Abstract: Professor William Byrnes examines whether it is prudent for taxpayers to trust the governments of the 117 countries that scored a fifty or below on Transparency International’s corruption index. The complete information system invoked by the Foreign Account Tax Compliance Act (FATCA) encourages, even prolongs, the bad behavior of black hat governments by providing fuel (financial information) to feed the fire of corruption and suppression of rivals. Professor Byrnes recommends that the United States leverage a “carrot-stick” policy tool to incentivize bad actors to adopt best tax administration practices. Article download at https://ssrn.com/abstract=2916444
Keywords: FATCA, Common Reporting Standards, OECD, Exchange of Information, Taxpayer Rights, IGA, corruption
Professor William Byrnes is the primary author of Lexis’ Guide to FATCA and Common Reporting Standard Compliance – 2017. He designed then wrote the initial 2012 edition and has grown it to the #1 FATCA resource for advisors and institutions. Now in its fifth edition for 2017!
Over 1,800 pages of analysis of the FATCA and CRS compliance challenges, 79 chapters by FATCA and CRS contributing experts from over 50 countries. Besides in-depth, practical analysis, the 2017 edition includes examples, charts, timelines, links to source documents, and compliance analysis pursuant to the IGA, CRS agreement, and local regulations for many financial centers. This fifth edition will provide the financial enterprise’s FATCA and CRS compliance officer the tools for developing and maintaining a best practices compliance strategy. No filler of forms and regs – it’s all beef ! See Lexis’ order site and request a copy of the forthcoming 2017 edition – http://www.lexisnexis.com/store/catalog/booktemplate/productdetail.jsp?pageName=relatedProducts&prodId=prod19190327
The 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.
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.
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
The Global Forum on Transparency and Exchange of Information for Tax Purposes released 9 peer review reports, including a Phase 1 Supplementary Report for Switzerland, demonstrating continuing progress toward implementation of the international standard for exchange of information on request. read them at International Financial Law Prof Blog.
EU Council Announces March 2014 Adoption of Expanded EU Savings Directive
On Saturday, March 22, 2014 the EU Council’s General Secretariat announced that it will adopt major amendments to the EU Directive on taxation of savings income at its next March 2014 meeting. The amendments will address the current loopholes, such as application to trusts, to foundations, and to investment income that is comparable to interest income.
Brief Background on EU Savings Directive
The liberalization of capital markets and the free movement of capital within the EU borders revealed how important it was to establish cooperation with a view to preventing, in the direct taxation area, fraud and evasion linked to cross-border financial investments. The problem with taxpayers moving their investments to Member States which did not impose taxation at source while the taxpayers simultaneously under-reported to their respective State of residence (or not reporting at all) the income earned. The EU Savings Directive was adopted to address this situation, coming into effect in 2005.
The mechanism of the Directive works by imposing an obligation to any paying agent in an EU Member State which makes a payment to an individual resident in the other Member State which is the beneficial owner of the income, to report that payment of interest to the competent tax authorities of the Member State in which the paying agent is established. The competent tax authorities of that (source) State in turn transfer the information collected to the competent tax authority of the residence of the beneficial owner. Based on the information received it is possible for the State of residence of the beneficial owner to verify if the amount is declared for tax purposes and to tax the corresponding income.
Loopholes Reported in 2008
In his 2004 Report on the Regulatory, Competitive, Economic and Socio-Economic Impact of the European Union Code of Conduct on Business Taxation and Tax Savings Directive to the United Kingdom Foreign and Commonwealth Office and the Overseas Territories of The Virgin Islands (British), Turks & Caicos Islands, Anguilla and Montserrat, Professor William Byrnes undertook an in-depth analysis of the EU Savings Directive identifying several loopholes that would require later amendments for it to achieve its objectives.
The Savings Directive loopholes include:
• Territorial scope: It is limited to intra-community situations in which a paying agent from one Member State pays to an individual resident in another Member State. It does not apply to payments from outside the EU, i.e. when the paying agent is located in a third (non-EU) State or to payments to beneficial owners who reside in third States.
• Personal scope: it does not apply to persons other than individuals, in particular payments made to legal entities. This limitation provides individuals with opportunities to circumvent the Savings Directive by using an interposed legal person or arrangement.
• Material scope: it does not cover other forms of savings like insurance products, pensions, some tailored investment funds, return on derivative contracts, structured products, etc.
These and other loopholes have been formally reported by the European Commission since 2008. The main findings of a report produced by the Commission identified as a major problem lack of “consistent treatment of other comparable situations”. Pursuing this aim of consistency requires that interest payments obtained by an individual through intermediate vehicles are consistently put on an equal footing with interest payments directly received by the individual. This consistency of coverage is required not only to ensure the effectiveness of the Directive, but also compliance with the rules of the internal market and fair competition between comparable financial products and structures.
European Council Announces Amended Savings Directive Adoption in March 2014
On March 22, 2014 the European Council reported in a press release that (emphasis added):
The European Council welcomes the Commission’s report on the state of play of negotiations on savings taxation with European third countries (Switzerland, Liechtenstein, Monaco, Andorra and San Marino) and calls on those countries to commit fully to implementing the new single global standard for automatic exchange of information, developed by the OECD and endorsed by the G20, and to the early adopters initiative.
The European Council calls on the Commission to carry forth the negotiations with those countries swiftly with a view to concluding them by the end of the year, and invites the Commission to report on the state of play at its December meeting. If sufficient progress is not made, the Commission’s report should explore possible options to ensure compliance with the new global standard.
In the light of this, the Council will adopt the Directive on taxation of savings income at its next March 2014 meeting.
The European Council invites the Council to ensure that, with the adoption of the Directive on Administrative Cooperation by the end of 2014, EU law is fully aligned with the new global standard.
What About the Withholding Exception for Austria and Luxembourg?
While most Member States adopted the exchange of information regime provided in the 2005 Savings Directive, three Member States with a tradition of bank secrecy—Belgium, Luxembourg and Austria—preferred to adopt, during a transitional period, a withholding tax regime. They were authorized to adopt a withholding tax (now 35%) on interest income that is paid to individual savers resident in other EU Member States. In the meantime Belgium decided to discontinue applying the transitional withholding tax as of 1 January 2010 and exchange information instead.
Therefore, only Luxembourg and Austria are currently entitled to levy a withholding tax. Luxembourg has notified the EU Commission that from next year, January 1, 2015 it will discontinue applying the transitional withholding tax and thus begin automatically exchanging information for applicable accounts from that date.
Thus, only Austria has expressed that it will maintain the withholding tax option. Austria’s finance minister is quoted in April 2013 stating: “All this data exchange will not put one red cent in my tax coffers, …. I want to have the money, not a data cemetery.” However, in light of the Council’s press release on Saturday, this position has probably changed.
The Austria’s Chancellor had also indicated that Austria may begin automatic exchange regarding the interest from savings accounts beginning 2014. Although this statement is different from the Luxembourg commitment towards automatic exchange of information, it would not be surprising that Austria will soon also endorse this automatic exchange standard within the scope of applying the Savings Directive, in light of FATCA, GATCA, and the Council’s press release.
Practical Compliance Aspects of Exchange of Information, FATCA and GATCA
For 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!
William H. Byrnes, author of six Lexis international tax titles, has achieved authoritative prominence with more than 20 books, 100 book chapters and supplements, and 1,000 media articles. In 2008 he was appointed Associate Dean at Thomas Jefferson School of Law, previously obtaining Professor of Law with Tenure at St. Thomas University. William Byrnes was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and consulted for clients involved with Africa, Europe, Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy.
“All this data exchange will not put one red cent in my tax coffers,” finance minister Maria Fekter said on 13 April. “I want to have the money, not a data cemetery.” Stamatoukou, Eleni, “EU Savings Directive to be modified”, New Europe Online, (April 15, 2013) Available at http://www.neurope.eu/article/eu-savings-directive-be-modified.
 Austria’s position regarding the extension of the EU Savings Directive requires that such extension be also imposed through international agreements with San Marino, Switzerland, Lichtenstein, Andorra, and Monaco. However, it is unclear if Austria has since backtracked and made these five agreements a pre-condition for its own automatic information exchange on savings income for depository accounts. See Bodoni, Stephanie, EU Push For Savings-Tax Deal Fought By Luxembourg, Austria, Bloomberg (Nov 14, 2013). Available at http://www.bloomberg.com/news/2013-11-14/eu-set-to-fail-to-meet-savings-tax-goal-on-luxembourg-opposition.html.
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.
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.
Fifty 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.
The countries of the world, pushed by a U.S. Treasury promotional campaign, have inevitably capitulated to the U.S. unilateral demand for information although the per-country compliance cost may exceed one billion dollars and privacy protection laws must be amended. However, push back by important U.S. trading partners resulted in the U.S. Treasury entering into an expanding network of bi-lateral intergovernmental agreements that in most instances provide for automatic exchange between the competent authorities of the required financial information to fulfill FATCA compliance. These agreements may lead to an imposition of FATCA reporting compliance, though to a lesser extent, upon U.S. financial institutions, that the U.S. Treasury may in turn provide automatically to the foreign competent authority.
FATCA should not be observed in a historical vacuum but instead requires at least an understanding of the U.S. previous attempt to collect such information under the qualified intermediary (‘QI’) regime. Moreover, FATCA should not be observed in a unilateral vacuum but instead requires an overview of the EU and OECD information exchange initiatives and challenges thereto, tax collection and remission alternatives, as well as an overview of the spawn of FATCA (e.g. the UK’s son-of-FATCA approach).
This discussion will also explore the general nature, issues, and challenges of information collection and exchange. During this discussion we will digress into the topic of the information of a business’ financials and of its operations, the topic of domestic and cross border asymmetry of information, as well as the dialogue for global harmonization of information (such as standardization of accounts and of tax base determination), and for exchange of such information. Such conversation is necessary for a robust understanding of the topics of base erosion and the efforts of countries to control ‘transfer pricing’.
Fifty 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 crafted into one, coherent voice by 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.
Following his October presentation in Moscow at Moscow Finance University organized with University of Amsterdam, Professor William Byrnes was invited to lecture last week for the intersession international tax course of the University of Amsterdam’s Centre for Tax Law. While at the University of Amsterdam, he engaged with Dean Dr. Edgar du Perron on collaborative distance education opportunities, and attended the European Law Student Association’s (ELSA) annual Groot Juridisch Dictee of the Amsterdam chapter.
William Byrnes noted, “Dr. Dennis Weber, the Director of the Amsterdam Centre for Tax Law, is a renowned jurist and author on tax issue brought before the European Court of Justice. He is frequently referred to as a powerhouse among European Tax Law faculty. In 2015, Amsterdam will begin offering the LL.M. of International Taxation in English for a very selective group of professionals. With his robust full-time tax faculty and cadre of Ph.D. candidates from around the world, I expect it to quickly become the premier international tax degree within Europe, perhaps globally.”
Professor Dennis Weber included, “I visited Thomas Jefferson’s campus last February when I lectured to its tax students about international tax risk management and also about practical aspects of careers in the tax field. I became very intrigued with how Associate Dean William Byrnes dynamically engaged students on campus and worldwide through leveraging communication and multimedia technologies. We are investigating potentially collaborating on joint online initiatives in the future and look forward to discussing these further when I return to San Diego this March to deliver my next international tax lectures.”
“Of all my international invitations” Professor Byrnes added, “University of Amsterdam is my favorite because I am an alumni and have fond memories and friends from my three years on campus when I studied international tax law, and participating as an active member of ELSA Amsterdam. The University of Amsterdam led to my initial academic opportunities in South Africa because my fellowship dissertation on transfer pricing profit-margin based methodologies was, at that time, quite unique and South Africa was re-thinking its tax system. With the G20 and OECD’s new agenda against base erosion and profit shifting (BEPS), transfer pricing is now a prominent topic of study in most tax law programs, but two decades ago only Amsterdam offered me the opportunity to delve deeply into it via a shared research program at the IBFD.”cts of careers in the tax field. I became very intrigued with how Associate Dean William Byrnes dynamically engaged students on campus and worldwide through leveraging communication and multimedia technologies. We are investigating potentially collaborating on joint online initiatives in the future and look forward to discussing these further when I return to San Diego this March to deliver my next international tax lectures.”
Professor Byrnes continued, “Also, Dr. Weber, Bruno Da Silva, and I had the opportunity to discuss several future collaborative publications stretching out through 2015 and beyond, including authoring a Lexis book on international tax for the Asian academic and professional market to be translated into several local languages, reworking a Lexis publication on tax treaties, and finally, expansion of my Lexis transfer pricing publication from the U.S. perspective to a global, comparative approach. Bruno Da Silva, who is just completing his doctoral candidacy at UvA on the topic of information exchange, and I just collaborated on the second edition of LexisNexis Guide to FATCA Compliance. His representation of the China Territory of Macau, his OECD research and his work with Loyens and Loeff is establishing him as a leader among his European colleagues for understanding cross border information information flows.”
“Moreover, I explored with Dr. Edgar du Perron, Dean of University of Amsterdam Faculty of Law, and Dr. Weber the ‘flipping the classroom’ approach to distance education and how we may implement some joint international tax courses in this regard that can receive status as professional designations from various financial service authorities and associations. Such courses could become the starting point for Amsterdam to leverage for the undergraduate law courses. It was interesting to learn from Dean Perron that a group of entrepreneurial Amsterdam law students have captured lecture recordings of some of their courses, splicing them into multimedia course outlines and then selling them, albeit potentially without obtaining the faculty members authorization.”
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.
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…”
The Savings Directive requires an automatic, cross-border, exchange of information between the EU members states and their territories.
EXCHANGE OF INFORMATION
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.
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.
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.
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 (firstname.lastname@example.org).
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.
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.
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 email@example.com
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.
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.
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 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.
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.
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. 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.
 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.
THE OECD FORUM REGARDING HARMFUL TAX COMPETITION
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.
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]. 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:
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.
Whether there is a lack of transparency regarding revenue rulings or financial regulation and disclosure.
Whether there is a favourable tax regime applying only to certain persons or activities (ring fencing).
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, international financial centres on OECD member blacklists i.e. The Bahamas, British Virgin Islands, and Cayman Islands. 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. 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. 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.
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. 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. 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. 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?
 The Forum has changed names since 1998 from “Harmful Tax Competition” to Harmful Tax Practices”.
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.
 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.
 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.
 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.
 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.
 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.
 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.
 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.
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….” 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) 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. 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. The take off of the embryonic London eurodollar market resulted from the imposition of the IET. 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. In 1964-65, the imposition of withholding tax in Germany, France, and The Netherlands, created the euromark, eurofranc and euroguilder markets respectively.
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. 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. 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. 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)
 International Tax Cooperation and Capital Mobility, Valpy Fitzgerald, 77 CEPAL Review 67 (August 2002) p.72.
 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?
 Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).
 Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.
 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?
 Globalisation, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000).
 Abolition of Withholding Tax Agreed in Bonn Five-Month-Old Interest Withholding To Be Repealed, 89 TNI 19-17.
 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).
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)
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
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 Standardissued 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. 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 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.
 Agreement on Mutual Legal Assistance Between the European Union and the United States of America, Article 16, Territorial Application.
 Including trust companies and company service providers
Over the past weeks, we have opened the exploration of issues addressing business and legal service outsourcing, new trends in wealth management, the history and taxation of charities, anti money laundering regulations, compliance training, and even The Obama administrations’ proposed international tax rule changes. Many topics have been left hanging for which further researched exploration is warranted.
However this week, because of the continuing interest in Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders, over the coming weeks we will explore Information Exchange and Cross Border Assistance with Tax Collection.
Keep your emails coming about suggestion for this blog, and your comments. I have been keeping up with answering each of you within a day or two. Prof. William Byrnes (firstname.lastname@example.org)
Cross-Border Information Exchange and Mutual Assistance (with regard to Tax)
To uncover and analyze the issues of cross-border tax information exchange and also the mutual assistance with regard to tax collection by one jurisdiction on behalf of another one, we must at a minimum over the next few weeks examine the following:
(1) the behaviour of the OECD and its members toward the micro economy jurisdictions versus the OECD’s treatment amongst it own members and other economically significantly trade partners;
(2) the EU Savings Directive and other related EU Directives;
(3) the US proposal to automatically report to EU State’s bank interest of their residents;
(4) the tax application of the mutual assistance and extradition treaty between the US and EU;
(5) the geo-politics of tax information exchange agreements (TIEAs) such as positive inducements made and broken by the US to the Caribbean, and the inverse being recent threats made by the OECD to the international financial centers;
(6) other international initiatives for the provision of tax information, such as the FATF and Offshore Group of Banking Supervisors (OGBS) partnership and finally,
(7) the procedural process and practicalities of seeking tax information pursuant to an international agreement, be it a full tax treaty, a limited agreement only applying to exchange of information, another type of bi-lateral or multi-lateral instrument, or just simply domestic legislation.
Tax Information Exchange Background
We will need to consult the following exemplary documents (amongst many others) over my coming blogticles, being:
OECD Model DTA – Tax Information Exchange (Art. 26 & 27)
OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
Convention on Mutual Administrative Assistance in Tax Matters (OECD & Council of Europe)
UN Model DTA – Tax Information Exchange (Art. 26)
OECD Model Tax Information Exchange Agreement (TIEA)
EU Directive on Exchange of Information
EU Directive on Mutual Assistance for the Recovery of Claims
EU Savings Directive
Mutual Legal Assistance Treaties (MLATs) and US-EU MLATs
Improving Access to Bank Information for Tax Purposes
Financial action task force (FATF)
Offshore Group of Banking Supervisors Best Practices (OGBS)
Exchange Pursuant to the OECD Conventions
OECD MODEL DTA – Tax Information Exchange (Art. 26 & 27)
Article 26, Exchange of Information, of the 2003 OECD Model Convention reads:
The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. … Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in the first sentence. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.
The 2003 OECD Model, pursuant to its Commentary to the article, allows the following methods of information disclosure
Simultaneous examination of same taxpayer between the two States
Allowing requesting foreign Revenue examination of taxpayer in requested State
Industry-wide exchange of tax information without identifying specific taxpayers
Other methods to be developed between the States
The 2003 Model established limitations on the request of information:
Requested State is not obliged to go beyond its own or the Requesting State’s capacity pursuant to its internal laws in providing information or taking administrative actions.
Requested State should not invoke tax secrecy as a shield.
Requested State is not obliged to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process.
Requested State is not obliged to supply information regarding its own vital interests or contrary to public policy (Ordre Public).
Article 27 of the 2003 Model addresses assistance in the collection of taxes, stating:
1. The Contracting States shall lend assistance to each other in the collection of revenue claims. …
2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.
3. … That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.
The limitations remain the same as under Article 26 but also include that the Requesting State must have exhausted reasonable efforts of collection and conservancy pursuant to its domestic law. Also, the Requested State’s obligation is limited if its administrative burden would exceed the tax collected for the Requesting State.
2003 OECD Model Agreement for Tax Information Exchange (TIEA)
The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino. The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.
The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.” The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.
The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”
Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes. But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws. However, the TIEA is specific that each Party is obliged to provide:
“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;
b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”
Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:
“(a) the identity of the person under examination or investigation;
(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;
(c) the tax purpose for which the information is sought;
(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;
(e) to the extent known, the name and address of any person believed to be in possession of the requested information;
(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;
(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”
In our next blogticle we will next turn to the 1988 Convention On Mutual Administrative Assistance In Tax Matters and continue form there. In case you are wondering what this Convention is and why it is relevant, it came into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, providing for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.
In the Tax Treaties course starting September 14, Prof. Marshall Langer will be undertaking an in-depth analysis f these instruments and issues raised above.
 Commentary to Article 26, paragraph 1 sections 9. and 9.1, OECD Model Tax Convention, 2003.
 Commentary to Article 26, paragraph 2 sections 14, 15 and 16, OECD Model Tax Convention, 2003.