This month, the Congressional Research Service released an overview of qualified tuitions programs, giving us an opportunity to revisit the tax-advantaged nature of these accounts for higher education.
The primary advantage of qualified tuition programs—typically referred to as 529 plans—is the tax savings they provide. Although there is no federal income tax deduction for contributions to a 529 plan, accounts appreciate federal income tax free and distributions can be taken tax free to pay qualified higher education expenses (QHEE). In addition to federal tax benefits, a partial to full state income tax deduction for plan contributions is offered by twenty-six states. But because 529 plan accounts are intended to be used to pay higher education expenses, distributions of account appreciation that are not used to pay QHEE are subject to a penalty that varies from state to state.
For an analysis of Pre-Paid Tuition Plans, College Savings Plans, pointing out your role as the trusted advisor, see our article in AdvisorFX Advisor’s Journal.
Why is this Topic Important to Wealth Managers? Discusses how international planning can impact clients’ tax position domestically. Provides discussion on a number of common international tax concepts as they relate to U.S. taxpayers.
In previous blog this week, it has been briefly discussed that there may be a number of reasons a client may consider offshore planning, generally. Today we will focus on one major component of offshore considerations, the impact of world-wide income on U.S. taxpayers. It is generally accepted that U.S. taxpayers are expected to pay income taxes on income earned from sources worldwide. This concept is commonly referred to as “outbound” taxation.
It is the case that many sovereign nations will also have taxes on personal and/or corporate income that an individual or corporation could become subject to, creating in effect “double taxation.” And some foreign nations choose to have very low or no tax rate on certain types of income, or on corporations in general, thus allowing foreign income to potentially escape foreign taxation (and current U.S. taxation in the year that it is earned).
What are some rules that that Congress has attempted to avoid double taxation or subject foreign income to U.S. taxation?
Valuation discounts are increasingly challenged by the IRS. Gone are the days when assets could be dropped into a family limited partnership with some transfer restrictions and forgotten about until a valuation discount was needed to reduce a gift or estate tax bill. A recent U.S. District Court case, Fisher v. U.S., reminds us that times have changed. Often, placing assets in a business entity is no longer enough to justify a valuation discount—the entity must be run like a business to justify the discount. Read the analysis by our experts Robert Bloink and William Byrnes located at AdvisorFX Journal Valuation Discounts: Only for a Bona Fide Business
For some good news about valuation discounts, see our article in AdvisorFX Advisor’s Journal on the Jensen case.
The tax landscape is changing for the amount U.S. multinational corporations may claim through the foreign tax credit. This change is the result of the Statutory Pay-As-You-Go Act of 2010 that requires any increased spending must be offset by a corresponding increase in revenue. The foreign tax credit modifications narrowly escaped becoming the offsetting revenue raising provisions of the Unemployment Compensation Extension Act of 2010 that extended unemployment benefits. However, the success was short-lived, as these modifications were added to Pub. L. No. 111-226, the Education, Jobs and Medicaid Assistance Act of 2010. This legislation provides $10 billion of elementary and secondary education funding to protect teacher jobs from being cut. Nearly $10 billion over ten years is expected to be raised by altering various rules that corporations leverage to calculate their foreign tax credits and foreign-source income, providing the necessary revenue offset for this law.
In the article, we will examine the concept behind foreign tax credits offered in the United States; the history of foreign tax credits in the United States; the changes to the foreign tax credits; and the public policy behind the bill and the potential effects upon multinational corporations. To download the free article, please link to LexisNexis here at Tax Law Community
You may post any questions or comments below – Prof. William Byrnes
A recent IRS Chief Counsel Advice addressed the importance of making adequate disclosures to the IRS when filing a gift tax return, demonstrating the dangers of a tight lip. There, a taxpayer failed to disclose the method and valuation discounts used to value gifted stock. As a result, the taxpayer was unable to seek the protection from gift tax changes based upon the three year statute of limitations.
The statute of limitations for the IRS to question an item on a gift tax return is essentially unlimited if a gift is not “adequately disclosed” on the return, so taxes—and fees and interest—can be imposed on the inadequately disclosed gift any time after the return is filed.
The business owner who supports his parent, or an adult family member, may be missing an opportunity to lower his tax burden. In the context of a properly established insurance funded buy-sell agreement, small business clients have an opportunity to provide an adult family member with a fixed income while also protecting the client’s interest in the business and avoiding adverse tax consequences.
Why is this Topic Important to Wealth Managers? The terminology associated with common estate planning techniques is generally misguided. Provides a better understanding of the tax and legal implications, on behalf of the client’s estate plans, of trusts that purchase life insurance.
One commentator states “If the practitioner would examine either the Internal Revenue Code or the Treasury Regulation designed to interpret the Code, they will not find the use of the term ‘Insurance Trust’ or the term ‘ILIT.’” For a detailed analysis of the ILIT see the Main Library Section 4. Estate Planning Techniques H—Life Insurance Trusts.
For the complete blogticle and its analysis, see AdvisorFYI
The IRS released proposals for FATCA guidance on August 27, 2010, in Notice 2010-60. The notice outlines the shape of the regulations and raises grave concerns for a wide swath of transactions that have an offshore component— from foreign investments to captives and beyond.
Why is this Topic Important to Wealth Managers? Provides discussion on current situation of federal tax “stand-off” as it relates to clients’ planning objectives. Gives insight into market participants current choices in dealing with the Tax Cut dilemma.
Congress’ inaction is causing concern for many high net worth taxpayers. Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington says, “uncertainty over taxes means some individuals are ‘vulnerable to hysteria’ ”. And that some financial advisers are urging clients into “unnecessary or unwise transactions.” [1] With “[a]n estimated 315,000 U.S. taxpayers earn more than $1 million, according to the Joint Committee on Taxation”, it leaves a lot of room for opportunity and error.
Why is this Topic Important to Wealth Managers? Provides an overview of how the pending tax cut provisions will affect the national economy and your clients as a part of it. Discusses generally the relationship between tax and Congressional budget as they relate to the taxpayer burdens.
In the face of bailouts, new legislation and regulation, and a stalling economy, one area, taxes, is certainly being discussed among the public scuttlebutt. Specifically, the Bush Era Tax Cuts are the center of attention because they will sunset or expire, without further legislative action by the end of this year.
Although, Reagan’s administration saw higher growth in total, and annually, on average, than that of the previous and post 8 years of his term, his administration’s numbers are still below the 50 year trend, as well as the terms of some other Presidents, notwithstanding the unsupportive data on the short term effects of the tax cuts. However, there is a lack of conclusive evidence, therefore, to determine that a decrease in capital gains tax rates will have the short or long term affect of increasing total GDP. Yet, neither will an increase in the rate increase tax revenues.
We invite you to read the study and analysis at AdvisorFYI
Why is this Topic Important to Wealth Managers? Author Ben Terner of the Panel of Experts offers detailed information that has a direct affect on clients’ planning objectives as it relates to estate and gift tax. Provides a general discussion as well as detailed analysis of the current law and the affect of Congress’ current indecision.
Generally, “[g]ross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” [1] Which means gift income or inheritance income received by the beneficiary is not taxable income to the individual who receives property by such gift, bequest, devise, or inheritance. [2] “Although the donated or inherited property itself is not taxable, income derived from such property is includable in gross income.” [3]
Why is this Topic Important to Wealth Managers? Provides a basic overview of the tax cut provisions that are in effect but set to expire by the end of this year. Helps financial professional understand implications regarding client’s estate and personal plans in consideration of the Bush Tax Cuts.
As busy as Congress has been over the last year, it’s “finally turning its attention to the expiring 2001 and 2003 tax cuts”, says Robert Rubin who is co-chairman of the Council on Foreign Relations and former Secretary of the U.S. Treasury. Read the entire analysis at AdvisorFYI
Topics: Treaty Structures, Transfer Pricing, Risk Score Cards, Offshore Strategies and Compliance amongst others – taught via case studies
Delivery: 40hours of live lecture and case studies – audio headsets for web conferencing
Start: May 24 (Monday) – end August 13 (Friday)
When: New York 11am – 12:30 pm (Eastern Time)
Recordings: all lectures are made available within 1 hour on-demand
Contact: Prof. William Byrnes, Associate Dean – wbyrnes@tjsl.edu +1 (619) 297-9700 x 6955
Materials: tuition includes full Westlaw, Lexis, CCH, IBFD, Checkpoint, Orbitax and 20 other professional databases
Accreditation: applies toward the Legum Magister (LL.M.), Juris Scientiae Magister (J.S.M), Scientiae Juridicae Doctor (JSD) of Thomas Jefferson School of Law (San Diego)
Collaboration each course is 42 lecture hours webcam-online for with showing and sharing of applications – recorded for on-demand viewing. Globalnetwork built amongst students, faculty, and returning alumni.
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.
Article 74
Members of the United Nations also agree that their policy in respect of the territories to which this Chapter applies, no less than in respect of their metropolitan areas, must be based on the general principle of good-neighbourliness, due account being taken of the interests and well-being of the rest of the world, in social, economic, and commercial matters.
1999 Partnership For Progress And Prosperity: Britain And Her Overseas Territories
In 1999, Robin Cook presented to Parliament a White Paper Partnership for Progress and Prosperity: Britain and the Overseas Territories (the “White Paper”). The White Paper’s primary conclusion was that the Overseas Territories had successfully diversified their economies through developing global market positions in the offshore financial services industry but that the Overseas Territories required reputation maintenance through regulatory enhancement in order to maintain their global market position within this industry. The White Paper noted that the Caribbean Overseas Territories were potentially susceptible to money laundering and fraud because of their proximity to drug producing and consuming countries, inadequate regulation and strict confidentiality rules.
Also, the White Paper proposed that Britain grant full citizenship, i.e. with right of abode, to the Overseas Territories citizens. But this right of citizenship was not in exchange for implementing the more extensive regulatory regimes in alignment with the OECD Report. In 2002, the UK enacted the British Overseas Territories Bill[1] in order to fulfil the Government’s commitment, announced in the White Paper, to extend full British citizenship to those who were British Dependent Territories citizens.
Free Movement of Persons
Note that the nationals of the US, Netherlands, French, Portugal and Spanish territories have full parent State nationality with rights of abode. The non-colony status jurisdictions charged further discriminatory treatment, that they did not have the same rights of free movement and abode as the colonial nationals.
In its Report, the OECD members targeted trade in capital and services with the stick of sanctions, but did not offer a carrot, much less a lifeline, to the independent micro-economies. Some Island states’ pundits allege that the OECD drive against tax competition is a geo-political move for re-(economic) colonization. These commentators propose that the inevitable declining human development impact of the OECD’s drive against tax competition will be a brain drain to the OECD countries via legal and illegal immigration.
Because the UN Human Development Annual Report does not include all the Caribbean Islands, such as the non self-governing former colonies, the OECS Human Development Report is critical for the quantitative measuring and qualitative analysis of social and economic indicators for Eastern Caribbean territories, and to then be able to contrast these to other UN members captured by the UN Report.
It should be noted that the OECS Report noted that the Caribbean financial centers held approximately US$2 trillion in assets from international financial center activities. The OECS stated that these international financial services contributed foreign exchange to its members’ economies, revenue to its governments, and that the sector created employment while developing human resources and contributing to the growth of technology. The OECS concluded that the most important impact to the economies from international financial services was economic diversification.[2]
1990 Gallagher Report
In 1989, HMG commissioned the Gallagher Report (Survey of Offshore Finance Sectors of the Caribbean Dependent Territories) with the intent to review whether its territories’ offshore financial services sectors regulations met international standards. Overall, the Gallagher Report presented proposals to extend the range and scope of offshore financial services in the COTs through the introduction of new measures designed to improve the regulatory framework especially with relation to banks, trusts, insurance and company management. The Gallagher Report made specific recommendations to several jurisdictions.
By example, with regard to the British Virgin Islands, the Gallagher Report presented proposals to extend the range and scope of offshore financial services through the introduction of new measures designed to improve the regulatory framework as it relates especially to banks, trusts, insurance and company management. Following the Gallagher Report’s proposals, the BVI government revised in 1990 the 1984 IBC Act, enacted a modern Banks & Trust Companies Act to replace the 1972 legislation; and passed the Company Management Act requiring companies providing registration and managerial services to be licensed. In 1993, BVI enacted a Trustee (Amendment) Act in order to modernise the 1961 Trust Ordinance and the following year passed the 1994 Insurance Act.
With regard to Anguilla, Gallagher’s Report criticised the lack of up-to-date legislation, inadequate supervision of its financial sectors, and a confidentiality statute that encouraged “the type of business best avoided”. Gallagher’s Report recommended the enactment of three draft laws, as well as the repeal of the Confidential Relationships Ordinance 1981.[3] Following Gallagher’s Report, in 1992 the British Government aid agency engaged the consultancy firm of Mokoro to advise the Government of Anguilla on its economic strategy for the 21st century. The Mokoro Report concluded that the development of additional economic activity in Anguilla principally required the development of the financial sector. The 1993 Report stated that the financial sector’s socio-economic impact would be:
Substantial additional government revenue.
Sizeable increase in the contribution of professional services to the GDP (Gross Domestic Product).
Range of new employment opportunities for young people.
Increase in professional trading.
Inward migration of Anguillans living overseas.
Increase in the number of visitors and a decrease in their seasonability.
As a result of the Report, Anguilla received a three-year 10.5 million English pound grant from the Minister for Overseas Development to research and to develop a Country Policy Plan. In 1994, Anguilla updated its international financial center through enacting a package of twelve statutes.
Please contact me for further information or research that you would like to share on these topics at http://www.llmprogram.org.
[1] Bill 40 of 2001-2002 was enacted to fulfil the Government’s commitment, announced in March 1999 in its White Paper, to extend full British citizenship to those who were British Dependent Territories citizens.
[3] The Confidential Relationships Ordinance, 1981, made it illegal to give other Governments information, including information regarding tax offences.
THE OECD FORUM REGARDING HARMFUL TAX COMPETITION[1]
Over the past several weeks, I have written a series of blogticles addressing issues of tax information exchange. I will now pull back to circle around this subject, touching upon several forums, reports, and initiatives that either led up to or occurred during the OECD Forum. Recognizing that the Forum has obtained steam due to the global financial slump – I will address current initiatives and impacts after the historical annotation. Importantly, I will need to research and address the most recent OECD Forum in Mexico wherein Dr. Dan Mitchell, a press commentator for the Cato Institute, reported that the OECD is attempting to resuscitate the debunked arguments for capital export neutrality.[2]
1998 HARMFUL TAX COMPETITION: AN EMERGING GLOBAL ISSUE (OECD)
Let us begin this look back with a review of the seminal 1998 OECD Report . In 1998, the Organization of Economic Cooperation and Development (“OECD”) presented its seminal report Harmful Tax Competition: An Emerging Global Issue [“1998 OECD Report].[3] The 1998 OECD Report addressed harmful tax practices in the form of tax havens and harmful preferential tax regimes in OECD Member countries, but primarily in non-Member countries and their dependencies. The 1998 OECD Report focused on geographically mobile activities, such as financial and other service activities. The Report defined the factors to be used in identifying harmful tax practices and regimes, proposing 19 recommendations to counteract such practices and regimes. Because Switzerland and Luxembourg abstained from the Report, these two OECD members are not bound by its recommendations. The OECD has followed the 1998 Report with progress reports regarding implementation of the recommendations.
The OECD listed as four key factors to determine whether a tax regime was harmful:
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[4], international financial centres on OECD member blacklists i.e. The Bahamas, British Virgin Islands, and Cayman Islands.[5] Notably though, the list did not target jurisdictions such as Hong Kong and Singapore. Their absence from the list constituted disparate treatment, alleged the micro-economies, resulting merely from the micro-economies lack of diplomatic importance.
Also, the 1998 OECD Report, in line with general OECD member trade negotiation policy, did not address its members’ ring-fenced tax policies that created harmful effects to the developing world, but rather only addressed the tax competition issues that affected the developed States. By example, the 1998 Report did not address the US tax ring-fenced policy established in 1984 of exempting from withholding tax non-resident’s portfolio interest that led to the capital flight from Latin America of US$300 billion to US banks.[6] The 2000 Report listed the British overseas territory Virgin Islands as a targeted jurisdiction but did not list the US ring-fenced policy favourable toward the US overseas territory Virgin Islands, and most of the US’ other dependencies, that allows an exemption from US taxation on non-US source income for US taxpayers resident in the dependencies.[7] This factor, alleged the micro-economies, illustrated the disingenuousness of the Report. The pro-micro economy commentators alleged an OECD discriminatory cartel against non-members, and in line that the Report was merely self-serving of the cartel’s interests.
Enforcement Measures
The OECD proposed counter-measures to be applied against listed uncooperative, such as:
Restricting the deductibility of payments to tax havens;
Withholding taxes on payments to tax havens; and
Application of transfer pricing guidelines.
In order to be removed from the targeted list, the micro-economies had to issue Letters of Commitment to engage in effective provision of information for criminal tax matters for tax periods starting from 1 January 2004 and for civil tax matters for tax periods starting from 2006. All Caribbean States and territories were targeted by the OECD and succumbed to commitment letters.[8] The States and Territories that have issued these Letters of Commitment have based their commitment on at least two quid pro quos: (1) a diplomatic seat at the table for future discussions regarding the issue of tax competition, and (2) a level playing field wherein the OECD obtains commitment from its members to implement its recommendations.
My Commentary: Pro and Con
My commentary on the criticism of the OECD Report has been very detailed, and addresses the policy issues raised by the Report from a complex perspective.
First, the OECD States have democratically chosen government that democratically set the tax rates and rules that apply to their residents.[9] If the residents do not like the rates or the rules, then the residents must either use the democratic process to change the rates and rules or move to a different jurisdiction.[10] Thus, the often heard justification that OECD residents are justified in ‘hiding income’ because the OECD welfare States require high tax rates is not legitimate. Evasion, in the OECD, is a democratically established crime with legitimate sanctions.
Secondly, in the OECD, taxpayers have a jurisprudentially long-established right to arrange their affairs so as to incur the lowest incidence of tax. This is known as tax avoidance planning. Planning involves characterisation of income and transactions, timing of income, arranging activities that create value in the income value chain with a system and among systems, leveraging definitional and interpretative anomalies within a system and among systems, to name the basics.
Democratically elected governments may, even perhaps a duty to their welfare state societies, to protect their tax bases. Thus, these governments may change the tax rules to impose tax on transactions that previously avoided tax. On the other hand, retroactive regulatory changes are an affront to the jurisprudential principle of certainty and the Rule of Law. Retroactive changes have been enacted, albeit very rarely, and Courts need to be vigilant in maintaining the Rule of Law and the principle of certainty by striking down retroactive application in these situations.
The groundwork is thus set for a conflicting claim: the government for revenue and the taxpayer (assisted by tax lawyers, accountants, and consultants) to minimize taxation.
Another principle policy established by and binding upon the OECD members is free trade, albeit in mitigated application. The OECD preaches the freedom of movement of goods, services, and investment capital. The free movement of persons which was once an international norm, lost favour amongst the members, but at least amongst the EU trade bloc, has regained its principle status. The principles of free trade and the principle of taxation may create conflicting claims, both legitimate, upon taxpayers (tax subjects) and upon the chain of events that create income (tax objects). I will not go into further detail on this argument, but leave it for the lecture and our discussions in our program.
Parting question for this week
Finally, this Report and the subsequent OECD Report on Banking that will be briefed in later blogticles both address the Exchange (“provision” because it is one way) of Information. I leave you with this issue to consider: Does Public International Law or international jurisprudence or the jurisprudence of our respective jurisdictions establish a right against retroactive application of a change in revenue department policy or attitude toward previously accepted norms in tax planning?
[1] The Forum has changed names since 1998 from “Harmful Tax Competition” to Harmful Tax Practices”.
[2]http://www.freedomandprosperity.org/memos/m09-09-09/m09-09-09.shtml. In potential support of Dr. Mitchell’s investigative press report is that the OECD Forum now uses the language in its communiqués “encourage an environment in which fair competition can take place”, sounding very similar to the industrial arguments promoting trade protectionism and barriers through countervailing dumping duties against States with low labour and materials costs.
[3] You may obtain this Report without charge in PDF on the OECD website at http://www.oecd.org/.
[4] The traditional micro-economies had previously been uni- agriculture economies, many exporting to their colonial parent under favourable import regimes to either counter OECD agricultural subsidy policies or as a subsidy in itself to the former/current colony to assist it with foreign exchange earnings that in turn could be used to meet the colonies trade deficit in goods. Many of the uni-economies diversified into tourism services to mitigate the trend of their lack of agricultural competitiveness. Eventually, the colonies entered the international financial services sector to mitigate against their dependency on tourism and to increase their local inhabitants standard of living.
[5] See Toward Global Cooperation, Progress in Identifying and Eliminating Harmful Tax Practices, OECD (2000) at 10. Forty-seven jurisdictions were initially targeted by the OECD, approximately a quarter of the world’s States and jurisdictions.
[6] The US imposes tax upon its taxpayers’ interest income. See Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, Reuven Avi-Yonah, 113 HVLR 1573, 1631 (May 2000) wherein he addresses this policy in the context of President Reagan’s administration’s efforts to attract foreign capital to fund the ballooning US deficit.
[7] The US imposes tax upon her citizens on the basis on their nationality. Thus, regardless of residency, a US taxpayer is subject to the full impact of US domestic taxation. This tax policy’s application to her own citizens is maintained in her tax treaties through the savings clause. The US grants two exceptions to this policy. The first is a exception limited to a ceiling of US$80,000 of employment income for US taxpayers resident in a foreign jurisdiction that remain outside the US at least 330 days. The second is the more egregious ring fence policy that allows an unlimited exemption from US tax on non-US source income for US taxpayers resident in the US Virgin Islands. The Virgin Islands, in turn, grants a generous tax subsidy benefit if the taxpayer’s activity is conducted through an approved investment incentive vehicle.
[8] By example, in June 2000, all members of the Organization of Eastern Caribbean States were listed by the OECD as tax havens. Under the threat of the OECD sanctions being implemented by its members against the Caribbean States, all issued Letters of Commitment to the OECD.
[9] I start with the democratic argument in order to ground my arguments in public international law. All OECD members are members of the UN (Switzerland having only recently joined). The OECD and UN principles hold high regard for democratic processes. Democratic participation is held up to the level of being a fundamental human right.
[10] Several OECD States have enacted anti-emigration tax statutes that continue to subject former residents (nationals in the case of the USA) to tax. I strongly disagree with this anti- free trade policy, in this case, that impacts the free movement of persons. This policy creates export barriers to low tax jurisdictions that seek to compete for the immigration of person with capital, such as retirees and entrepreneurs.
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.[1] The EU-US MLA and Extradition Agreements (see my blogticle wherein I will address Extradition Agreements) do not currently extend to the United Kingdom’s Overseas Territories. Article 16 (1)(b) of the MLA agreement enables the agreement to apply to Overseas Territories of EU member States but only where this is agreed by exchange of diplomatic note, so it is not automatic.
The agreement’s purpose is to assist a requesting state to prosecute offences through cooperation of another State or jurisdiction in obtaining cross-border information and evidence. This Agreement applies to tax matters involving criminal tax evasion. This Agreement could widen the scope of financial institution and professional service provider information allowed to be requested specifically with regard to the financial information covered below.
Any party to the Agreement is required pursuant to the request to provide information regarding whether its banks, other financial institutions and non-bank institutions[2] within its jurisdiction possess information on accounts and financial transactions unrelated to accounts regarding targeted natural or legal persons. The Agreement specifically excludes banking secrecy as a defense for non-compliance. In order to receive banking or financial information from a financial institution or non-financial institution, the requesting State must provide the competent authority of the other State with:
the natural or legal person’s identity relevant to locating the accounts or transactions;
information regarding the bank/s or non-bank financial institution/s that may be involved, to the extent such information is available, in order to avoid fishing expeditions; and
sufficient information to enable that competent authority:
to reasonably suspect that the target concerned has engaged in a criminal offence;
to reasonably expect that the bank/s or non-bank financial institution/s of the requested state may have the information requested; and
to reasonably expect that there is a nexus between the information requested and the offence.
This multi-lateral MLAT Agreement, unlike TIEAs that have developed since 2001, contains a dual criminality requirement, but it applies retroactively to offences committed before the Agreement’s entry into force date, Article 12-(1) provides for this. Criminal tax fraud is an underlying crime for purposes of the offence of money laundering. Thus, this Agreement probably will allow any party to the Agreement to seek financial information from another State regarding a specific taxpayer’s criminal tax fraud for offences committed before the tax year beginning January 1, 2004. The retroactive provision in Article 12(1) may run counter to a fundamental principle of criminal law in that a person cannot criminally suffer for an act or conduct which was not an offence at the time the act was committed or conduct took place. Whether these MLAT agreements establish a situation of retroactive criminal application may eventually be addressed as a human rights issue.
Tax Treaties course
In the Tax Treaties course starting in September, Prof. Marshall Langer will be undertaking an in-depth analysis of these instruments and issues raised above.
[1] Agreement on Mutual Legal Assistance Between the European Union and the United States of America, Article 16, Territorial Application.
[2] Including trust companies and company service providers
Over the past weeks, we have opened the exploration of issues addressing business and legal service outsourcing, new trends in wealth management, the history and taxation of charities, anti money laundering regulations, compliance training, and even The Obama administrations’ proposed international tax rule changes. Many topics have been left hanging for which further researched exploration is warranted.
However this week, because of the continuing interest in Cross-Border Information Exchange, primarily due to the press about the UBS settlement and the soon turning over of approximately 5,000 tax-evading US account holders, over the coming weeks we will explore Information Exchange and Cross Border Assistance with Tax Collection.
Keep your emails coming about suggestion for this blog, and your comments. I have been keeping up with answering each of you within a day or two. Prof. William Byrnes (wbyrnes@tjsl.edu)
Cross-Border Information Exchange and Mutual Assistance (with regard to Tax)
To uncover and analyze the issues of cross-border tax information exchange and also the mutual assistance with regard to tax collection by one jurisdiction on behalf of another one, we must at a minimum over the next few weeks examine the following:
(1) the behaviour of the OECD and its members toward the micro economy jurisdictions versus the OECD’s treatment amongst it own members and other economically significantly trade partners;
(2) the EU Savings Directive and other related EU Directives;
(3) the US proposal to automatically report to EU State’s bank interest of their residents;
(4) the tax application of the mutual assistance and extradition treaty between the US and EU;
(5) the geo-politics of tax information exchange agreements (TIEAs) such as positive inducements made and broken by the US to the Caribbean, and the inverse being recent threats made by the OECD to the international financial centers;
(6) other international initiatives for the provision of tax information, such as the FATF and Offshore Group of Banking Supervisors (OGBS) partnership and finally,
(7) the procedural process and practicalities of seeking tax information pursuant to an international agreement, be it a full tax treaty, a limited agreement only applying to exchange of information, another type of bi-lateral or multi-lateral instrument, or just simply domestic legislation.
Tax Information Exchange Background
We will need to consult the following exemplary documents (amongst many others) over my coming blogticles, being:
OECD Model DTA – Tax Information Exchange (Art. 26 & 27)
OECD Model Convention for Mutual Administrative Assistance in the Recovery of Tax Claims
Convention on Mutual Administrative Assistance in Tax Matters (OECD & Council of Europe)
UN Model DTA – Tax Information Exchange (Art. 26)
OECD Model Tax Information Exchange Agreement (TIEA)
EU Directive on Exchange of Information
EU Directive on Mutual Assistance for the Recovery of Claims
EU Savings Directive
Mutual Legal Assistance Treaties (MLATs) and US-EU MLATs
Improving Access to Bank Information for Tax Purposes
Financial action task force (FATF)
Offshore Group of Banking Supervisors Best Practices (OGBS)
Exchange Pursuant to the OECD Conventions
OECD MODEL DTA – Tax Information Exchange (Art. 26 & 27)
Article 26, Exchange of Information, of the 2003 OECD Model Convention reads:
The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Convention or of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. … Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in the first sentence. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.
The 2003 OECD Model, pursuant to its Commentary to the article, allows the following methods of information disclosure[1]
By request
Automatically
Spontaneously
Simultaneous examination of same taxpayer between the two States
Allowing requesting foreign Revenue examination of taxpayer in requested State
Industry-wide exchange of tax information without identifying specific taxpayers
Other methods to be developed between the States
The 2003 Model established limitations on the request of information:[2]
Requested State is not obliged to go beyond its own or the Requesting State’s capacity pursuant to its internal laws in providing information or taking administrative actions.
Requested State should not invoke tax secrecy as a shield.
Requested State is not obliged to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process.
Requested State is not obliged to supply information regarding its own vital interests or contrary to public policy (Ordre Public).
Article 27 of the 2003 Model addresses assistance in the collection of taxes, stating:
1. The Contracting States shall lend assistance to each other in the collection of revenue claims. …
2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.
3. … That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.
The limitations remain the same as under Article 26 but also include that the Requesting State must have exhausted reasonable efforts of collection and conservancy pursuant to its domestic law. Also, the Requested State’s obligation is limited if its administrative burden would exceed the tax collected for the Requesting State.
2003 OECD Model Agreement for Tax Information Exchange (TIEA)
The OECD Model TIEA was developed by an OECD Working Group consisting of the OECD Members and delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino. The OECD Model TIEA obviates from several principles established in the 2003 OECD Model DTA, 2001 UN Model, 1981 OECD Convention on Tax Claims and 1988 OECD Convention on Administrative Assistance.
The Model TIEA provides that the Parties shall give “information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.” The Model TIEA allows for a two year phase between information sought in criminal tax matters, i.e. criminal tax evasion, versus the later extension to information sought in civil tax matters i.e. civil tax evasion but importantly also tax avoidance.
The TIEA obviates from the traditional requirement of dual criminality, that is the underlying crime for which information is sought should be a crime in both Parties’ domestic laws: “Such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under the laws of the requested Party if such conduct occurred in the requested Party.”
Because the OECD Model TIEA is meant to be applied to negotiations with jurisdictions that do not have a direct tax system, the TIEA provides that the Requested Party must seek requested information even when it does not need the information for its own tax purposes. But a Requested State is not obliged to exceed the power to gather information that is allowable under its laws. However, the TIEA is specific that each Party is obliged to provide:
“a) information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees;
b) information regarding the ownership of companies, partnerships, trusts, foundations, “Anstalten” and other persons,…ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and in the case of foundations, information on founders, members of the foundation council and beneficiaries….”
Procedurally, the Requesting State’s competent authority must provide, in order to “demonstrate the foreseeable relevance of the information to the request” the following information:
“(a) the identity of the person under examination or investigation;
(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;
(c) the tax purpose for which the information is sought;
(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;
(e) to the extent known, the name and address of any person believed to be in possession of the requested information;
(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;
(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”
Next Blogticle
In our next blogticle we will next turn to the 1988 Convention On Mutual Administrative Assistance In Tax Matters and continue form there. In case you are wondering what this Convention is and why it is relevant, it came into force April 1, 1995 amongst the signatories Belgium, Denmark, Finland, Iceland, Netherlands, Norway, Poland, Sweden, and the US, providing for exchange of information, foreign examination, simultaneous examination, service of documents and assistance in recovery of tax claims.
In the Tax Treaties course starting September 14, Prof. Marshall Langer will be undertaking an in-depth analysis f these instruments and issues raised above.
[1] Commentary to Article 26, paragraph 1 sections 9. and 9.1, OECD Model Tax Convention, 2003.
[2] Commentary to Article 26, paragraph 2 sections 14, 15 and 16, OECD Model Tax Convention, 2003.
William Byrnes' Tax, Wealth, and Risk Intelligence 