Wednesday, October 12, 2011

GAO Report On Exchange of Information Between U.S. and Its Treaty Partners (10/12/11)

GAO recently issued a report, titled IRS's Information Exchanges with Other Countries Could Be Improved through Better Performance Information (GAO-11-730 September 2011), here, describing the U.S. treaty system for sharing information between treaty partners (the treaties involved are bilateral negotiated treaties involving only two countries (or states in treaty speak). Readers of this blog will recall that, pursuant to pressure on UBS and indirectly the Swiss system of banking secrecy, the United States obtained information about UBS' U.S. clients by treaty request pursuant to the Exchange of Information provision in the U.S. / Swiss Double Tax Treaty.  I call the type of request where the name of the taxpayer is not known a John Doe Treaty Request. Readers will also remember that the U.S. continues to put pressure to obtain this type of information from other Swiss banks. Negotiations regarding that access are ongoing.

The GAO report is a worthwhile read for those interested in the use of treaties to obtain information regarding U.S. persons' offshore accounts. The report is broader than that, of course, but is useful for those interested in offshore accounts. I excerpt below some parts that I think are particularly useful for readers of this blog. I focus only on the concepts involved and not on the specific procedures and implementations (which are summarized in the Report). I also omit footnotes.

IRS's Information Exchanges with Other Countries Could Be Improved
through Better Performance Information
United States Government Accountability Office

Report to the Permanent Subcommittee on Investigations,
Committee on Homeland Security and Governmental Affairs, U.S. Senate

September 2011




International agreements, such as income tax treaties, permit the United States and other countries to provide information to each other for tax administration and enforcement purposes through a process referred to as exchange of information or information exchange. Information may be shared upon request or without a preceding request.

The information shared between countries can cover a range of documents and sources, and can occur in a variety of formats. Exchanges include responses to narrowly tailored requests for documents related to a specific taxpayer, as well as records for thousands of taxpayers. Exchanges are not limited to tax returns and other tax system-specific information; other sources can involve public records, information from securities brokers, and real-estate information. Exchanges are also defined to include broad-based discussions of policy and administration between tax authorities. According to the Joint Committee on Taxation (JCT), there were nearly 2.5 million disclosures of tax returns or return information to foreign countries under tax treaty disclosure authority in 2010.2 The total number of disclosures may be greater than the number of taxpayers involved, as the same taxpayer may be the subject of more than one information exchange.

Legal Framework of Exchange of Information

Tax treaties [often referred to as Double Tax Treaties], Tax Information Exchange Agreements (TIEA), and Mutual Legal Assistance Treaties (MLAT) provide U.S. officials working on tax matters the authority to exchange information with authorities in other countries. Generally, these agreements contain exchange of information provisions that have been agreed upon by the United States and one other country or jurisdiction; that is, they are bilateral. While U.S. domestic law or international law does not prevent countries from providing the United States with otherwise unprotected information, such exchanges typically do not occur outside the bounds of these agreements.

Agreement Types

Tax treaty provisions cover a wide range of tax issues but have two primary purposes; (1) avoiding double taxation and (2) enforcing the domestic tax laws of treaty partners. All but one tax treaty between the United States and other countries contains provisions that authorize exchange of information. According to officials at the Department of the Treasury, U.S. officials generally rely on a model income tax treaty to identify the terms and provisions that the United States would like to incorporate into its agreements with other countries. The U.S. Model Income Tax Convention of 2006 is the most recently published model treaty that U.S. officials rely on to negotiate tax treaty provisions, and includes Article 26 concerning information exchange. The Department of State serves as an advisor to the Department of the Treasury, which develops and negotiates tax treaties and other international agreements related to tax matters.

Although model treaties are the starting point for U.S. negotiations with other countries, officials we spoke to noted that the terms and conditions of tax treaties, like other international agreements, are the product of negotiations between the countries involved. Specific agreements vary in the terms or provisions governing exchange of information between the United States and individual treaty partners, and, as discussed later in this report, these variations can have meaningful effects on the exchange of information process. When seeking approval for a treaty, including tax treaties, the Secretary of State formally submits the proposed treaty to the President of the United States for transmittal to the United States Senate. Following advice and consent of the United States Senate, the President of the United States signs the treaty, and directs the Secretary of State to take the actions necessary for the treaty to enter into force. After both countries have complied with the entry-into-force provisions of the treaty, it becomes binding under international law.

TIEAs also authorize exchange of information between the United States and other countries for tax purposes. Like tax treaties, the provisions contained in TIEAs must be agreed upon by all parties to the agreement, and the terms and conditions governing exchange of information between the United States and other countries may differ from agreement to agreement. Unlike treaties, however, TIEAsTIEA is to facilitate the exchange of information. As with tax treaties, TIEAs become binding under international law once both countries have complied with the entry-into-force provisions.

MLATs create a routine channel for obtaining a broad range of legal assistance for criminal matters. Like tax treaties, MLATs are treaties that require the advice and consent of the Senate. MLATs are negotiated by the DOJ in cooperation with the Department of State. Unlike the information obtained through tax treaties and TIEAs, which authorize the exchange of information for tax purposes, MLATs authorize the exchange of information for criminal matters, which can include criminal tax matters.

Information shared through exchange of information and information about such exchanges is confidential and protected by domestic laws and provisions contained in tax treaties and other such agreements. The Internal Revenue Code (IRC) protects information exchanged under tax treaties and other relevant agreements from disclosure in the same manner as information obtained under domestic laws except in specific circumstances, such as to courts and administrative bodies. The identity of taxpayers, information about those taxpayers, and the identity of the countries involved in the exchange of information are protected from public disclosure.

Types of Exchange of Information

Specific exchanges of information are those in which information is provided by one jurisdiction after it is requested by a partner jurisdiction in the context of a specific audit or investigation. From the U.S. perspective, requests for specific exchange of information are incoming or outgoing. When a treaty partner submits a request for specific exchange of information to the United States, these foreign initiated requests are called incoming requests for specific exchange of information. Conversely, when the United States initiates a request for specific exchange of information, that request is referred to as an outgoing request for specific exchange of information.

Treaty partners may also exchange information with one another without a request. For example, tax administration officials may come across information about a taxpayer that officials believe could be of interest to tax administration and compliance officials in another country. The competent authority may then send this information to the treaty partner's competent authority through what is referred to as a spontaneous exchange of information.

Treaty partners may also exchange information with one another on a regular or routine basis, through what is referred to as an automatic exchange of information. Such exchanges typically involve the voluntary exchange of information on multiple taxpayers, and cumulatively can include millions of records. For example, a country may routinely provide information on domestic dividends paid to foreign citizens. Automatic exchanges of information are similar to spontaneous exchanges because they are not associated with a formal, one-time written request for information on a specific taxpayer or taxpayers.

The United States also exchanges information with treaty partners through the Simultaneous Examination Program (SEP) and Simultaneous Criminal Investigation Program (SCIP). SEP/SCIP is used in situations where the United States and a treaty partner have common issues concerning the examination or investigation of a taxpayer or related taxpayers. Officials meet to discuss audit plans, information requirements, and other issues related to the examination or investigation. Treaties also allow broad-based discussions on matters such as tax administration trends, operating practices, and tax matters related to particular economic sectors. In the United States, these exchanges are referred to as industrywide exchanges of information. According to IRS officials, industrywide exchanges are rare and do not involve sharing information about specific taxpayers.

While the provisions of most tax treaties and relevant agreements are broad enough to permit the exchanges of information previously described, specific exchanges of information are the only type of exchanges that the United States and its treaty partners are obligated or required to do under the terms of these agreements. Therefore, the administrative processes and much of the data presented in later sections of this report will focus on the activity occurring through specific exchanges of information.

As of April 30, 2011, the United States had 143 bilateral agreements authorizing exchange of information with 90 treaty partners. These agreements include 58 tax treaties, 27 TIEAs, 49 MLATs plus 7 partial MLATs, and 2 MLAAs in force between the United States and foreign jurisdictions.15 Another 12 instruments (7 tax treaties, 2 TIEAs, and 3 MLATs), all incorporating tax information exchange, were signed but were not in force as of that date.16 See appendix IV for a list of all income tax treaties, TIEAs, and MLATs in force as of April 30, 2011. Agreements signed but not in force are also listed in appendix IV.

* * * *

Tax treaties with information exchange articles and TIEAs create, at a minimum, the obligation for exchange partners to respond to permitted requests for information. Fifty-eight treaties and 12 TIEAs explicitly describe a standard for the relevance or necessity of the information allowed to be requested. The standard found in the 2006 U.S. Model Tax Convention is that information that "may be relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes of every kind" is to be exchanged upon request, which mirrors the statutory standard governing IRS's authority to access records in a domestic context. Some agreements use a variation of the standard, however, such as "foreseeably relevant," "as is necessary," "as is relevant," or "as is pertinent." The "may be relevant" standard and the "forseeably relevant" standard -- regarded as equivalent by the U.S.government -- are considered a lower bar than some other standards.

The 2006 U.S. Model Tax Convention technical explanation cites a U.S. Supreme Court case and states that the "may be" language "would not support a request in which a Contracting State simply asked for information regarding all bank accounts maintained by residents of that Contracting State in the other Contracting State, or even all accounts maintained by its residents with respect to a particular bank." This means that, as a general rule, the United States does not make requests or respond to requests under these agreements where the names or other identifier (such as an account number) of potentially noncompliant persons are unknown. The information exchange provisions of TIEAs and bilateral tax treaties concluded by the United States require that a request for information satisfy a standard of relevance in order to be considered a valid request under the agreement. One of the requirements of the relevance standard is that requests contain "the identity of the person(s) under examination or investigation." During interviews, officials of the IRS and Treasury Department explained that the recent global recognition of the importance of full exchange of information for tax purposes has led countries to refine information exchange practices to ensure that exchange will occur to the widest appropriate extent, and that these topics are under active discussion at international standard-setting bodies such as the Organisation for Economic Co-operation and Development (OECD) and the Global Forum on Transparency and Exchange of Information that focuses on exchange of information issues. Accordingly, a valid request for information will not always require the name of particular taxpayers under examination or investigation. In addition, the Treasury Department's Technical Explanation of the 2009 protocol21 amending the 1996 bilateral tax treaty with Switzerland states the following: "In a typical case, information sufficient to identify the person under examination or investigation would include a name, and to the extent known, an address, account number or similar identifying information." Moreover, IRS and Treasury Department officials explained that the template TIEA text used by the United States was changed in January 2011 to state that a request for information must contain "the identity of the person or ascertainable group or category of persons under examination or investigation." It is mutually understood that there can be circumstances in which there is information sufficient to identify the person under examination or investigation even though the requesting state cannot provide a name. At the time that this study was conducted, however, the Internal Revenue Manual had not been correspondingly updated to reflect this clearer articulation of policy.
 Carl Levin, head of the Committee, posted the following about the report and the concerns on his web site here.

GAO Report Discloses Mixed Record on Use of Tax Treaties to Combat Offshore Tax Abuse
Friday, October 7, 2011

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Taxpayer Names. One key issue that the Subcommittee asked GAO to examine was the extent to which international requests for tax information were required to include the names of specific taxpayers. GAO reported that, as a general rule, the IRS and its tax information exchange partners do not make or respond to information requests lacking specific taxpayer names or other specific taxpayer identifiers, such as account numbers. GAO also reported that the United States had made a recent policy change to support information requests that identify a specific group of persons under investigation, even when those persons’ names are unknown.

This issue has become a matter of controversy between the United States and Switzerland which has resisted allowing its banks to respond to U.S. requests for the names of U.S. persons with Swiss bank accounts that have not been disclosed to the IRS. In 2009, in connection with a deferred criminal prosecution agreement, Switzerland’s largest bank, UBS AG, paid a $780 million fine and admitted helping U.S. taxpayers evade U.S. taxes by opening undisclosed Swiss accounts. In a related civil proceeding to enforce a John Doe summons, the United States asked UBS for the names of an estimated 52,000 U.S. persons with undisclosed Swiss accounts. After extended negotiations, the Swiss allowed UBS to disclose about 4,400 names of U.S. taxpayers whose Swiss accounts met certain criteria. Switzerland also amended its tax treaty with the United States to allow some tax information requests without taxpayer names. Despite those actions, U.S. requests for the names of U.S. persons with undisclosed accounts at other Swiss banks have stalled, due to an ongoing refusal by Switzerland to allow its banks to provide the names.

GAO reported that the U.S. Treasury Department and IRS now take the position that “a valid request for information will not always require the name of particular taxpayers.” GAO observed that, in January 2011, the United States changed its standard TIEA agreement to provide that an information request is adequate if it contains “the identity of the person or [an] ascertainable group or category of persons under examination or investigation.” GAO noted that the United States is working with other nations to adopt a similar approach in the internationally-accepted model tax information exchange agreement.

“The Subcommittee’s work has exposed how bankers, financial advisors, attorneys, accountants, and others deliberately help taxpayers hide assets in foreign jurisdictions to evade taxes,” said Levin. “It is a global problem, and tax officials need to be able to get the client lists of the institutions and professionals facilitating offshore tax evasion. Limiting tax information exchange to instances where taxpayer names are already known is not enough. International tax agreements need to assist, rather than create obstacles to, the exchange of tax information critical in combating offshore tax abuse.”

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