Mutual Administrative Assistance in Tax Matters
Mutual Administrative Assistance in Tax Matters For decades now, the United States Treasury Department has proclaimed that exchange of tax information between the United States and other nations is critical to the Internal Revenue Service's ability to fight income tax evasion by U.S. residents willing to make use of foreign bank accounts and foreign entities to escape the U.S. tax net. Article 26 of the U.S. Model Income Tax Convention (the U.S. Model Convention), implemented in nearly 70 bilateral income tax treaties between the United States and its major (and less major) trading partners, provides for extensive exchange of information between the IRS and its counterparts abroad. In addition, the United States has entered into Tax Information Exchange Agreements (TIEAs) with more than twenty countries with which the United States has been unwilling or unable to negotiate full-scale income tax treaties – most recently, such former "tax haven" jurisdictions as Liechstenstein, Monaco, Gibraltar and Panama. The U.S. success in extending the reach of its tax information exchange arrangements is mirrored by the increasing numbers of income tax treaties and TIEAs now in force around the world that are based on Article 26 of the Model Convention with respect to Taxes on Income and on Capital published by the Organization for Economic Development and Cooperation (the OECD and the OECD Model Convention) -- a provision which is in most respects identical to Article 26 of the U.S. Model Treaty.
The ever-growing list of bilateral income tax treaties and TIEAs is important, certainly, but there is another development that has been occurring with far less fanfare: the emergence of the Convention on Mutual Administrative Assistance (the Mutual Assistance Convention) under the auspices of the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum). Originally established in 2001 by developed-nation members of the OECD, the Global Forum reemerged during the financial crisis of 2009 as a far broader-based institution devoted to the development of an international standard of transparency in tax matters and its implementation through arrangements permitting the free flow of tax information across national borders. As of late 2012, the Global Forum had 116 members, all committed to extending the reach of tax information according to the "global standards" emerging from the work of the OECD and the experience of leading countries like the United States.
In May 2010, with the support of the Global Forum, the OECD and the Council of Europe published a Protocol amending the Convention on Mutual Assistance in Tax Matters that they had adopted in January 1988 (the 1988 Convention) as a vehicle for facilitating tax information exchange among their respective member states. As of January 2013, the revamped Mutual Assistance Convention had been ratified by 19 nations and signed by at least 20 more.
The United States signed the Mutual Assistance Convention at the unveiling ceremonies at the offices of the OECD in Paris in May 2010. President Obama submitted the Convention to the U.S. Senate for ratification on May 17, 2012. The Senate has yet to act.
The 1988 Convention
The OECD and the Council of Europe developed the 1988 Convention as a mechanism for facilitating cooperation with respect to tax information and tax audits among their respective member states, virtually all of which enjoyed developed economies and had extensive income tax treaty networks already in place. The 1988 Convention built on precedents for tax information exchange and assistance that had emerged in the European Union and in earlier arrangements for the sharing of tax information among smaller groups of nations (such as the so-called Nordic Union of the Scandinavian states).
The substantive provisions of the 1988 Convention set forth the circumstances under which one party to the Convention (the requesting party) can obtain assistance in tax matters from another party to the Convention (the requested party). Under Article 5, one party may request another party to provide specific tax information with respect to identified taxpayers and the requested party is obliged to do so, subject to exemptions specified in the Convention. Subsequent articles deal with assistance that is permitted, but not strictly speaking required, under the Convention: automatic exchange of information upon agreement of the two parties (Article 6); spontaneous transfer of information from one party to another (Article 7); simultaneous tax examinations by agreement of the two parties (Article 8); and tax examinations conducted by one party on the territory of the other party with the agreement of the other party (Article 9).
The 1988 Convention was open to all members of the OECD and all members of the Council of Europe. Once five eligible members signed and ratified the Convention, it became binding on all signing and ratifying members. By the end of the year 1999, the Convention had been signed and ratified by the United States (1991) and by seven other European nations: the five Nordic nations (1995-96), the Netherlands (1996) and Poland (1997). Thereafter, the Convention was signed and ratified by Belgium (2000), Azerbaijan (2004), France (2005), Italy (2006), the United Kingdom (2008), Ukraine (2009) and Spain (2010). Three countries adopted the 1988 Convention at the same they ratified the amended Convention: Georgia and Slovenia (2011) and Korea (2012).
The Financial Crisis and the G-20 Call
By the onset of the financial crisis of 2007-09, international tax evasion had been widely recognized as a serious problem for tax administrators worldwide. The visibility of the issue skyrocketed when, in April 2009, the representatives of the G-20 Group of developed nations issued a call for action "to make it easier for developing nations to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information." Aided by the impetus of the G-20 pronouncement, the Global Forum reemerged with renewed force and a determination to extend its scope beyond the developed nations of the OECD and the Council of Europe to the rest of the developed and the developing world.
One method that the Global Forum chose to implement the mandate of the G-20 pronouncement was to revive the 1988 Convention, update it to meet the current "global standard" for tax assistance, and open it up to any nation willing and capable of engaging in meaningful exchange of tax information. Barely a year after the publication of the G-20 pronouncement, drawing on the work of the Global Forum, the OECD and the Council of Europe published their Protocol revising the 1988 Convention and offering membership in the revised Mutual Assistance Convention (the Revised Convention) to all qualified nations.
Adoption of the Emerging "Global Standard"
From a substantive point of view, the text of the Revised Convention is not all that different from the text of the 1988 Convention. The Revised Convention adopts the newly-emerged elements of the so-called "global standard" for transparency and information exchange and, not surprisingly, largely mirrors the provisions of the updated Article 26 of the OECD Model Convention that the OECD eventually approved in July 2012. The following discussion focuses on the changes between the 1988 Convention and the Revised Convention.
Article 4 of the 1988 Convention set out general standards under which a requested party was required to obtain and exchange tax information with a requesting party. Article 4 of the Revised Convention continues to impose on the requested party the obligation to obtain and exchange all information foreseeably relevant to tax matters in the requesting party, but simplifies and expands the standard so that the obligation applies to all information foreseeably relevant to "the administration or enforcement of [the requesting party's] domestic laws concerning the taxes covered by the Convention" – which includes all taxes on income, capital and net wealth imposed by the national governments of the parties and many additional taxes levied by the national governments of the parties and their political subdivisions.
Article 4 of the Revised Convention extends the obligation to obtain and exchange information to information relevant to criminal as opposed to civil tax matters, eliminating a requirement that the requested party agree to the requesting party's request before becoming obliged to obtain and exchange information relevant to criminal investigations.
Information Exchange on Request
Article 5 of the 1988 Convention, dealing with exchange of information on request, is unchanged.
Automatic Exchange of Information
Article 6 of the 1988 Convention imposed an obligation on a requested party to exchange information with a requesting party automatically, but only with respect to categories of cases and in accordance with procedures adopted by the requesting party and the requested party by mutual agreement. Article 6 of the Revised Convention is unchanged.
Spontaneous Exchange of Information
Article 7 of the 1988 Convention permitted any party to forward to another party, without being asked, information which the transmitting party deems of potential interest to the recipient party. Article 7 of the Revised Convention is unchanged.
Simultaneous Tax Examinations
Article 8 of the 1988 Convention permitted two parties to agree to engage in simultaneous tax examinations. Article 8 of the Revised Convention is unchanged.
Tax Examinations Abroad
Article 9 of the 1988 Convention permitted one party to agree to permit agents of another party to enter the territory of the first party to conduct tax examinations. Article 9 of the Revised Convention is unchanged.
Assistance in Recovery
Articles 11 through 16 of the 1988 Convention set out rules under which a requested party could provide assistance to a requesting party with respect to the recovery of tax claims. The corresponding articles of the Revised Convention are unchanged.
Service of Documents
Articles 17 of the 1988 Convention set out rules under which a requested party could provide assistance to a requesting party with respect to the recovery of tax claims. The corresponding article of the Revised Convention is unchanged.
Information to be Provided
Article 18 of the 1988 Convention, setting out the information that a requesting party must supply to the requested party with its request, is largely unchanged, except that the wording is changed to make clear that the requesting party may identify a taxpayer by information other than the taxpayer's name and address. The Commentary to the Revised Convention addresses generally the issue of drawing the line between legitimate requests for assistance and unacceptable "fishing expeditions."
Limits to the Obligation to Provide Assistance
Articles 19 and 21 of the 1988 Convention set out limitations on the obligation of a requested party to provide assistance to a requesting party. The Revised Convention generally carries these limitations forward, with relatively minor amendments relating to the following two rules: first, the rule that a requesting party exhaust all internal means of obtaining information before seeking assistance under the Convention, unless the costs of such measures would give rise to "disproportionate difficulty"; and second, the rule that a requested party may decline to provide assistance where the administrative burden of doing so would be "clearly disproportionate" to the benefits to be derived by the requesting state.
More significantly, Article 21 of the Revised Convention contains two new provisions that implement the emerging "global standard" on the extent of mutual assistance obligations:
- Article 21, paragraph 3, requires a requested state to obtain and exchange relevant tax information even though the requested state "may not need such information for its own tax purposes"; and
- Article 21, paragraph 4, prohibits a requested state from declining to obtain and exchange relevant tax information "solely because the information is held by a bank [or other financial institution] or because it relates to ownership interests in a person."
Article 22 of the 1988 Convention set forth standards under which a requesting party was required to maintain and protect the confidentiality of information received from a requested party. The Revised Convention generally carries forward these restrictions, with the following significant changes:
- The requesting party is required to follow the rules of confidentiality prevailing under its national law and "under safeguards which may be specified by the requested party as required under its domestic law"; and
- The requesting party is permitted to disclose confidential information in public court proceedings or in judicial decisions relating to taxes without prior authorization from the requested party.
Article 30 of the 1988 Convention permitted any party to enter reservations to its ratification of the 1988 Convention limiting the extent, if any, to which it agreed to provide assistance to other parties with respect to any matter other than the exchange of information relating to income, capital and wealth taxes imposed at the national level of another party. The substance of Article 30 is carried forward in the Revised Convention virtually unchanged.
Extension of the Revised Convention beyond the OECD and the Council of Europe
The text and the commentary to the Revised Convention, as noted above, generally correspond to the most recent revision to the OECD Model Convention, and in that sense adhere to the emerging "global standard" of transparency and exchange of information. What is perhaps most interesting about the Revised Convention is that the OECD and the Council of Europe have extended an invitation to all nations, not just their respective members, to adhere to the Revised Convention. The invitation thus extended is not, however, unlimited. Nations that are not members of the OECD or the Council of Europe must request to be invited to sign and ratify the Revised Convention. Decisions on whether to permit applicants to join the Revised Convention are to be taken by consensus of the parties to the Revised Convention through the coordinating body established under Article 24 of the Original Convention. Article 24 of the Original Convention, which was not changed by the Revised Convention, provided that a coordinating body composed of representatives of the competent authorities of the Parties should monitor the implementation and development of the Convention, under the aegis of the OECD.
The primary issue here is, of course, whether potential parties to the Revised Convention have the necessary resources both: (i) to obtain and provide information requested by other parties; and (ii) to maintain the confidentiality of information received from other parties. This was not such a big issue under the 1988 Convention because, for the most part, the parties to the 1988 Convention were already linked by a network of bilateral tax conventions that included at the very least tax information exchange provisions. Even so, only the United States and 14 other members of the OECD and/or the Council of Europe had ratified the 1988 Convention by the time the OECD released the Revised Convention.
The Revised Convention is potentially available to all 116 members of the Global Forum and any additional nations that apply to join the Global Forum in the future, but the Global Forum has developed a process by which the reach of the Revised Convention can safely be extended worldwide. Specifically, the Global Forum has developed detailed standards for determining when a particular nation has the capacity and the inclination to participate fully in the exchange of information and the provision of tax assistance under the Revised Convention. Armed with these standards, the Global Forum embarked in 2010 on a program of conducting two in-depth "peer reviews" of each member of the Global Forum and potential participant in the Revised Convention:
- a Phase I "peer review" that "examine[s] the legal and regulatory framework for transparency and the exchange of information for tax purposes"; and
- a Phase II "peer review" that "looks into the implementation of global transparency standards and exchange of information in practice."
The results of the Global Forum's efforts are impressive. According to a report issued in October 2012, the Global Forum had completed 88 reviews of Global Forum members, representing a significant majority of the membership. Sixty-six of the completed reviews were Phase 1 reviews, with only 14 of the reviewed jurisdictions failing to be cleared to move on to Phase 2 reviews. Twenty-two of the completed reviews were combined Phase 1/Phase 2 reviews: Argentina, Australia, Canada, China, Denmark, France, Germany, Greece, Ireland, Isle of Man, Italy, Japan, Jersey, Korea, Mauritius, Netherlands, New Zealand, Norway, South Africa, Spain, the United Kingdom and the United States. As a result of these 88 reviews, the following 12 nations were determined to have all the necessary elements of transparency and information exchange in place: Australia, China, France, Ireland, Isle of Man, Italy, Japan, Norway, and, after Phase 1 audits only, India, Malta, Qatar and the Seychelles. The United States was deemed not to have all the necessary elements in place primarily because of concerns over the availability of information regarding the ownership of limited liability companies organized in the United States (read, Delaware) but having few if any economic connections to the United States.
The Global Forum has now begun Phase 2 reviews of nations that passed the Phase 1 audit, either on the first try or after addressing deficiencies raised in the Phase 1 audit.
The object of the Global Forum's "peer review" process is to assure that each nation that adheres to the Revised Convention can and will comply with its mandates for broad exchange of tax information and assistance in tax matters between member nations. This is critically important to any potential participant in the Revised Convention because, by signing on to the Revised Convention, a new participant becomes bound to exchange tax information with, and provide tax assistance to, each other member, without the opportunity to make an independent determination with respect to the likely quality of the interactions with any particular counterparty.
Ratification of the Revised Convention
The United States was one of the 15 nations that signed the Revised Convention when the OECD presented it in May 2010, but the U.S. Senate has not yet ratified the Revised Convention. As of January 2013, the following 18 countries have signed and ratified the Revised Convention:
The Revised Convention became effective as to ratifying members after 5 countries ratified the Revised Convention.
Prospects for the United States
The United States has been an ardent proponent of information exchange over the years and was one of the first states to sign the Revised Convention. There are costs to the United States of adopting the Revised Convention, however, notably: (i) the obligation to exchange tax information and provide tax assistance to any nation invited to join the Revised Convention by consensus of the parties to the Revised Convention; and (ii) the obligation to take steps to assure that the United States itself can satisfy its reciprocal obligations to exchange tax information and provide tax assistance to other parties. These costs, however, pale in comparison with the addition of basically the entire world to the network of nations with which the United States shares tax information and provides tax assistance.
One immediate benefit to the Revised Convention is that it solves a major impediment to the implementation of the Foreign Account Tax Compliance Act, or FATCA. The U.S. Treasury Department is actively seeking intergovernmental agreements with nations around the world to implement FATCA, but as it now stands the United States must negotiate a TIEA or tax treaty to permit it to make such an agreement with a country like Argentina or Brazil, neither of which has a tax treaty with the United States. A new TIEA or a new treaty is subject to ratification by the U.S. Senate. But if it can only get the Revised Convention past the U.S. Senate, the Treasury Department can enter into a FATCA agreement with any other party under the authority of the Revised Convention. Argentina has already ratified the Revised Convention, and Brazil is on track to do so as well.
But this all depends on whether the U.S. Senate puts its stamp of approval on the Revised Convention.
Mr. Smiley is Professor, Graduate Tax Program, at the Georgetown University Law Center. Professor Smiley is also Senior Counsel to Caplin & Drysdale, Chartered, Washington, D.C.
The Global Forum on Transparency and Exchange of Information for Tax Purposes (OECD, 16 April 2012). The OECD maintains and information website at: www.oecd.org. The Global Forum maintains informational websites at: www.oecd.org/tax/transparency ; and at: www.eoi-tax.org.
Global Forum on Transparency and Exchange of Information for Tax Purposes: Statement of Outcomes, Cape Town, South Africa, 26-27 October 2012 (OECD, 26-27 October 2012).
Protocol amending the Convention on Mutual Administrative Assistance in Tax Matters and Revised Explanatory Report to the Convention on Mutual Administrative Assistance in Tax Matters (OECD 2010).
Exchange of Information: Argentina becomes the first South American country to become a party to the Multilateral Convention (OECD, 13 September 2012). Updated data from Wikipedia as of January 31, 2013.
Message from the President of the United States transmitting the Protocol Amending the Convention on Mutual Administrative Assistance in Tax Matters, done at Paris on May 27, 2010 [and] signed by the United States on May 27, 2010 (112th Congress, 2d Session, Treaty Document 112-5, 2010).
Joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters and Explanatory Report (OECD 1988).
As reported on Wikipedia as of January 31, 2013.
Update to Article 26 of the OECD Model Tax Convention and its Commentary (OECD 17 July 2012).
Regarding automatic exchange of information, see Automatic Exchange of Information: What It IS, How It Works, Benefits, What Remains to be Done (OECD 24 July 2012).
Regarding secrecy issues, see Keeping It Safe: The OECD Guide on the Protection of Confidentiality of Information Exchanged for Tax Purposes (OECD 24 July 2012). See in this regard Treasury Decision 9584 (April 19, 2012), "Guidance on Reporting Interest Paid to Nonresident Alien Individuals."
Tax Transparency 2012: Report on Progress (OECD October 2012).
See in this regard Treasury Decision 9584 (April 19, 2012), "Guidance on Reporting Interest Paid to Nonresident Alien Individuals."
"Mutual Administrative Assistance in Tax Matters", published in Journal of Corporate Taxation, Volume 40, Number 03, May/June 2013. © 2013 by Thomson Reuters/Tax & Accounting. Reprinted with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of Thomson Reuters/Tax & Accounting.
- Senior Counsel