted Nonfinancial Entity in Liquidation or Bankruptcy
  • Part XXIII Publicly Traded NFFE or NFFE Affiliate of a Publicly Traded Corporation
  • Part XXIV Excepted Territory NFFE
  • Part XXV Active NFFE
  • Part XXVI Passive NFFE
  • Part XXVII Sponsored Direct Reporting NFFE

book coverPractical Compliance Aspects of FATCA and GATCA

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters by 50 industry experts grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of Intergovernmental Agreements (IGAs) and local law compliance challenges (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems.   A free download of the first of the 34 chapters is available at http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

<— Subscribe by email on the left menu to the FATCA Updates on this blog:  https://profwilliambyrnes.com/category/fatca/

 

If you are interested in discussing the Master or Doctoral degree in the areas of international taxation or anti money laundering compliance, please contact me profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour” 

Posted in FATCA, information exchange | Tagged: , , , , | 4 Comments »

Court Upholds IRS Regulations for Foreign Taxpayer Interest Reporting by US Banks

Posted by William Byrnes on February 25, 2014


Florida Bankers Association, et al., v. United States Department Of Treasury, et al., District Court For The District Of Columbia (January 13, 2014).

Relevant excerpts from the decision (citation omitted):

The Florida and Texas Bankers Associations now challenge those reporting requirements, alleging that the regulations violate the Administrative Procedure Act and the Regulatory Flexibility Act. The Bankers Associations contend … that the IRS got the economics of its decision wrong and that the requirements will cause far more harm to banks than anticipated. Because the Service reasonably concluded that the regulations will improve U.S tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor – other than a tax evader – to withdraw his funds from U.S. accounts, the Court upholds the regulations … 

The IRS is on a constant quest to bridge the so-called “tax gap” – that is, the $450 billion gap between what taxpayers owe the government and what they actually pay. Part of this gap is caused by a lack of taxpayer candor regarding assets retained in off-shore accounts. While U.S. citizens and residents owe taxes on the interest meted out by foreign banks, much of those off-shore earnings go unreported and undetected. 

Honesty, however, may not be every American taxpayer’s greatest virtue. As a result, the Government also relies on third-party reporting, matching, and verification to confirm the correct amount of taxpayer liability and to encourage accurate self-reporting. 

As a result, the United States has entered into treaties with at least 70 foreign governments to provide for the exchange of tax information upon request.

Reciprocity is the key to success in such treaties. If the United States does not gather and report tax information for foreign accountholders, then other countries have little incentive to provide us with similar information.

In the IRS’s 2011 Notice of Proposed Rulemaking, the Agency put forward regulations that would require U.S. banks to report the interest paid to all non-resident aliens. The Agency claimed that such regulations were warranted as a result of the “growing global consensus” that “cooperative [tax] information exchange[s]” were necessary to apprehend tax cheats. “[R]outine reporting” of non-resident tax information would, it said, “strengthen the United States exchange of information program” and thus “help to improve voluntary compliance” with existing tax laws by U.S. taxpayers.

The Financial Accountability and Corporate Transparency Coalition, for example, noted that “America should not be a haven for international tax evaders.”

While the United States has exchange agreements with only 70 countries, the proposed amendments required reporting for all 196 countries worldwide.

Commenters also worried about the confidentiality of the information collected and the potential risk of “capital flight” – that is, non-residents’ closing their accounts and withdrawing their money due to the new regulations.

The final rule, which was issued in 2012, responded to these comments by preserving the core of the amendment while somewhat narrowing and clarifying the regulations. 77 Fed. Reg. 23,391. Pursuant to the final rule, effective January 1, 2013, banks are now required to report interest payments to non-resident aliens, but only for aliens from countries with which the United States has an exchange agreement. The reports utilize the same forms already employed to report Canadian non-resident income, Forms 1042 and 1042-S.

In addition, the IRS responded to the various concerns raised in the comments it received. As noted, the rule narrowed the reporting requirement to countries with which the United States has an exchange agreement. The Service also addressed confidentiality questions by noting that “all of the information exchange agreements to which the United States is a party require that the information exchanged under the agreement be treated and protected as secret by the foreign government.” Id. In terms of capital flight, the IRS reasoned that “these regulations should not significantly impact the investment and savings decisions of the vast majority of non-residents who are aware of and understand these safeguards and existing law and practice.” Their information, after all, would remain confidential and could only detrimentally affect them if they were evading their countries’ tax laws.

While the IRS conceded that the regulations would affect many small banks, it determined that they would not have a “significant economic impact” because banks have already “developed the systems to perform . . . withholding and reporting” for U.S. citizens, residents, and Canadian citizens. “U.S. financial institutions can,” therefore, “use their existing W-8 information” – which contains data on residency and citizenship for all accountholders – “to produce Form 1042-S disclosures for the relevant nonresident alien individual account holders. Nearly all U.S. banks and other financial institutions have automated systems to produce” those forms.  

The IRS admits that it does not know exactly how much money non-resident aliens have deposited in U.S. banks. It notes, however, that gathering that information is one critical point of the regulations – to figure out how much money foreign residents hold in U.S. accounts and how much interest they are earning. As the Government highlights, it makes little sense to require an agency to possess the data it wishes to collect before enacting new data-collecting requirements.

Instead of using exact data, the IRS estimated, based on a mountain of existing information from the Treasury Department, that non-resident alien deposits in U.S. banks amounted to no more than $400 billion.  Plaintiffs argue that such an estimate does not comport with the APA. But nothing in the APA forbids a government agency from estimating.

In addition – as explained more extensively below – the IRS’s estimate of how much money could be affected was not central to its decision to proceed with these regulations. The estimate was not even published in the Federal Register; it appears only in the administrative record. The IRS was unconcerned because it had determined that very little of this money would be affected – namely, because these regulations would not deter any rational actor other than a tax fraud from using U.S. banks.

No one with a passport would gainsay that the 70 covered countries diverge significantly in, inter alia, their populations, forms of government, and financial systems. For all their differences, however, those countries have one very important similarity to Canada: each has entered into an exchange treaty with the United States

4. Capital Flight

At the heart of the Bankers Associations’ argument – albeit buried somewhat in their brief – is the contention that the regulations should not have been issued given the negative impact they may have on banks. Plaintiffs claim that the IRS “disregarded” a flood of comments arguing that the new regulations would cause non-residents to withdraw their deposits en masse and thereby trigger substantial and harmful capital flight. The IRS, however, did not ignore those comments; indeed, it dedicated a majority of the preamble to addressing concerns about capital flight.

Many of the comments on this topic related to the privacy of customers’ tax information. In its preamble, the IRS noted that some comments “expressed concerns that the information required to be reported under th[e] regulations might be misused” or disclosed to rogue governments. Those privacy concerns, commenters worried, might trigger an exodus of foreign funds. To address those fears, the IRS described in great detail the privacy protections that were in place to safeguard account information, including the fact that “all of the information exchange agreements to which the United States is a party require that the information exchanged under the agreement be treated and protected as secret by the foreign government” as well as by the IRS. As a result of those protections, the Government concluded that the “regulations should not significantly impact the investment and savings decisions of the vast majority of non-residents.”

Plaintiffs raise one additional, related issue: They claim that the IRS ignored the massive capital flight that took place after the Canadian reporting requirements became effective in January 2000.  The IRS, by contrast, contends that the alleged Canadian capital flight is a fiction: While the amount of Canadian interest-bearing deposits may have dipped after the reporting requirements were issued, they climbed back up shortly after that.

Commentary update: The Texas Bankers Association has reported that $500 million of foreign deposits has expatriated from Texas banks, and the Texas Bankers Association will file an Appeal to this decision.

LexisNexis FATCA Compliance Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

Posted in FATCA, information exchange | Tagged: , , | 2 Comments »

OECD Global Automatic Information Exchange Framework Released

Posted by William Byrnes on February 14, 2014


On target with its previously announced timelines, February 13 the OECD released the Standard for Automatic Exchange of Financial Account Information Common Reporting Standard with an accompanying Press Release and Background Information Brief.  Below are pertinent excerpts of the Press Release, Background Information Brief, and the new global Standard for Automatic Exchange.

Developed by the OECD together with G20 countries, the standard calls on jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.  The OECD will formally present the standard for the endorsement of G20 finance ministers during a 22-23 February meeting in Sydney, Australia.  The OECD is expected to deliver a detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.

Presenting the new standard, OECD Secretary-General Angel Gurría said: “This is a real game changer. Globalisation of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence. This new standard on automatic exchange of information will ramp up international tax co-operation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”

What are the main differences between the standard and FATCA?

The standard consists of a fully reciprocal automatic exchange system from which US specificities have been removed. For instance, it is based on residence and unlike FATCA does not refer to citizenship. Terms, concepts and approaches have been standardised allowing countries to use the system without having to negotiate individual Annexes. Unlike FATCA the standard does not provide for thresholds for pre-existing individual accounts, but it includes a residence address test building on the EU savings directive. It also provides for a simplified indicia search for such accounts. Finally, it has special rules dealing with certain investment entities where they are based in jurisdictions that do not participate in the automatic exchange under the standard.

More than 40 countries have committed to early adoption of the standard. The Global Forum on Transparency and Exchange of Information for Tax Purposes, hosted by the OECD, brings together 121 jurisdictions worldwide. It has been mandated by the G20 to monitor and review implementation of the standard. 

Single Global Standard for Automatic Exchange

Under the single global standard jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Part I of this report gives an overview of the standard. Part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together make up the standard.

The Report sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

To prevent taxpayers from circumventing the CRS it is specifically designed with a broad scope across three dimensions:

  • The financial information to be reported with respect to reportable accounts includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets.
  • The financial institutions that are required to report under the CRS do not only include banks and custodians but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies.
  • Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the individuals that ultimately control these entities.

The CRS also describes the due diligence procedures that must be followed by financial institutions to identify reportable accounts.

Sources of Excerpts:

OECD delivers new single global standard on automatic exchange of information, OECD Press Release (February 13, 2014).

Automatic Exchange of Financial Account Information, Background Information Brief, OECD (February 13, 2014).

Standard for Automatic Exchange of Financial Account Information Common Reporting Standard, OECD (released February 13, 2014).

LexisNexis FATCA Compliance Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

Posted in FATCA, information exchange, OECD | Tagged: , , | 1 Comment »

106 Swiss Banks seek Non-Prosecution Agreements and Non-Target Letter with the DOJ (but twice that, did not…)

Posted by William Byrnes on January 31, 2014


free chapter download here —> http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2457671   Number of Pages in PDF File: 58

On January 25, Kathryn Keneally, assistant attorney general of the Justice Department’s Tax Division, served as the keynote speaker for the American Bar Association Section of Taxation 2014 Midyear Meeting. to provide agency updates – including on the Switzerland banks non-prosecution agreement program that expired December 31.  

David Voreacos of Bloomberg News reported that Kathryn Keneally, in her keynote remarks, stated that 106 Swiss banks (of approximately 300 total) filed the requisite letter of intent to join the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“) by the December 31, 2013 deadline.  Renown attorney Jack Townsend reported on his blog on December 31st a list of 47 Swiss banks that had publicly announced the intention to submit the letter of intent, as well as each bank’s category for entry: six announced seeking category 4 status, eight for category 3, thirty-three for category 2.  106 is a large jump from the mid-December report by the international service of the Swiss Broadcasting Corporation (“SwissInfo”) that only a few had filed for non prosecution with the DOJ’s program (e.g. Migros Bank, Bank COOP, Valiant, Berner Kantonalbank and Vontobel). [1]

SwissInfo reported that Migros Bank selected Program Category 2 because “370 of its 825,000 clients, mostly Swiss citizens residing temporarily in the US or clients with dual nationality”, met the criteria of US taxpayer.  Valiant told SwissInfo that “an internal review showed it had never actively sought US clients or visited Americans to drum up business. The bank said less than 0.1% of its clients were American.”   The DOJ reported that in July 2013, Liechtensteinische Landesbank AG, a bank based in Vaduz, Liechtenstein, entered into a non-prosecution agreement and agreed to pay more than $23.8 million stemming from its offshore banking activities, and turned over more than 200 account files of U.S. taxpayers who held undeclared accounts at the bank.

William R. Davis and Lee A. Sheppard of Tax Analysts’ Worldwide Tax Daily reported that “one private practitioner estimated that some 350 banks holding 40,000 accounts have not come in.” (see “ABA Meeting: Keneally Reports Success With Swiss Bank Program”, Jan. 28, 2014, 2014 WTD 18-3.)

Two court orders entered in November 2013 in a New York federal court will further aid the offshore compliance investigations by authorizing the IRS to serve what are known as “John Doe” summonses on five banks to obtain information about possible tax fraud by individuals whose identities are unknown.  The John Doe summonses direct the five banks to produce records identifying U.S. taxpayers holding interests in undisclosed accounts at Zurcher Kantonalbank (ZKB) and its affiliates in Switzerland and at The Bank of N.T. Butterfield & Son Limited (Butterfield) and its affiliates in Switzerland, the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta and the United Kingdom.  The summonses also direct the five banks to produce information identifying foreign banks that used ZKB’s and Butterfield’s correspondent accounts at the five banks to service U.S. clients.

Swiss banks Wegelin ceased operations because of the DOJ investigation and its consequent guilty plea.  Bank Frey followed suit because of the DOJ investigation and costs of future compliance with FATCA (its former head of private banking was indicted, and an > attorney in the same indictment pled guilty to conspiracy to commit tax fraud <).  Frey bank, in a November 28, 2013 statement, defended itself: “In October, the former Bank Frey & Co. AG decided to cease its banking activities and to terminate all of its client relationships. Beforehand, the Bank verified the tax compliance of all its US clients, and an external auditor confirmed so. In addition, the Bank examined all of its other clients to determine whether they had any link to the US. Again, an external auditor checked and confirmed these findings. As a result, it was determined that Bank Frey did not have any clients with potential US tax issues.”

What is the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks?

The Tax Division of the Department of Justice > released a statement on December 12 < strongly encouraging Swiss banks wanting to seek non-prosecution agreements to resolve past cross-border criminal tax violations to submit letters of intent by a Dec. 31, 2013 deadline required by the Program for Non-Prosecution Agreements or Non-Target Letters (the “Program“).  The Program was announced on Aug. 29, 2013, in a > joint statement < signed by Deputy Attorney General James M. Cole and Ambassador Manuel Sager of Switzerland (> See the Swiss government’s explanation of the Program < ).  Switzerland’s Financial Market Supervisory Authority (FINMA) has issued a deadline of Monday, December 16, 2013 for a bank to inform it with its intention to apply for the DOJ’s Program.[2]

The DOJ statement described the framework of the Program for Non-Prosecution Agreements: every Swiss bank not currently under formal criminal investigation concerning offshore activities will be able to provide the cooperation necessary to resolve potential criminal matters with the DOJ.  Currently, the department is actively investigating the Swiss-based activities of 14 banks.  Those banks, referred to as Category 1 banks in the Program, are expressly excluded from the Program.  Category 1 Banks against which the DoJ has initiated a criminal investigation as of 29 August 2013 (date of program publication).

On November 5, 2013 the Tax Division of the DOJ had released > comments about the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks < .

Swiss banks that have committed violations of U.S. tax laws and wished to cooperate and receive a non-prosecution agreement under the Program, known as Category 2 banks, had until Dec. 31, 2013 to submit a letter of intent to join the program, and the category sought. 

To be eligible for a non-prosecution agreement, Category 2 banks must meet several requirements, which include agreeing to pay penalties based on the amount held in undeclared U.S. accounts, fully disclosing their cross-border activities, and providing detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest.  Providing detailed information regarding other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed is also a stipulation for eligibility. The Swiss Federal Department of Finance has released a > model order and guidance note < that will allow Swiss banks to cooperate with the DOJ and fulfill the requirements of the Program.

The DOJ’s November comments responded to such issues as: (a) Bank-specific issues and issues concerning individuals, (b) Choosing which category among 2, 3, or 4, (c) Qualifications of independent examiner (attorney or accountant), (d) Content of independent examiner report, (e) Information required under the Program – no aggregate account data, (f) Penalty calculation – permitted reductions, (g) Category 4 banks – retroactive application of FATCA Annex II, paragraph II.A.1, and (h) Civil penalties.

Regarding which category to file under, the DOJ replied: “Each eligible Swiss bank should carefully analyze whether it is a category 2, 3 or 4 bank. While it may appear more desirable for a bank to attempt to position itself as a category 3 or 4 bank to receive a non-target letter, no non-target letter will be issued to any bank as to which the Department has information of criminal culpability. If the Department learns of criminal conduct by the bank after a non-target letter has been issued, the bank is not protected from prosecution for that conduct. If the bank has hidden or misrepresented its activities to obtain a non-target letter, it is exposed to increased criminal liability.”

Category 2 Banks against which the DoJ has not initiated a criminal investigation but have reasons to believe that that they have violated US tax law in their dealings with clients are subject to fines of on a flat-rate basis.  Set scale of fine rates (%) applied to the untaxed US assets of the bank in question:

– Existing accounts on 01.08.2008: 20%
– New accounts opened between 01.08.2008 and 28.02.2009: 30%
– New accounts after 28.02.2009: 50%

Category 2 banks must delivery of information on cross-border business with US clients, name and function of the employees and third parties concerned, anonymised data on terminated client relationships including statistics as to where the accounts re-domiciled.

Category 3 banks have no reason to believe that they have violated US tax law in their dealings with clients and that can have this demonstrated by an independent third party. A category 3 bank must provide to the IRS the data on its total US assets under management and confirmation of an effective compliance programme in force.

Category 4 banks are a local business in accordance with the FATCA definition.

Regarding the requirement of the independence of the qualified attorney or accountant examiner, the DOJ stated that the examiner “is not an advocate, agent, or attorney for the bank, nor is he or she an advocate or agent for the government. He or she must provide a neutral, dispassionate analysis of the bank’s activities. Communications with the independent examiner should not be considered confidential or protected by any privilege or immunity.”  The attorney / accountant’s report must be substantive, detailed, and address the requirements set out in the DOJ’s non-prosecution Program.  The DOJ stated that “Banks are required to cooperate fully and “come clean” to obtain the protection that is offered under the Program.”

In the ‘bottom line’ words of the DOJ: “Each eligible Swiss bank should carefully weigh the benefits of coming forward, and the risks of not taking this opportunity to be fully forthcoming. A bank that has engaged in or facilitated U.S. tax-related or monetary transaction crimes has a unique opportunity to resolve its criminal liability under the Program. Those that have criminal exposure but fail to come forward or participate but are not fully forthcoming do so at considerable risk.”

[1] See Mathew Allen, US tax deal could prove deadly for small banks, SwissInfo, December 10, 2013, available at http://www.swissinfo.ch/eng/politics/US_tax_deal_could_prove_deadly_for_small_banks.html?cid=37506872

[2] See Supermarket banks sign up to US tax probe, SwissInfo, December 11, 2013, available at http://www.swissinfo.ch/eng/business/Supermarket_banks_sign_up_to_US_tax_probe.html?cid=37516028 (accessed December 12, 2013).

FATCA Compliance Program and Manual

book coverFifty contributing authors from the professional and financial industry provide 600 pages of expert analysis within the LexisNexis® Guide to FATCA Compliance (2nd Edition): many perspectives – one voice crafted by the primary author William Byrnes.

The LexisNexis® Guide to FATCA Compliance (2nd Edition) comprises 34 Chapters grouped in three parts: compliance program (Chapters 1–4), analysis of FATCA regulations (Chapters 5–16) and analysis of FATCA’s application for certain trading partners of the U.S. (Chapters 17–34), including intergovernmental agreements as well as the OECD’s TRACE initiative for global automatic information exchange protocols and systems. The 34 chapters include many practical examples to assist a compliance officer contextualize the regulations, IGA provisions, and national rules enacted pursuant to an IGA.  Chapters include by example an in-depth analysis of the categorization of trusts pursuant to the Regulations and IGAs, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within new BRIC and European country chapters.

Posted in Compliance, FATCA, Financial Crimes, information exchange | Tagged: , , , , | 2 Comments »

LexisNexis® Guide to FATCA Compliance release …

Posted by William Byrnes on May 3, 2013


Over 400 pages of compliance analysis !! now available with the 20% discount code link in this flier –> LN Guide to FATCA_flier.

The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies,  in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions.  A sample chapter from the 25 is available on LexisNexis: http://www.lexisnexis.com/store/images/samples/9780769853734.pdf

book coverContributing FATCA Expert Practitioners

Kyria Ali, FCCA is a member of the Association of Chartered Certified Accountants (“ACCA”) of Baker Tilly (BVI) Limited.

Michael Alliston, Esq. is a solicitor in the London office of Herbert Smith Freehills LLP.

Ariene d’Arc Diniz e Amaral, Adv.  is a Brazilian tax attorney of Rolim, Viotti & Leite Campos Advogados.

Maarten de Bruin, Esq. is a partner of Stibbe Simont. 

Jean-Paul van den Berg, Esq.  is a tax partner of Stibbe Simont.

Amanda Castellano, Esq. spent three years as an auditor with the Internal Revenue Service.

Luzius Cavelti, Esq. is an associate at Tappolet & Partner in Zurich.

Bruno Da Silva, LL.M.  works at Loyens & Loeff, European Direct Tax Law team and is a tax treaty adviser for the Macau special administrative region of the People’s Republic of China.

Prof. J. Richard Duke, Esq. is an attorney admitted in Alabama and Florida specializing over forty years in income and estate tax planning and compliance, as well as asset protection, for high net wealth families.  He served as Counsel to the Ludwig von Mises Institute for Austrian Economics 1983-1989.

Dr. Jan Dyckmans, Esq. is a German attorney at Flick Gocke Schaumburg in Frankfurt am Main.

Arne Hansen is a legal trainee of the Hanseatisches Oberlandesgericht (Higher Regional Court of Hamburg), Germany.

Mark Heroux, J.D. is a Principal in the Tax Services Group at Baker Tilly who began his career in 1986 with the IRS Office of Chief Counsel.

Rob. H. Holt, Esq. is a practicing attorney of thirty years licensed in New York and Texas representing real estate investment companies.

Richard Kando, CPA (New York) is a Director at Navigant Consulting and served as a Special Agent with the IRS Criminal Investigation Division where he received the U.S. Department of Justice – Tax Division Assistant Attorney General’s Special Contribution Award.

Denis Kleinfeld, Esq., CPA. is a renown tax author over four decades specializing in international tax planning of high net wealth families.  He is Of Counsel to Fuerst Ittleman David & Joseph, PL, in Miami, Florida and was employed as an attorney with the Internal Revenue Service in the Estate and Gift Tax Division.

Richard L. Knickerbocker, Esq.  is the senior partner in the Los Angeles office of the Knickerbocker Law Group and the former City Attorney of the City of Santa Monica.

Saloi Abou-Jaoude’ Knickerbocker Saloi Abou-Jaoude’ Knickerbocker is a Legal Administrator in the Los Angeles office of the Knickerbocker Law Group concentrated on shari’a finance.

Jeffrey Locke, Esq.  is Director at Navigant Consulting.

Josh Lom works at Herbert Smith Freehills LLP.

Prof. Stephen Polak is a Tax Professor at Thomas Jefferson School of Law’s International Tax & Financial Services Graduate Program where he lectures on Financial Products, Tax Procedure and Financial Crimes. As a U.S. Senior Internal Revenue Agent, Financial Products and Transaction Examiner he examined exotic financial products of large multi-national corporations. Currently, Prof. Polak is assigned to U.S. Internal Revenue Service’s three year National Research Program’s as a Federal State and Local Government Specialist where he examines states, cities, municipalities, and other governmental entities.

Dr. Maji C. Rhee is a professor of Waseda University located in Tokyo.

Jean Richard, Esq.  a Canadian attorney, previously worked for the Quebec Tax Department, as a Senior Tax Manager with a large international accounting firm and as a Tax & Estate consultant for a pre-eminent Canadian insurance company.  He is currently the Vice President and Sr. Wealth Management Consultant of the BMO Financial Group.

Michael J. Rinaldi, II, CPA. is a renown international tax accountant and author, responsible for the largest independent audit firm in Washington, D.C.

Edgardo Santiago-Torres, Esq., CPA, is also a Certified Public Accountant and a Chartered Global Management Accountant, pursuant to the AICPA and CIMA rules and regulations, admitted by the Puerto Rico Board of Accountancy to practice Public Accounting in Puerto Rico, and an attorney.

Hope M. Shoulders, Esq. is a licensed attorney in the State of New Jersey whom has previously worked for General Motors, National Transportation Safety Board and the Department of Commerce.

Jason Simpson, CAMS is the Director of the Miami office for Global Atlantic Partners, overseeing all operations in Florida, the Caribbean and most of Latin America. He has worked previously as a bank compliance employee at various large and mid-sized financial institutions over the past ten years.  He has been a key component in the removal of Cease and Desist Orders as well as other written regulatory agreements within a number of Domestic and International Banks, and designed complete AML units for domestic as well as international banks with over three million clients.

Dr. Alberto Gil Soriano, Esq.  worked at the European Commission’s Anti-Fraud Office in Brussels, and most recently at the Legal Department of the International Monetary Fund’s Financial Integrity Group in Washington, D.C. He currently works at the Fiscal Department of Uría Menéndez Abogados, S.L.P in Barcelona (Spain).

Lily L. Tse, CPA. is a partner of Rinaldi & Associates (Washington, D.C.).

Dr. Oliver Untersander, Esq. is partner at Tappolet & Partner in Zurich.

Mauricio Cano del Valle, Esq. is a Mexican attorney who previously worked for the Mexican Ministry of Finance (Secretaría de Hacienda) and Deloitte and Touche Mexico.  He was Managing Director of the Amicorp Group Mexico City and San Diego offices, and now has his own law firm. 

John Walker, Esq. is an accomplished attorney with a software engineering and architecture background.

Bruce Zagaris, Esq. is a partner at the Washington, D.C. law firm Berliner, Corcoran & Rowe, LLP. 

Prof. William Byrnes was a Senior Manager then Associate Director at Coopers & Lybrand, before joining academia wherein he became a renowned author of 38 book and compendium volumes, 93 book & treatise chapters and supplements, and 800+ articles.  He is Associate Dean of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Dr. Robert J. Munro is the author of 35 published books is a Senior Research Fellow and Director of Research for North America of CIDOEC at Jesus College, Cambridge University, and head of the anti money laundering studies of Thomas Jefferson School of Law’s International Taxation & Financial Services Program.

Posted in Compliance, Estate Tax, Financial Crimes, information exchange, Money Laundering, OECD, Reporting, Tax Policy, Taxation, Wealth Management | Tagged: , , , , , , | 1 Comment »

LexisNexis® Guide to FATCA Compliance

Posted by William Byrnes on March 1, 2013


The LexisNexis® Guide to FATCA Compliance was designed in consultation, via numerous interviews and meetings, with government officials, NGO staff, large financial institution compliance officers, investment fund compliance officers, and trust companies, from North and South America, Europe, South Africa, and Asia, and in consultation with contributors who are leading industry experts. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions. Thus, the challenges of the FATCA Compliance Officer are approached from several perspectives and contextual backgrounds.

This edition will provide the financial enterprise’s FATCA compliance officer the tools for developing a best practices compliance strategy, starting with determining what information is needed for planning the meetings with outside FATCA experts.

This 330 page Guide contains three chapters written specifically to guide a financial institution’s lead FATCA compliance officer in designing a plan of internal action within the enterprise and interaction with outside FATCA advisors with a view of best leveraging available resources and budget [see Chapters 2, 3, and 4].

This Guide includes a practical outline of the information that should be requested by, and provided to, FATCA advisors who will be working with the enterprise, and a guide to the work flow and decision processes.

Click here to pre-order the LexisNexis® Guide to FATCA Compliance!  Remember that only US customers can buy on the US Lexis store.

Chapter 1 Introduction
Chapter 2 Practical Considerations for Developing a FATCA Compliance Program
Chapter 3 FATCA Compliance and Integration of Information Technology
Chapter 4 Financial Institution Account Remediation
Chapter 5 FBAR & 8938 FATCA Reporting
Chapter 6 Determining U.S. Ownership Under FATCA
Chapter 7 Foreign Financial Institutions
Chapter 8 Non-Financial Foreign Entities
Chapter 9 FACTA and the Insurance Industry
Chapter 10 Withholding and Qualified Intermediary Reporting
Chapter 11 Withholding and FATCA
Chapter 12 ”Withholdable” Payments
Chapter 13 Determining and Documenting the Payee
Chapter 14 Framework of Intergovernmental Agreements
Chapter 15 Analysis of Current Intergovernmental Agreements
Chapter 16 UK-U.S. Intergovernmental Agreement and Its Implementation
Chapter 17 Mexico-U.S. Intergovernmental Agreement and Its Implementation
Chapter 18 Japan-U.S. Intergovernmental Agreement and Its Implementation
Chapter 19 Switzerland-U.S. Intergovernmental Agreement and Its Implementation
Chapter 20 Exchange of Tax Information and the Impact of FATCA for Germany
Chapter 21 Exchange of Tax Information and the Impact of FATCA for The Netherlands
Chapter 22 Exchange of Tax Information and the Impact of FATCA for Canada
Chapter 23 Exchange of Tax Information and the Impact of FATCA for The British
Virgin Islands
Chapter 24 European Union Cross Border Information Reporting
Chapter 25 The OECD, TRACE Program, FATCA and Beyond
Index

Posted in Compliance, information exchange, OECD, Reporting, Tax Policy, Taxation | Tagged: , , , , , , , | 1 Comment »

IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives

Posted by William Byrnes on September 18, 2010


The IRS released proposals for FATCA guidance on August 27, 2010, in Notice 2010-60.  The notice outlines the shape of the regulations and raises grave concerns for a wide swath of transactions that have an offshore component— from foreign investments to captives and beyond.

Today’s analysis by our Experts William Byrnes and Robert Bloink is located at AdvisorFX Journal IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives.

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

Posted in Compliance, information exchange | Tagged: , , , , , , | Leave a Comment »

Historical Anecdotes Regarding the European Union Savings Directive

Posted by William Byrnes on November 1, 2009


Historical Anecdotes Regarding the European Union Savings Directive

This week I continue in my historical anecdotes on the subject of cross-border tax (financial) information exchange and cross-border tax collection in the context of the European Union Tax Savings Directive.  In our live course webinars, we will continue our indepth address of the related compliance issues.

2003 Savings Directive Agreement

On 21 January 2003, the EU Finance Ministers meeting within the Council of Ministers (“the ECOFIN Council”) reached a political agreement on a “tax package”, which comprises a Code of Conduct for business taxation, a proposal for a Community Directive on the taxation of interest and royalty payments and a proposal for a Community Directive on the taxation of income from savings (“the Savings Directive”).  Furthermore on 7 March the ECOFIN Council agreed the text of the Savings Directive, although the Directive has not yet been formally adopted.

In its current form, the Savings Directive only applies to interest paid to individuals, and in particular it does not apply to companies.

Article 2

Definition of beneficial owner

1. For the purposes of this Directive, ‘beneficial owner’ means any individual who receives an interest payment or any individual for whom an interest payment is secured…”[1]

The Savings Directive requires an automatic, cross-border, exchange of information between the EU members states and their territories.[2]

EXCHANGE OF INFORMATION

Article 8

Information reporting by the paying agent

1. Where the beneficial owner is resident in a Member State other than that in which the paying agent is established, the minimum amount of information to be reported by the paying agent to the competent authority of its Member State of establishment shall consist of:

(a) the identity and residence of the beneficial owner established in accordance with Article 3;

(b) the name and address of the paying agent;

(c) the account number of the beneficial owner or, where there is none, identification of the debt claim giving rise to the interest;

(d) information concerning the interest payment in accordance with paragraph 2.

Article 9

Automatic exchange of information

1. The competent authority of the Member State of the paying agent shall communicate the information referred to in Article 8 to the competent authority of the Member State of residence of the beneficial owner.

2. The communication of information shall be automatic and shall take place at least once a year, within six months following the end of the tax year of the Member State of the paying agent, for all interest payments made during that year.

Three EU members, the territories and dependencies of the UK, and to date the accession state of Switzerland have been granted a transitional period of time to implement automatic exchange of information.  The transitional period of time is to last until all listed non-EU members, i.e.  Switzerland, Monaco, Andorra, Liechtenstein, and the USA, have entered into automatic exchange of information with the EU member states.  During the transition, these States and jurisdictions must collect a withholding tax of which 75% of that tax must then be forward to the Member State of residence of the beneficial owner of the interest.  

Article 11

Withholding tax

1. During the transitional period referred to in Article 10, where the beneficial owner is resident in a Member State other than that in which the paying agent is established, Belgium, Luxembourg and Austria shall levy a withholding tax at a rate of 15 % during the first three years of the transitional period, 20 % for the subsequent three years and 35 % thereafter.

Each of the twenty-five members (including the accession of the new group of ten members), their relevant territories, and the non-EU members acceding to the Directive is allowed to interpret the Directive for legislative implementation under its national law.

Tax Based Elasticity and Capital Flight

The Savings Directive recognises the issue of capital flight due to the sensitivity of taxpayers to exchange of information.  At paragraph 24 it states, “So long as the United States of America, Switzerland, Andorra, Liechtenstein, Monaco, San Marino and the relevant dependent or associated territories of the Member States do not all apply measures equivalent to, or the same as, those provided for by this Directive, capital flight towards these countries and territories could imperil the attainment of its objectives. Therefore, it is necessary for the Directive to apply from the same date as that on which all these countries and territories apply such measures.calls for.”  This capital flight issue is based upon three historical benchmarks regarding the imposition of withholding tax on interest and the immediate and substantial impact that withholding tax on interest has on capital flight.  The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the capital flight of hundreds of million of dollars and the corresponding creation of the London euro-dollar bond market; (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks; and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy of over a billion DM, so substantial that the tax was repealed but four months after imposition.  Please refer to my earlier blogticles for further information about this topic.

Please contact me with any comments or follow up research materials.

Prof. William Byrnes wbyrnes@tjsl.edu


[1] COUNCIL DIRECTIVE 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments.

[2] The directive does not apply to Bermuda, but Bermuda has entered into agreements that have equivalent measures.

Posted in Compliance, information exchange, Legal History, Taxation | Tagged: , , , , | 1 Comment »

Mutual Assistance in the Recovery of Tax Claims

Posted by William Byrnes on October 26, 2009


Historical anecdotes relating to tax information exchange and cross-border assistance with tax collection (continued)

This week I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection.  In this blogticle I turn to the OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims and the EU Directive on the Mutual Assistance for the Recovery of Claims  In our live webinars in the tax treaty course, Marshall Langer will continue to address these issues indepthly.

1981 OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims

This 1981 OECD Model provides for both the exchange of information (article 5) and the assistance in recovery (article 6), which state respectively:

EXCHANGE OF INFORMATION

At the request of the applicant State the requested State shall provide any information useful to the applicant State in the recovery of its tax claim and which the requested State has power to obtain for the purpose of recovering its own tax claims.

ASSISTANCE IN RECOVERY

1. At the request of the applicant State the requested State shall recover tax claims of the first-mentioned State in accordance with the laws and administrative practice applying to the recovery of its own tax claims, unless otherwise provided by this Convention.

Procedurally, the documentation must state (1) the authority requesting, (2) name, address and other particulars for identification of the taxpayer, (3) nature and components of the tax claim, and (4) assets of which the Requesting State is aware of from which the claim may be recovered.  The nature of the tax claim must include documentary evidence in the form of the instrumentality establishing that the tax is determined, that it is due, and that it is without further recourse to contest under the Requesting State’s laws.  The applicable Statute of Limitation is of the Requesting State.

The Requested State’s obligation is limited, as under the OECD DTA Model Article 26 and 27, if the request requires the Requested State to go beyond its own or the Requesting State’s capacity to either provide information or take administrative actions pursuant to their respective internal laws.  The Requesting State has a duty to exhaust its own reasonable collection remedies before making the request which procedural requirement may be relied upon by the Requested State.  All requests are also limited by ordre public.

1988 Convention On Mutual Administrative Assistance In Tax Matters

Coming into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, this multilateral convention was originally agreed in 1988.  The Convention provides for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.

Tax covered includes income, capital gains, wealth, social security, VAT and sales tax, excise tax, immovable property tax, movable property tax such as automobiles, and any other tax save customs duties.  The tax also includes any penalties and recovery costs.  The tax may have been levied by the State and any of its subdivisions. 

The convention allows the request of information regarding the assessment, collection, recovery and enforcement of tax.  The information may be used for criminal proceedings on a case-by-case basis pursuant to the Requested State agreeing, unless the States have waived the requirement of agreement.

Spontaneous provision of information shall be provided without request when a State with information:

(1) has “grounds for supposing” a loss of tax to another State,

(2) knows that a taxpayer receives a tax reduction in its State that would increase the tax in the other State,

(3) is aware of business dealings between parties located in both States that saves tax,

(4) has grounds for supposing an artificial intro-group transfer of profits, and

(5) that was obtained from the other State has led to further information about taxes in the other State.  

Similar to the OECD Model Conventions above, procedurally the requesting documentation must state (1) the authority requesting and (2) name, address and other particulars for identification of the taxpayer.  For an information request, the document should include in what form the information should be delivered.  For a tax collection assistance request, (1) the tax must be evidenced by documentation in the form of the instrumentality establishing that the tax is determined, that it is due and that it is without further recourse to contest, (2) the nature and components of the tax claim, and (3) assets of which the Requesting State is aware of from which the claim may be recovered. 

This Multilateral Convention’s limitations follow the 1981 and 2003 OECD Model, but further provide for a non-discrimination clause.  The non-discrimination clause limits providing assistance if such assistance would lead to discrimination between a requested State’s national and requesting State’s nationals in the same circumstances.

2001 EU Directive on the Mutual Assistance for the Recovery of Claims relating to Certain Levies, Duties, Taxes and Other Measures

The OECD is not alone in its quest to improve tax information exchanges.  On June 15, 2001 the EU Commission issued a Directive that amended a previous 1976 Directive which substantially changed the impact of that 1976 Directive (on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and in respect of value added tax and certain excise duties).

The 2001 Directive provided that Member States enact regulations that provide for the implementation of a number of EU Directives on mutual assistance between Member States of the Community on the provision of information in respect of, and the recovery in the State of, claims made by Other Member States in respect of debts due to the Member State in question from:

  • Import & Export Duties
  • Value Added Tax
  • Excise duties on manufactured tobacco, alcohol and alcoholic beverages and mineral oils
  • Taxes on income and capital
  • Taxes on insurance premiums
  • Interest, administrative penalties and fines, and costs incidental to these claims (with the exclusion of any sanction in respect of which the act or commission giving rise to the sanction if committed in the State would be criminal in nature)
  • Refunds, interventions and other measures forming part of the system of financing the European Agricultural Guidance and Guarantee Fund
  • Levies and other duties provided for under the common organization of the market of the market for the sugar section

In summary, the Directive provides for one Member State’s competent authority at the request of another Member State’s competent authority to disclose to the requester’s competent authority any information in relation to a claim which is required to be disclosed by virtue of the Directive.
On receipt of a request, the Revenue Commissioners can decline a request to provide information in the following circumstances:

– if the information would, in the opinion of the Competent Authority, be liable to prejudice the security of the State or be contrary to public policy;

– if the Competent Authority would not be able to obtain the information requested for the purpose of recovering a similar claim, or

– if the information, in the opinion of the Competent Authority, would be materially detrimental to any commercial, industrial or professional secrets.

Any information provided to a competent authority under the enacting regulations pursuant to the Directive can only be used for the purposes of the recovery of a claim or to facilitate legal proceedings to the recovery of such a claim.

Under the Directive, the collecting Member State is obliged to collect the amount of a claim specified in any request received from a competent authority in another Member State and remit the amount collected to that competent authority.

In the Tax Treaties course, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above regarding the IRS efforts to collect tax via assistance from foreign states.  For further tax treaty course information, please contact me at William Byrnes (wbyrnes@tjsl.edu).

Posted in Compliance, Financial Crimes, information exchange, Legal History, OECD, Taxation | Tagged: , , , , , , | 1 Comment »

Historical Anecdotes of Tax Information Exchange (continued)

Posted by William Byrnes on October 22, 2009


This week I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection.  In this blogticle I turn to the FATF, Edwards and KPMG reports, OECD and Offshore Group of Bank Supervisors.  In our live webinars, Marshall Langer will continue to address these issues indepthly.

1990 – 2001 Financial Action Task Force (FATF)

In 1990, the FATF established forty recommendations as an initiative to combat the misuse of financial systems by persons laundering drug money. In 1996, the FATF revised its forty recommendations to address “evolving money laundering typologies”.  The 1996 forty recommendations developed into the international anti-money laundering standard, having been endorsed by more than 130 countries.  In 2001, because of 9/11, the FATF issued eight terrorist financing special recommendations to combat the funding of terrorist acts and terrorist organizations.  Regarding the micro-economies, the activities of the Offshore Group of Banking Supervisors (OGBS) have lead to agreement with the FATF on ways to evaluate the effectiveness of the money-laundering laws and policies of its members. The difficulty is that only about a half of offshore banking centers are members of OGBS.

See the FATF Methods and Trends page for detailed typologies.

1999 Review Of Financial Regulation In The Crown Dependencies (Edwards Report)

In 1999 and 2000, the UK government in association with the governments of its Crown Dependencies and Overseas Territories assessed the territories financial regulations against international standards and good practice, as well as make recommendations for improvement where any territory fell beneath the standards.  In general the reports concluded that the regulatory regimes were good, given limited resources, but that significant further resources had to be employed.  The primary conclusions of the reports included:

(1) employment of more regulatory resources,

(2) establish an independent regulatory body in each jurisdiction,

(3) maintain records of bearer share ownership,

(4) allow disclosure of beneficial owners’ names to regulators for possible onward transmittal to other jurisdiction’s regulators, and

(5) expand company disclosure with regard to the directors.

2000 KPMG Review Of Financial Regulation in The Caribbean Overseas Territories and Bermuda

In 2000, the UK government in association with the governments of the Caribbean Overseas Territories and Bermuda commissioned the London office of KPMG to assess the territories financial regulations against international standards and good practice, as well as make recommendations for improvement where any territory fell beneath the standards.  A brief example summary for Anguilla and British Virgin Islands (BVI) is below.

Anguilla

KPMG commented that while Anguilla’s offshore regulatory operations are “well-run by skilled officers”, KPMG critiqued that the regulatory operations were not fully in accordance with international standards.  KPMG’s principal recommendations for regulatory refinement were: 

  • Shift responsibility for offshore financial services from the Governor back to the Minister of Finance, specifically the Director of the Financial Services Department.
  • Fight money laundering and other fraud by keeping records of bearer share ownership, allowing, where necessary the disclosure of the owners’ names to Anguilla’s regulators for possible onward transmittal to other jurisdiction’s regulators.
  • Expand the IBC disclosure by including director’s names in the Articles of Incorporation as well as empowering the Registrar of Companies to apply for a Court appointed inspector.
  • Require partnerships to maintain financial records.
  • Enact a new insurance law.
  • Amend the 1994 Fraudulent Dispositions and 1994 Trust Act’s disclosure requirements to prevent insertion in trust documents of clauses hampering legitimate creditors or restricting official investigations.

 The KPMG Report concluded that Anguilla’s ACORN electronic company registration system “enhanced” the regulatory environment.

British Virgin Islands

KPMG commented that while BVI’s offshore regulatory operations are well run, KPMG pointed out that the regulatory operations were not fully in accordance with international standards.  KPMG’s principal recommendations for regulatory refinement were: 

  • Consolidating control of offshore financial services in an independent Financial Services Department (which was renamed the Financial Services Commission), which at the time functioned as the regulatory authority. This required devolving powers of licensing, regulation and supervision from the Governor in Council, composed of the Governor, Attorney General, Chief Minister, and four Ministers.  KPMG urged the FSD to give up its marketing activities.  In 2002 this activity was hived off and reposed in a newly established BVI International Financial Centre.
  • Grant the Registrar of Companies power to initiate an investigation of a company and petition the courts to wind up an IBC.
  • Establish standards, based upon the International Organisation of Securities Commissions, for supervision of mutual funds, drafting a regulatory code affecting all securities and investment ventures, and increasing the Registrar of Mutual Funds’ enforcement powers.
  • Enact enforceable codes of practice for company and trust service providers and increase the supervisor’s regulatory powers.

Influenced by international reports concerning combating money laundering, the BVI passed legislation restricting the anonymity and mobility of bearer shares through requiring them to be held by a licensed financial institution. The anonymity of directors was reduced by requiring information about them to be filed preferably in the Company Registry in the jurisdiction.

2000 Improving Access To Bank Information For Tax Purposes (OECD)

In 2000, the OECD issued Improving Access to Bank Information for Tax Purposes.  The 2000 OECD Report acknowledged that banking secrecy is “widely recognised as playing a legitimate role in protecting the confidentiality of the financial affairs of individuals and legal entities”.  This Report focused on improving exchange of information pursuant to a specific request for information related to a particular taxpayer.  In this regard, it noted that pursuant to its 1998 Report, 32 jurisdictions had already made political commitments to engage in effective exchange of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006.  We have already covered the corresponding TIEAs established in light of this report in a previous blogticle hereunder.   Black/White and Grey lists will be covered in a future blogticle.

2002 Offshore Group Of Banking Supervisors Statement Of Best Practices

In 2002, the OGBS formed a working group to establish a statement of best practices for company and trust service providers. The working group included representatives from the micro-economies of Bahamas, Bermuda, B.V.I., Cayman Islands, Cyprus, Guernsey, Gibraltar, Isle of Man an Jersey and from the OECD members   France, Italy, the Netherlands, the U.K., as well as the relevant NGOs of the FATF, IMF, and OECD.  The terms of reference of the working groups was to “To produce a recommended statement of minimum standards/guidance for Trust and Company Service Providers; and to consider and make recommendations to the Offshore Group of Banking Supervisors for transmission to all relevant international organisations/authorities on how best to ensure that the recommended minimum standards/guidance are adopted as an international standard and implemented on a global basis”.

The Working Group concluded: “There should be proper provision for holding, having access to and sharing of information, including ensuring that – 

       (i)  information  on the ultimate beneficial owner and/or controllers of companies, partnerships and other legal entities, and the trustees, settlor, protector/beneficiaries of trusts is known to the service provider and is properly recorded;

       (ii) any change of client control/ownership is promptly monitored (e.g. in particular where a service provider is administering a corporate vehicle in the form of a “shelf” company or where bearer shares or nominee share holdings are involved); 

       (iii) there is an adequate, effective and appropriate mechanism in place for information to be made available to all the relevant authorities (i.e. law enforcement authorities, regulatory bodies, FIU’s); 

       (iv) there should be no barrier to the appropriate flow of information to the authorities referred to in 3 (iii) above; 

       (v) KYC and transactions information  regarding the clients of the Service Provider is maintained in the jurisdiction in which the Service Provider is located; 

       (vi) there should be no legal or administrative barrier to the flow of information/documentation necessary for the recipient of business from a Service Provider who is an acceptable introducer to satisfy itself that adequate customer due diligence has been undertaken in accordance with the arrangements set out in the Basel Customer Due Diligence paper.

Please contact me with any comments or follow up research materials.  Prof. William Byrnes wbyrnes@tjsl.edu

Posted in information exchange, Legal History, OECD | Tagged: , , , , , , | 2 Comments »

Caribbean Historical Anecdotes of its Financial Centers

Posted by William Byrnes on September 26, 2009


I continue in my historical anecdotes leading back up to the subject of cross-border tax (financial) information exchange and cross-border tax collection.  This week, we start with the United Nations Declaration Regarding Non-Self Governing Territories, which is in the UN Charter, then turn the a few UK Reports about her territories, and the UN and OECS Human Development Indices.

Marshall Langer will be addressing these much more in-depthly during his lectures in October and November.

Chapter XI

Declaration Regarding Non-Self-Governing Territories

Article 73 

Members of the United Nations which have or assume responsibilities for the administration of territories whose peoples have not yet attained a full measure of self-government recognize the principle that the interests of the inhabitants of these territories are paramount, and accept as a sacred trust the obligation to promote to the utmost, within the system of international peace and security established by the present Charter, the well-being of the inhabitants of these territories, and, to this end:

     a. to ensure, with due respect for the culture of the peoples concerned, their political, economic, social, and educational advancement, their just treatment, and their protection against abuses;

     b. to develop self-government, to take due account of the political aspirations of the peoples, and to assist them in the progressive development of their free political institutions, according to the particular circumstances of each territory and its peoples and their varying stages of advancement;

     c. to further international peace and security;

      d. to promote constructive measures of development, to encourage research, and to co-operate with one another and, when and where appropriate, with specialized international bodies with a view to the practical achievement of the social, economic, and scientific purposes set forth in this Article; and

     e. to transmit regularly to the Secretary- General for information purposes, subject to such limitation as security and constitutional considerations may require, statistical and other information of a technical nature relating to economic, social, and educational conditions in the territories for which they are respectively responsible other than those territories to which Chapters XII and XIII apply.

 Article 74 

Members of the United Nations also agree that their policy in respect of the territories to which this Chapter applies, no less than in respect of their metropolitan areas, must be based on the general principle of good-neighbourliness, due account being taken of the interests and well-being of the rest of the world, in social, economic, and commercial matters.

 1999 Partnership For Progress And Prosperity: Britain And Her Overseas Territories 

In 1999, Robin Cook presented to Parliament a White Paper Partnership for Progress and Prosperity: Britain and the Overseas Territories (the “White Paper”).  The White Paper’s primary conclusion was that the Overseas Territories had successfully diversified their economies through developing global market positions in the offshore financial services industry but that the Overseas Territories required reputation maintenance through regulatory enhancement in order to maintain their global market position within this industry.  The White Paper noted that the Caribbean Overseas Territories were potentially susceptible to money laundering and fraud because of their proximity to drug producing and consuming countries, inadequate regulation and strict confidentiality rules. 

 Also, the White Paper proposed that Britain grant full citizenship, i.e. with right of abode, to the Overseas Territories citizens.  But this right of citizenship was not in exchange for implementing the more extensive regulatory regimes in alignment with the OECD Report.  In 2002, the UK enacted the British Overseas Territories Bill[1] in order to fulfil the Government’s commitment, announced in the White Paper, to extend full British citizenship to those who were British Dependent Territories citizens. 

Free Movement of Persons 

Note that the nationals of the US, Netherlands, French, Portugal and Spanish territories have full parent State nationality with rights of abode.  The non-colony status jurisdictions charged further discriminatory treatment, that they did not have the same rights of free movement and abode as the colonial nationals. 

 In its Report, the OECD members targeted trade in capital and services with the stick of sanctions, but did not offer a carrot, much less a lifeline, to the independent micro-economies.  Some Island states’ pundits allege that the OECD drive against tax competition is a geo-political move for re-(economic) colonization.  These commentators propose that the inevitable declining human development impact of the OECD’s drive against tax competition will be a brain drain to the OECD countries via legal and illegal immigration.     

The United Nations Human Development Report for 2009, to be released within a few weeks in October, will address the international issue of the movement of persons. 

The OECS Human Development Report 2002 

Because the UN Human Development Annual Report does not include all the Caribbean Islands, such as the non self-governing former colonies, the OECS Human Development Report is critical for the quantitative measuring and qualitative analysis of social and economic indicators for Eastern Caribbean territories, and to then be able to contrast these to other UN members captured by the UN Report.

It should be noted that the OECS Report noted that the Caribbean financial centers held approximately US$2 trillion in assets from international financial center activities.  The OECS stated that these international financial services contributed foreign exchange to its members’ economies, revenue to its governments, and that the sector created employment while developing human resources and contributing to the growth of technology.  The OECS concluded that the most important impact to the economies from international financial services was economic diversification.[2] 

1990 Gallagher Report 

In 1989, HMG commissioned the Gallagher Report (Survey of Offshore Finance Sectors of the Caribbean Dependent Territories) with the intent to review whether its territories’ offshore financial services sectors regulations met international standards.  Overall, the Gallagher Report presented proposals to extend the range and scope of offshore financial services in the COTs through the introduction of new measures designed to improve the regulatory framework especially with relation to banks, trusts, insurance and company management.  The Gallagher Report made specific recommendations to several jurisdictions.

By example, with regard to the British Virgin Islands, the Gallagher Report presented proposals to extend the range and scope of offshore financial services through the introduction of new measures designed to improve the regulatory framework as it relates especially to banks, trusts, insurance and company management.  Following the Gallagher Report’s proposals, the BVI government revised in 1990 the 1984 IBC Act, enacted a modern Banks & Trust Companies Act to replace the 1972 legislation; and passed the Company Management Act requiring companies providing registration and managerial services to be licensed.  In 1993, BVI enacted a Trustee (Amendment) Act in order to modernise the 1961 Trust Ordinance and the following year passed the 1994 Insurance Act.

With regard to Anguilla, Gallagher’s Report criticised the lack of up-to-date legislation, inadequate supervision of its financial sectors, and a confidentiality statute that encouraged “the type of business best avoided”.  Gallagher’s Report recommended the enactment of three draft laws, as well as the repeal of the Confidential Relationships Ordinance 1981.[3]  Following Gallagher’s Report, in 1992 the British Government aid agency engaged the consultancy firm of Mokoro to advise the Government of Anguilla on its economic strategy for the 21st century.  The Mokoro Report concluded that the development of additional economic activity in Anguilla principally required the development of the financial sector.  The 1993 Report stated that the financial sector’s socio-economic impact would be: 

  • Substantial additional government revenue.
  • Sizeable increase in the contribution of professional services to the GDP (Gross Domestic Product).
  • Range of new employment opportunities for young people.
  • Increase in professional trading.
  • Inward migration of Anguillans living overseas.
  • Increase in the number of visitors and a decrease in their seasonability.

As a result of the Report, Anguilla received a three-year 10.5 million English pound grant from the Minister for Overseas Development to research and to develop a Country Policy Plan.  In 1994, Anguilla updated its international financial center through enacting a package of twelve statutes.

Please contact me for further information or research that you would like to share on these topics at http://www.llmprogram.org.


[1] Bill 40 of 2001-2002 was enacted to fulfil the Government’s commitment, announced in March 1999 in its White Paper, to extend full British citizenship to those who were British Dependent Territories citizens.

[2] 2002 OECS Report p.23.

[3] The Confidential Relationships Ordinance, 1981, made it illegal to give other Governments information, including information regarding tax offences.

Posted in information exchange, Legal History, OECD, Taxation | Tagged: , , , , , , , | Leave a Comment »

Critiques of the OECD Forum On Harmful Tax Competition

Posted by William Byrnes on September 12, 2009


THE OECD FORUM REGARDING HARMFUL TAX COMPETITION[1]

Over the past several weeks, I have written a series of blogticles addressing issues of tax information exchange.  I will now pull back to circle around this subject, touching upon several forums, reports, and initiatives that either led up to or occurred during the OECD Forum.  Recognizing that the Forum has obtained steam due to the global financial slump – I will address current initiatives and impacts after the historical annotation.  Importantly, I will need to research and address the most recent OECD Forum in Mexico wherein Dr. Dan Mitchell, a press commentator for the Cato Institute, reported that the OECD is attempting to resuscitate the debunked arguments for capital export neutrality.[2]

1998 HARMFUL TAX COMPETITION: AN EMERGING GLOBAL ISSUE (OECD)

Let us begin this look back with a review of the seminal 1998 OECD Report .  In 1998, the Organization of Economic Cooperation and Development (“OECD”) presented its seminal report Harmful Tax Competition: An Emerging Global Issue [“1998 OECD Report].[3]  The 1998 OECD Report addressed harmful tax practices in the form of tax havens and harmful preferential tax regimes in OECD Member countries, but primarily in non-Member countries and their dependencies.  The 1998 OECD Report focused on geographically mobile activities, such as financial and other service activities.  The Report defined the factors to be used in identifying harmful tax practices and regimes, proposing 19 recommendations to counteract such practices and regimes.  Because Switzerland and Luxembourg abstained from the Report, these two OECD members are not bound by its recommendations.  The OECD has followed the 1998 Report with progress reports regarding implementation of the recommendations.

The OECD listed as four key factors to determine whether a tax regime was harmful:

  1. Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.
  2. Whether there is a lack of transparency regarding revenue rulings or financial regulation and disclosure.
  3. Whether there is a favourable tax regime applying only to certain persons or activities (ring fencing).
  4. Whether there is an absence of a requirement that the activity be substantial, which would suggest that a jurisdiction may be attempting to attract investment or transactions that are purely tax driven.

The 2000 follow up report downgraded the 1998 factor of whether the jurisdiction imposed a minimal level of tax from a determinative factor to only as an indicative factor of tax haven status that would lead to further investigation into the four determinative factors.

Was the 1998  Forum Influenced by Geo-Politics at the Expense of Neutrally Developed Outcomes?

The list of tax havens determined to have harmful regimes included many of the traditionally targeted, primarily uni- and micro-economy[4], international financial centres on OECD member blacklists i.e. The Bahamas, British Virgin Islands, and Cayman Islands.[5]  Notably though, the list did not target jurisdictions such as Hong Kong and Singapore.  Their absence from the list constituted disparate treatment, alleged the micro-economies, resulting merely from the micro-economies lack of diplomatic importance.

Also, the 1998 OECD Report, in line with general OECD member trade negotiation policy, did not address its members’ ring-fenced tax policies that created harmful effects to the developing world, but rather only addressed the tax competition issues that affected the developed States.  By example, the 1998 Report did not address the US tax ring-fenced policy established in 1984 of exempting from withholding tax non-resident’s portfolio interest that led to the capital flight from Latin America of US$300 billion to US banks.[6]  The 2000 Report listed the British overseas territory Virgin Islands as a targeted jurisdiction but did not list the US ring-fenced policy favourable toward the US overseas territory Virgin Islands, and most of the US’ other dependencies, that allows an exemption from US taxation on non-US source income for US taxpayers resident in the dependencies.[7]  This factor, alleged the micro-economies, illustrated the disingenuousness of the Report.  The pro-micro economy commentators alleged an OECD discriminatory cartel against non-members, and in line that the Report was merely self-serving of the cartel’s interests.

Enforcement Measures

The OECD proposed counter-measures to be applied against listed uncooperative, such as:

  • Restricting the deductibility of payments to tax havens;
  • Withholding taxes on payments to tax havens; and
  • Application of transfer pricing guidelines.

In order to be removed from the targeted list, the micro-economies had to issue Letters of Commitment to engage in effective provision of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006.    All Caribbean States and territories were targeted by the OECD and succumbed to commitment letters.[8]  The States and Territories that have issued these Letters of Commitment have based their commitment on at least two quid pro quos: (1) a diplomatic seat at the table for future discussions regarding the issue of tax competition, and (2) a level playing field wherein the OECD obtains commitment from its members to implement its recommendations.

My Commentary: Pro and Con

My commentary on the criticism of the OECD Report has been very detailed, and addresses the policy issues raised by the Report from a complex perspective.

First, the OECD States have democratically chosen government that democratically set the tax rates and rules that apply to their residents.[9]  If the residents do not like the rates or the rules, then the residents must either use the democratic process to change the rates and rules or move to a different jurisdiction.[10]  Thus, the often heard justification that OECD residents are justified in ‘hiding income’ because the OECD welfare States require high tax rates is not legitimate.  Evasion, in the OECD, is a democratically established crime with legitimate sanctions. 

Secondly, in the OECD, taxpayers have a jurisprudentially long-established right to arrange their affairs so as to incur the lowest incidence of tax.  This is known as tax avoidance planning.  Planning involves characterisation of income and transactions, timing of income, arranging activities that create value in the income value chain with a system and among systems, leveraging definitional and interpretative anomalies within a system and among systems, to name the basics.

Democratically elected governments may, even perhaps a duty to their welfare state societies, to protect their tax bases.  Thus, these governments may change the tax rules to impose tax on transactions that previously avoided tax.  On the other hand, retroactive regulatory changes are an affront to the jurisprudential principle of certainty and the Rule of Law.  Retroactive changes have been enacted, albeit very rarely, and Courts need to be vigilant in maintaining the Rule of Law and the principle of certainty by striking down retroactive application in these situations.

The groundwork is thus set for a conflicting claim: the government for revenue and the taxpayer (assisted by tax lawyers, accountants, and consultants) to minimize taxation.

Another principle policy established by and binding upon the OECD members is free trade, albeit in mitigated application.  The OECD preaches the freedom of movement of goods, services, and investment capital.  The free movement of persons which was once an international norm, lost favour amongst the members, but at least amongst the EU trade bloc, has regained its principle status.  The principles of free trade and the principle of taxation may create conflicting claims, both legitimate, upon taxpayers (tax subjects) and upon the chain of events that create income (tax objects).  I will not go into further detail on this argument, but leave it for the lecture and our discussions in our program.

Parting question for this week

Finally, this Report and the subsequent OECD Report on Banking that will be briefed in later blogticles both address the Exchange (“provision” because it is one way) of Information.  I leave you with this issue to consider: Does Public International Law or international jurisprudence or the jurisprudence of our respective jurisdictions establish a right against retroactive application of a change in revenue department policy or attitude toward previously accepted norms in tax planning?


[1] The Forum has changed names since 1998 from “Harmful Tax Competition” to Harmful Tax Practices”.

[2] http://www.freedomandprosperity.org/memos/m09-09-09/m09-09-09.shtml. In potential support of Dr. Mitchell’s investigative press report is that the OECD Forum now uses the language in its communiqués “encourage an environment in which fair competition can take place”, sounding very similar to the industrial arguments promoting trade protectionism and barriers through countervailing dumping duties against States with low labour and materials costs.

[3] You may obtain this Report without charge in PDF on the OECD website at http://www.oecd.org/.

[4] The traditional micro-economies had previously been uni- agriculture economies, many exporting to their colonial parent under favourable import regimes to either counter OECD agricultural subsidy policies or as a subsidy in itself to the former/current colony to assist it with foreign exchange earnings that in turn could be used to meet the colonies trade deficit in goods.  Many of the uni-economies diversified into tourism services to mitigate the trend of their lack of agricultural competitiveness.  Eventually, the colonies entered the international financial services sector to mitigate against their dependency on tourism and to increase their local inhabitants standard of living.  

[5] See Toward Global Cooperation, Progress in Identifying and Eliminating Harmful Tax Practices, OECD (2000) at 10.  Forty-seven jurisdictions were initially targeted by the OECD, approximately a quarter of the world’s States and jurisdictions.

[6] The US imposes tax upon its taxpayers’ interest income.  See Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000) wherein he addresses this policy in the context of President Reagan’s administration’s efforts to attract foreign capital to fund the ballooning US deficit.

[7] The US imposes tax upon her citizens on the basis on their nationality.  Thus, regardless of residency, a US taxpayer is subject to the full impact of US domestic taxation.  This tax policy’s application to her own citizens is maintained in her tax treaties through the savings clause.  The US grants two exceptions to this policy.  The first is a exception limited to a ceiling of US$80,000 of employment income for US taxpayers resident in a foreign jurisdiction that remain outside the US at least 330 days.  The second is the more egregious ring fence policy that allows an unlimited exemption from US tax on non-US source income for US taxpayers resident in the US Virgin Islands.  The Virgin Islands, in turn, grants a generous tax subsidy benefit if the taxpayer’s activity is conducted through an approved investment incentive vehicle.

[8] By example, in June 2000, all members of the Organization of Eastern Caribbean States were listed by the OECD as tax havens.  Under the threat of the OECD sanctions being implemented by its members against the Caribbean States, all issued Letters of Commitment to the OECD.

[9] I start with the democratic argument in order to ground my arguments in public international law.  All OECD members are members of the UN (Switzerland having only recently joined).  The OECD and UN principles hold high regard for democratic processes.  Democratic participation is held up to the level of being a fundamental human right.

[10] Several OECD States have enacted anti-emigration tax statutes that continue to subject former residents (nationals in the case of the USA) to tax.  I strongly disagree with this anti- free trade policy, in this case, that impacts the free movement of persons. This policy creates export barriers to low tax jurisdictions that seek to compete for the immigration of person with capital, such as retirees and entrepreneurs.

Posted in information exchange, OECD, Taxation | Tagged: , , , , | 3 Comments »

Tax Information Exchange (TIEA): an Opportunity for Latin America and Switzerland to Clawback the Capital Flight to America?

Posted by William Byrnes on September 3, 2009


Tax Information Exchange (TIEA): an Opportunity for Latin American to Clawback Its Capital Flight Back from America?  Perhaps even Switzerland?

This blogticle is a short note regarding the potential risk management exposure of US financial institutions’ exposure to a UBS style strategy being employed by foreign revenue departments, such as that of Brazil, and Switzerland.  Of course, such foreign government strategies can only be productive if US financial institutions are the recipient of substantial funds that are unreported by foreign nationals to their respective national revenue departments and national reserve banks, constituting tax and currency/exchange control violations in many foreign countries. 

The important issue of Cross Border Assistance with Tax Collection takes on more relevance when foreign governments begin seeking such assistance from the USA Treasury in collecting and levying against the hundred thousand plus properties purchased with unreported funds, and whose asset value may not have been declared to foreign tax authorities where such reporting is required in either the past, or the current, tax years.  

In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.

Tax Elasticity Of Deposits

In the 2002 article International Tax Co-operation and Capital Mobility, prepared for an ECLAC report, from analysing data from the Bank for International Settlements (“BIS”) on international bank deposits, Valpy Fitzgerald found “that non-bank depositors are very sensitive to domestic wealth taxes and interest reporting, as well as to interest rates, which implies that tax evasion is a determinant of such deposits….”[1]  Non-bank depositors are persons that instead invest in alternative international portfolios and financial instruments. 

Estimating How Much Latin American Tax Evasion are US Banks Involved With?

Within two weeks I will post a short blogticle that I am preparing regarding an estimated low figure of $300B capital outflow that has begun / will occur from the USA pursuant to its signing of a TIEA with Brazil.  Some South Florida real estate moguls have speculated that this TIEA has played a substantial role in the withdrawal of Brazilian interest in its real estate market, which has partly led to the sudden crash in purchases of newly contrasted condominium projects.  

Three historical benchmarks regarding the imposition of withholding tax on interest illustrate the immediate and substantial correlation that an increase in tax on interest has on capital flight.  The benchmarks are (1) the 1964 US imposition of withholding tax on interest that immediately led to the creation of the London Euro-dollar market;[2] (2) the 1984 US exemption of withholding tax on portfolio interest that immediately led to the capital flight from Latin America of US$300 billion to US banks;[3] and (3) the 1989 German imposition of withholding tax that led to immediate capital flight to Luxembourg and other jurisdictions with banking secrecy[4].  The effect was so substantial that the tax was repealed only four months after imposition.

The Establishment of London as an International Financial Center

The 1999 IMF Report on Offshore Banking concluded that the US experienced immediate and significant capital outflows in 1964 and 1965 resulting from the imposition of a withholding tax on interest.  Literature identifies the establishment of London as a global financial centre as a result of the capital flight from the US because of its imposition of Interest Equalisation Tax (IET) of 1964.[5]  The take off of the embryonic London eurodollar market resulted from the imposition of the IET.[6]  IET made it unattractive for foreign firms to issue bonds in the US.  Syndicated bonds issued outside the US rose from US$135 million in 1963 to US$696 million in 1964.[7]    In 1964-65, the imposition of withholding tax in Germany, France, and The Netherlands, created the euromark, eurofranc and euroguilder markets respectively.[8]  

The Establishment of Miami as an International Financial Center

Conversely, when in 1984 the US enacted an exemption for portfolio interest from withholding tax, Latin America experienced a capital flight of $300 billion to the US.[9]  A substantial portion of these funds were derived from Brazil.  In fact, some pundits have suggested that Miami as a financial center resulted not from the billions generated from the laundering of drug proceeds which had a tendency to flow outward, but from the hundreds of billions generated from Latin inward capital, nearly all unreported to the governments of origination.

The Establishment of Luxembourg as an International Financial Center

In January of 1989, West Germany imposed a 10% withholding tax on savings and investments.  In April it was repealed, effective July 1st, because the immediate cost to German Banks had already reached DM1.1 billion.[10]  The capital flight was so substantial that it caused a decrease in the value of the Deutsche mark, thereby increasing inflation and forcing up interest rates.  According to the Financial Times, uncertainty about application of the tax, coupled with the stock crash in 1987, had caused a number of foreign investment houses to slow down or postpone their investment plans in Germany.  A substantial amount of capital went to Luxembourg, as well as Switzerland and Lichtenstein.

Switzerland’s Fisc May Come Out Ahead

Perhaps ironically given the nature of the UBS situation currently unfolding, a Trade Based Money Laundering study by three prominent economists and AML experts focused also on measuring tax evasion uncovered that overvalued Swiss imports and undervalued Swiss exports resulted in capital outflows from Switzerland to the United States in the amount of $31 billion within a five year time span of 1995-2000.[11]  That is, pursuant to this transfer pricing study, the Swiss federal and cantonal revenue authorities are a substantial loser to capital flight to the USA.  The comparable impact of the lost tax revenue to the much smaller nation of Switzerland upon this transfer pricing tax avoidance (and perhaps trade-based money laundering) may be significantly greater than that of the USA from its lost revenue on UBS account holders.  Certainly, both competent authorities will have plenty of work on their hands addressing the vast amount of information that needs to be exchanged to stop the bleeding from both countries’ fiscs.

Let me know if you are interested in further developments or analysis in this area.  Prof. William Byrnes (www.llmprogram.org)


[1] International Tax Cooperation and Capital Mobility, Valpy Fitzgerald, 77 CEPAL Review 67 (August 2002) p.72.

[2] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?

[3] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).

[4] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.

[5] See Charles Batchelor, European Issues Go from Strength to Strength: It began with Autostrade’s International Bond in 1963, The Financial Times (September 25, 2003) p.33; An E.U. Withholding Tax?

[6] 1999 IMF Offshore Banking Report  p.16.

[7] 1999 IMF Offshore Banking Report  p.16-17.

[8] 1999 IMF Offshore Banking Report  p.17.

[9] Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).

[10] Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.

[11] Maria E. de Boyrie, Simon J. Pak and John S. Zdanowicz The Impact Of Switzerland’s Money Laundering Law On Capital Flows Through Abnormal Pricing In International Trade Applied 15 Financial Economics 217–230 (Rutledge 2005).

Posted in Compliance, Financial Crimes, information exchange, Legal History, OECD, Taxation, Uncategorized | Tagged: , , , , , , | 1 Comment »

OECD Model Agreement for Tax Information Exchange (TIEA) Part 2 (Legal Privilege)

Posted by William Byrnes on September 1, 2009


This week we continue with our examination of Cross-Border Information Exchange deciphering the Legal Privilege Limitation requirements of exchange contemplated by the OECD Model Agreement for Tax Information Exchange.  In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.

Tax Evasion Request (1 January 2004)

In the BVI TIEA, criminal tax evasion, for which the exchange of information begins 1 January 2004, is defined:

“”criminal tax evasion” means willfully, with dishonest intent to defraud the public revenue, evading or attempting to evade any tax liability where an affirmative act constituting an evasion or attempted evasion has occurred. The tax liability must be of a significant or substantial amount, either as an absolute amount or in relation to an annual tax liability, and the conduct involved must constitute a systematic effort or pattern of activity designed or tending to conceal pertinent facts from or provide inaccurate facts to the tax authorities of either party. The competent authorities shall agree on the scope and extent of matters falling within this definition;” (emphasis added)[1]

The Cayman TIEA does not contain the last emphasized sentence.  The Bahamas TIEA states more broadly that “”criminal matter” means an examination, investigation or proceeding concerning conduct that constitutes a criminal tax offense under the laws of the United States.  The IOM and Jersey TIEAs define criminal tax matters as those “involving intentional conduct which is liable to prosecution under the criminal laws of the applicant Party.”  Barbados and Bermuda TIEAs do not contain a specific definition of criminal tax evasion, that is the USA may request information regarding civil tax matters.

From January 1, 2006, information regarding any civil tax matters may be requested by the USA from all of the jurisdictions.  This date coincides with the date established by the OECD it demanding its commitment letters from targeted tax havens regarding the 1998 and 2000 Reports.

Legal Privilege Limitation

The BVI, Cayman and Bahamas TIEAs contain a protection for information subject to legal privilege.  The BVI TIEA broadly define legal privilege:

     “items subject to legal privilege” means:

       (a) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client;

       (b) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and

       (c) items enclosed with or referred to in such communications and made –

              (i) in connection with the giving of legal advice; or

              (ii) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when the items are in the possession of a person who is entitled to possession of them.

              Items held with the intention of furthering a criminal purpose are not subject to legal privilege, and nothing in this Article shall prevent a professional legal adviser from providing the name and address of a client where doing so would not constitute a breach of legal privilege; (emphasis added)

The Cayman TIEA does not contain the provision that a professional legal advisor is not prevented from providing a client’s name and address.  The Bahamas definition is more restrictive in that it does not contain the clause (c) regarding items enclosed in legally privileged communications.  The NLA and Barbados TIEAs incorporate legal privilege pursuant to its definition under domestic law in that the TIEA limits the Requested Party to the information collection means available under domestic law.  Whereas the IOM TIEA contains a definition of legal privilege, Jersey does not, though like NLA and Barbados, such definition and limitation is incorporated.  Like Cayman, the IOM TIEA defines legal privilege as:

       (i) communications between a professional legal adviser and his client or any person representing his client made in connection with the giving of legal advice to the client;

       (ii) communications between a professional legal adviser and his client or any person representing his client or between such an adviser or his client or any such representative and any other person made in connection with or in contemplation of legal proceedings and for the purposes of such proceedings; and

       (iii) items enclosed with or referred to in such communications and made-

             (a) in connection with the giving of legal advice; or

            (b) in connection with or in contemplation of legal proceedings and for the purposes of such proceedings, when they are in the possession of a person who is entitled to possession of them.

Items held with the intention of furthering a criminal purpose are not subject to legal privilege.

Procedural Application – Fishing Expeditions

The BVI TIEA provides in order to demonstrate the relevance of the information sought to the request that the US shall provide the following information:

       (a) the name of the authority seeking the information or conducting the investigation or proceeding to which the request relates;

       (b) the identity of the taxpayer under examination or investigation;

       (c) the nature and type of the information requested, including a description of the specific evidence, information or other assistance sought;

       (d) the tax purposes for which the information is sought;

       (e) the period of time with respect to which the information is requested;

       (f) reasonable grounds for believing that the information requested is present in the territory of the requested party or is in the possession or control of a person subject to the jurisdiction of the requested party and may be relevant to the tax purposes of the request;

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

       (h) a declaration that the request conforms to the law and administrative practice of the requesting party and would be obtainable by the requesting party under its laws in similar circumstances, both for its own tax purposes and in response to a valid request from the requested party under this Agreement.

The Cayman TIEA does not include clauses (a) or (e) above, but practically such information should be included in any valid request under any TIEA. Jersey and IOM’s TIEA is similar to the BVI TIEA in respect of this section, absent clause (a).  NLA does not contain this section in its TIEA, but such information by the USA should be provided.

Time to Comply

The BVI and Cayman TIEAs allow them 60 days to identify of any deficiencies in a request and provide the US notice.  If BVI or Cayman will not provide requested information, or cannot, it must immediately notify the US.

Check back for Part 2 on Thursday, September 3.  Prof. William Byrnes


[1] BVI TIEA, Article 4.

Posted in Compliance, information exchange, Taxation | Tagged: , , | Leave a Comment »

OECD MODEL AGREEMENT FOR TAX INFORMATION EXCHANGE (TIEA) PART 1

Posted by William Byrnes on August 29, 2009


This week we continue with our examination of Cross-Border Information Exchange deciphering the procedural and substantive requirements of exchange contemplated by the OECD Model Agreement for Tax Information Exchange.  The other important issue of Cross Border Assistance with Tax Collection will be addressed in a few weeks. 

In the 15 week online International Tax courses starting September 14, we will be undertaking an in-depth analysis of the topics covered in this blog during the 10 online interactive webinars each week.

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.”

US TIEAs Coming into Effect since 2001

  • Barbados, 3 November 1984
  • Bermuda, 11 July 1986
  • Cayman Islands, 27 November 2001
  • Antigua & Barbuda, 6 December 2001
  • Bahamas, 25 January 2002
  • BVI, 3 April 2002
  • Netherlands Antilles, 17 April 2002
  • Guernsey, 19 September 2002
  • Isle of Man, 3 October 2002
  • Jersey, 4 November 2002
  • Aruba,  13 September 2004
  • Brazil, pending
  • Liechtenstein, pending

The BVI and Cayman TIEAs are nearly duplicate.

Tax Covered

The BVI and Cayman Islands TIEAs scope is limited to collecting information for issues of US federal “income” tax.[1]  For more broad in scope are the Isle of Man (“IOM”)[2], Jersey[3], The Bahamas[4] and Netherlands Antilles[5] (“NLA”) TIEAs that apply to “all federal taxes”, thus by example encompassing federal estate tax, federal gift tax, federal social security tax,  federal self employment tax and federal excise tax.  The Barbados[6] and Bermuda[7] TIEAs apply to the specific federal taxes previously listed, which has the same broad affect as The Bahamas and NLA TIEAs.

Scope of Information

The BVI and Cayman TIEAs scope of information includes that “relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons.”  The IOM, Jersey, Bahamas, NLA and Bermuda TIEAs provide that information means any fact or statement, in any form, by example an individual’s testimony or documents, that is foreseeably relevant or material to United States federal tax administration and enforcement.  The Barbados TIEA provides more generally for the exchange of information to administer and enforce the TIEA listed taxes covered within the scope.

Jurisdiction : Parties and Information Subject to Requests

The BVI, Cayman, IOM, Jersey, and NLA TIEAs do not limit the scope of the request to parties that are nationals or resident in BVI and Caymans, but rather allow a request for information as long as either the information is within the jurisdiction or is in the possession of, or controlled by, a party within the jurisdiction.  The Bahamas treaty does not address this jurisdictional issue directly but probably will result in the same application.  The Barbados TIEA also does not limit the scope of the request to resident parties.  The Bermuda TIEA, when the information is sought about a non-resident of both jurisdictions, requires that the requesting party establish the necessity of the information for the proper administration and enforcement of its tax law.

Notice to Taxpayer of Request

The TIEAs do not address the issue, however the TIEAs require that enabling legislation be enacted to ensure the carrying out of the TIEAs obligations.  BVI may include in its enabling legislation that the taxpayer must receive notice that a TIEA request has been made targeting the taxpayer.  The Government of Switzerland, in its public statements regarding the turning over information including bank records for approximately 5,000 accounts UBS settlement with the US IRS, stated that it will post notices to the UBS account holding US taxpayers whose information has been disclosed via the tax treaty between the US and Switzerland.  The IRS has in turn said that these Swiss notices will not service a notice for IRS purposes that these (alleged) tax evaders may still, if not under current audit for this non-disclosure, may still quickly take advantage of the reduced civil penalty and elimination of criminal penalty amnesty.

Check back for Part 2 on Wednesday, September 2.  Prof. William Byrnes


[1] Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland, Including The Government Of The British Virgin Islands, For The Exchange Of Information Relating To Taxes, Article 1 (BVI TIEA”; Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland, Including The Government Of The Cayman Islands, For The Exchange Of Information Relating To Taxes, Article 1 (“CI TIEA”).

[2] Agreement Between The Government Of The United States Of America And The Government Of The Isle of Man For The Exchange Of Information Relating To Taxes, Art. 3.

[3] Agreement Between The Government Of The United States Of America And The Government Of The States Of Jersey For The Exchange Of Information Relating To Taxes, Art. 3.

[4] Agreement Between The Government Of The United States Of America And The Government Of The Commonwealth Of The Bahamas For The Provision Of Information With Respect To Taxes And For Other Matters, Article 1 d).

[5] Agreement Between The Government Of The United States Of America And The Government Of The Kingdom Of The Netherlands In Respect Of The Netherlands Antilles For The Exchange Of Information With Respect To Taxes, Article 3 f).

[6] Agreement Between The Government Of The United States Of America And The Government Of Barbados For The Exchange Of Information With Respect To Taxes, Article 3.

[7] Agreement Between The Government Of The United States Of America And The Government Of The United Kingdom Of Great Britain And Northern Ireland (On Behalf Of The Government Of Bermuda) For The Exchange Of Information With Respect To Taxes, Article 2 i).

Posted in Compliance, information exchange, Taxation | Tagged: , , , | Leave a Comment »

Cross-Border Information Exchange part 2

Posted by William Byrnes on August 26, 2009


This week we continue with our examination of 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.  Information Exchange is of course one aspect of cross-border cooperation.  Another important aspect is Cross Border Assistance with Tax Collection which we will address within the next two weeks.

2001 UN Model DTA – Tax Information Exchange (Art. 26)

The United Nations Model is similar in scope to the OECD model displayed in my previous blogticle.  However, the UN Model defines the type of information and methodology of investigative exchange as regards the requesting state having access to cross border corporate records, though under the OECD Model such information may also be sought and methodology used.

Agreement Among The Governments Of The Member States Of The Caribbean Community For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income, Profits, Or Gains And Capital Gains And For The Encouragement Of Regional Trade And Investment

Article 24: Exchange of Information

     1. The competent authorities of the Member States shall exchange such information as is necessary for the carrying out of this Agreement and of the domestic laws of the Member States concerning taxes covered by this Agreement in so far as the taxation thereunder is in accordance with this Agreement. Any information so exchanged shall be treated as secret and shall only be disclosed to persons or authorities including Courts and other administrative bodies concerned with the assessment or collection of the taxes which are the subject of this Agreement. Such persons or authorities shall use the information only for such purposes and may disclose the information in public court proceedings or judicial decisions.

      2. In no case shall the provisions of paragraph 1 be construed so as to impose on one of the Member States the obligation:

           (a) to carry out administrative measures at variance with the laws or the administrative practice of that or/of the other Member States;

           (b) to supply particulars which are not obtainable under the laws or in the normal course of the administration of that or of the other Member States;

           (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process the disclosure of which would be contrary to public policy.

2000 Improving Access to Bank Information for Tax Purposes (OECD)

In 2000, the OECD issued Improving Access to Bank Information for Tax Purposes.  The 2000 OECD Report acknowledged that banking secrecy is “widely recognised as playing a legitimate role in protecting the confidentiality of the financial affairs of individuals and legal entities”.  This Report focused on improving exchange of information pursuant to a specific request for information related to a particular taxpayer.  In this regard, it noted that pursuant to its 1998 (OECD) Report, 32 jurisdictions had already made political commitments to engage in effective exchange of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006. 

 A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard

 When we examine TIEAs, we will also look at the most recent OECD update A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard issued August 25, 2009 (see http://www.oecd.org/dataoecd/50/0/42704399.pdf). The exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes is the standard the OECD developed in co-operation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting.  

The OECD claims that the confidentiality of the information exchanged will be protected by the recipient jurisdiction though at this time no measures have been announced to assess any safeguards should such be established.

2003 EU-US Agreements for Mutual Legal Assistance

On 25 June 2003 the US and EU signed an agreement, applying to all EU member States, for Mutual Legal Assistance.[1]  The EU-US MLA and Extradition Agreements (see my blogticle wherein I will address Extradition Agreements) do not currently extend to the United Kingdom’s Overseas Territories.  Article 16 (1)(b) of the MLA agreement enables the agreement to apply to Overseas Territories of EU member States but only where this is agreed by exchange of diplomatic note, so it is not automatic.  

The agreement’s purpose is to assist a requesting state to prosecute offences through cooperation of another State or jurisdiction in obtaining cross-border information and evidence.  This Agreement applies to tax matters involving criminal tax evasion.  This Agreement could widen the scope of financial institution and professional service provider information allowed to be requested specifically with regard to the financial information covered below.

Any party to the Agreement is required pursuant to the request to provide information regarding whether its banks, other financial institutions and non-bank institutions[2] within its jurisdiction possess information on accounts and financial transactions unrelated to accounts regarding targeted natural or legal persons.  The Agreement specifically excludes banking secrecy as a defense for non-compliance.  In order to receive banking or financial information from a financial institution or non-financial institution, the requesting State must provide the competent authority of the other State with: 

  • the natural or legal person’s identity relevant to locating the accounts or transactions;
  • information regarding the bank/s or non-bank financial institution/s that may be involved, to the extent such information is available, in order to avoid fishing expeditions; and
  • sufficient information to enable that competent authority:  
  •     to reasonably suspect that the target concerned has engaged in a criminal offence;
  •     to reasonably expect that the bank/s or non-bank financial institution/s of the requested state may have the information requested; and
  •     to reasonably expect that there is a nexus between the information requested and the offence.

 This multi-lateral MLAT Agreement, unlike TIEAs that have developed since 2001, contains a dual criminality requirement, but it applies retroactively to offences committed before the Agreement’s entry into force date, Article 12-(1) provides for this.  Criminal tax fraud is an underlying crime for purposes of the offence of money laundering. Thus, this Agreement probably will allow any party to the Agreement to seek financial information from another State regarding a specific taxpayer’s criminal tax fraud for offences committed before the tax year beginning  January 1, 2004.  The retroactive provision in Article 12(1) may run counter to a fundamental principle of criminal law in that a person cannot criminally suffer for an act or conduct which was not an offence at the time the act was committed or conduct took place.  Whether these MLAT agreements establish a situation of retroactive criminal application may eventually be addressed as a human rights issue.

 Tax Treaties course

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


[1] Agreement on Mutual Legal Assistance Between the European Union and the United States of America, Article 16, Territorial Application.

[2] Including trust companies and company service providers

Posted in Compliance, information exchange, Taxation | Tagged: , , , , , | 1 Comment »

 
%d bloggers like this: