Friday, September 13, 2013

G-20 Encouragement on the OECD Multilateral Convention on Mutual Assistance in Tax Matters (9/13/13)

I posted the following as a comment the other day:
There is a Multilateral Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the OECD to which many of the developed nations, including the U.S., are parties. The following is a "cut and paste" of a general description from the OECD web site: 
The amended Convention facilitates international co-operation for a better operation of national tax laws, while respecting the fundamental rights of taxpayers. The amended Convention provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. This co-operation ranges from exchange of information, including automatic exchanges, to the recovery of foreign tax claims. 
See OECD website titled Exchange of information: Convention on Mutual Administrative Assistance in Tax Matters, here
For a linked brochure explaining the treaty, see here
For an information brief, see here
Finally, Reuters just recently reported that the Group of 20 is encouraging developing countries to join the convention wto which over 50 countries have already signed up. See G20 pledges to help developing countries tackle tax dodging (Reuters 9/6/13), here:
While I have not studied the amended convention in detail, I suspect that the opportunities to enlist other countries in the collection of U.S. taxes and resulting judgments will be significant. Now, of course, that does not address whether the FBAR penalty would be subject to this convention. I have not looked at that issue and, when I do, I will report my conclusions (but don't know when that will be).
It may be helpful to readers to see the G-20 document, here, to which I referred.  I cut and paste below the provisions that are relevant to this blog (emphasis supplied by JAT):

September, 2013 
1. The G20 has been at the forefront of efforts to establish a more effective, efficient and fair international tax system since they declared the era of bank secrecy over at the G20 London Summit in April 2009.  In an increasingly borderless world, strengthening international cooperation in tax matters is essential to ensuring the integrity of national tax systems and maintaining trust in governments.  
2. The Global Forum on Transparency and Exchange of Information for Tax Purposes has played a critical role in ensuring that the international standard of exchange of information on request endorsed by the G20 is implemented effectively around the world.  Since the Global Forum responded in 2009 to the G20’s call to ensure rapid implementation of its standards of transparency and exchange of information, the Global Forum has completed 113 peer review reports and has issued over 600 recommendations for improvement, with more than 300 of those recommendations having been acted upon to date. The number of jurisdictions that have committed to implement the standards and have joined the Global Forum has increased to 120.  All but 14 of the jurisdictions reviewed have advanced to Phase 2 reviews, thus demonstrating the effectiveness of the peer review process in achieving the implementation of the standards. Those 14 jurisdictions are urged to implement the Global Forum’s recommendations without further delay. In July 2013, G20 Finance Ministers and Central Bank Governors asked the Global Forum to give overall ratings of exchange of information on request at its meeting in November 2013. The Global forum will draw on the work of FATF on beneficial ownership and ensure that all countries have information regarding the beneficial ownership of entities operating in their jurisdictions. 
3. The G20 has now endorsed the development of a new global tax standard: to automatic exchange of information. At the Cannes Summit in 2011, the G20 agreed to consider exchanging information automatically for tax purposes on a voluntary basis. In 2012, the Los Cabos Summit welcomed the OECD report on automatic exchange and encouraged all countries to join this practice. Given the developments in the Global Forum and other recent advances, it is now time to migrate to a more ambitious, more efficient and higher standard, which is automatic exchange of information. Recent developments involving undisclosed foreign bank accounts have also highlighted the urgent need to move to this new standard which the Global Forum will monitor to ensure its effective implementation. In July 2013, G20 Finance Ministers and Central Bank Governors fully endorsed the ambitious OECD proposal for a truly global model for multilateral and bilateral automatic exchange of information for tax purposes and declared their commitment to automatic exchange of information as the new global standard. The OECD has initiated work with G20 countries to develop the new single global standard for automatic exchange of information. G20 Finance Ministers and Central Bank Governors have mandated the OECD to provide a progress report at the October Finance Ministers’ meeting, including a timeline for completing this work in 2014. The new standard (included in a Model Competent Authority Agreement) will be presented at G20 Finance Ministers and Central Bank Governors’ meeting in February 2014. There is a clear need for the practical and full implementation of this new tax standard on a global scale. The Global Forum will establish a mechanism to monitor and review the implementation of the new standard on automatic exchange of information and will be working with the OECD Task Force on Tax and Development, the World Bank Group and others to help developing countries identify their need for technical assistance and capacity building.    
4. The next challenge regarding automatic exchange of information is now to get all jurisdictions to commit to this standard and put it into practice. Calling on all other jurisdictions to join us by the earliest possible date, we are committed to automatic exchange of information as the new global standard, which must ensure confidentiality and the proper use of information exchanged, and we fully support the OECD work with G20 countries aimed at presenting such a new single global standard for automatic exchange of information by February 2014 and to finalizing technical modalities of effective automatic exchange by mid-2014. In parallel, we expect to begin to exchange information automatically on tax matters among G20 members by the end of 2015. The multilateral Convention is key to ensuring rapid implementation of the new standard and to enabling developing countries to benefit from the new more transparent environment. In 2009 the OECD and the Council of Europe swiftly responded to the G20’s call for a multilateral instrument by amending the Convention on Mutual Administrative Assistance in Tax Matters in 2010 to meet international standards and to allow all countries with domestic laws that are sufficient to uphold the confidentiality of tax information to join. All G20 countries have led by example in signing this Convention and to date more than 70 countries and jurisdictions are covered or are likely to be covered by the Convention, including significant financial centres. The Convention is a powerful tool in the fight against tax evasion and allows for all forms of cooperation in tax matters, including automatic exchange of information. We expect all jurisdictions to join the Convention without further delay.   
[Base Erosion Discussion Omitted: although offshore bank accounts are surely base erosion, typically base erosion evasion / avoidance is pursued by manipulations such a transfer pricing by mutinational enterprises ("MNEs")] 
* * * * 
8. Developing countries must reap the benefits of the G20 tax agenda. The G20-led efforts can advance efforts to improve domestic resource mobilisation. The Global Forum on Transparency and Exchange of Information, the OECD Task Force on Tax and Development, the World Bank Group and other international organizations are key partners who can assist developing countries identify their needs for technical assistance and capacity building in implementing of the transparency and exchange of information standards, including through the multilateral Convention and automatic exchange of information. These efforts will help developing countries secure the corporate tax revenue they need to foster long-term development. The OECD’s Tax Inspectors Without Borders initiative to assist tax administrations of developing countries plays a useful role in this regard. Finally, we are committed to continue to assist developing countries, including through the IOs, in identifying individual country needs and building capacity in the area of tax administration (in addition to automatic exchange of information) and encourage such support to be developing country led.
9. Inernational taxation issues do not stop at addressing double non-taxation. We encourage continued discussion on other tax matters among tax administrators. 


  1. I did not make clear that I was talking about income tax noncompliance. There is no income tax noncompliance. I have corrected the Example to make that clear. It is true, of course, that for FBAR reporting, duplication would not be eliminated whether or not there is income tax noncompliance.

    I think that the IRS will exclude accounts and assets that are income tax compliant even if they are FBAR noncompliant.

    I am going to work my way through your other comments. Thank you very much for taking to time to read the blog and offering your excellent insights.

    Jack Townsend

  2. I think our disagreement is over FBAR noncompliance and what role it should have. If the taxpayer is fully income tax compliant and fully FBAR noncompliant, there is no penalty and the taxpayer does not have to even enter the program. If that hypothetical were to enter the program, however, the miscellaneous penalty would be zero because income tax compliant accounts and assets are excluded from the penalty base.

    I agree that, if in the example, the real estate were income tax compliant, the real estate would have been excluded and the only place the IRS could get a penalty would be in the noncompliant financial account, FAC1. That does not mean that it should get the penalty.

    But, of course, the IRS sets the terms of the tax and penalties inside the program, whether the tax is foreclosed by the income tax statute of limitations or the insistence on a penalty makes not principle sense. I think requiring the inclusion of the temporary deposit makes no sense because it was temporary and provably beyond a doubt contributed to no income tax noncompliance. At least that's the way I feel.

    Thanks again for your comments.

    Jack Townsend

  3. Also, thank you for your experience in the final paragraph. I think you got the result that I think is fair -- elimination of the temporary deposit from the penalty base and then test whether the destination permanent investment (here real estate) is compliant (in which case it will not be subject to the miscellaneous penalty) or noncompliant (In which case it will be subject to the miscellaneous penalty).

    Jack Townsend

  4. Thanks, you are correct that there was a bust. There was only one foreign account in this Example 5 -- FAC1. I have corrected that.

    Jack Townsend

  5. See the correction to eliminate any reference in Example 5 and correspondingly in Example 6 to FAC2.

    Sorry that I caused you to analyze the question as including FAC2. I had not intended that.

    Jack Townsend

  6. What about the in and out in the same day that might not show up in the statements? Can a taxpayer knowing of the in and out eliminate the temporary deposit from the high balance on the penalty calculation he must submit under oath?

    Jack Townsend

  7. Can I assume that you did not file an FBAR for 2011?
    In that case, it seems that the account balance would be included in the penalty calculation worksheet for 2011 only. This might very well cause 2011 to be the highest balance year on the penalty calculation worksheet.
    I would argue that the account should not be included in the worksheet total in prior years. I would do this by having a penalty calculation worksheet that would show the account in all years, but subtract it so that it does not show up in the total.
    Example for 2011:
    Account X $100K
    Account Y $ 50K
    Less: Acct. Y -$ 50K
    TOTAL $100K

    On the other hand, if you either showed the account in a timely-filed FBAR for 2011 (i.e. received by 6/30/2012) OR you showed the income on the PFIC account on your ORIGINAL return for 2011 (timely filed by 4/15/2012 ... or later date if under estension) then I would argue that the account should be excluded from the penalty base for 2011 as well.

    As to the account with de minimis income I would not be too optimistic on having any basis on which to exclude it, but at the same time if I were in your shoes I would talk to the agent's manager about it, even try to get TAS involved, not with the expectation of succeeding, but just as a way to not just accept it without a fight. But that's my own inclination.

    Disclaimers: 1) I am not a lawyer 2) Even if I were, I have little confidence that there are clear guidelines on this or much of anything else.

  8. Jack,

    There are a couple of key issues left out in regards to this. First the US has signed and ratified(back in 1992) the first earlier version of the treaty(which allows for information sharing but not group/john doe requests) however, the second protocol to the treaty(which does allow group requests) is being held in the US Senate along with the new US Swiss Treaty.

    Second, the United States has taken a full reservation on article 16 of treaty which deals with assistance in collection. Thus the US is not required to provide assistance in collection for other signatories and other signatories are not required to provide assistance in collection to the United States. It is my understanding that even upon ratification of the second protocol the present state regarding assistance in collection will continue. The only way to reverse the treaty reservation of article 16 would be via a two thirds vote of the US Senate.

    The only other country interestingly enough that has taken a reservation on Article 16 is Canada and that is believed to be related to present global tax circumstances as might call it.

  9. Thanks for the nuance you offer.

    Jack Townsend

  10. Your assumption is incorrect. Since I entered the program for 2003-2010 I filled the correct FBAR for 2011 and beyond all on time.
    The agent rejected both arguments. She wants 27.5% of the PFIC during the period even though all the tax due is caused by M2M. She wants a portion of an account that had income but no taxes.
    The way the OVDI/P works is the rules are vague and poorly documented. They always go against you. They pull out amazing things to deny you stuff such that you don't really know what you signed up for anymore.

  11. Not quite what you asked but similar.
    I have a bank account opened by my parents when I was too young to remember it. This bank account was forgotten for 40 years. It built up a balance over these years of several thousand dollars via interest.
    The bank demutualized and the bank opened an account to hold the securities without my knowledge. The stock rose quite a bit in value and paid dividends into the bank account. The stock crashed and became of very low value.
    Agent wants 27.5% of both balances. They won't break out these accounts from the others for 5% treatment despite the wording in the FAQ clearly saying account not accounts etc.
    If you have accounts that had income (not taxes due) then they want 27.5% of it's value.

  12. In my case while I was still in OVDP, transfers from one account to another were not counted twice. I also provided English language tables showing what had happened together with a gazillion (non-English) account statements and a glossary of all the important terms in the those statements. The examiner checked my work and basically agreed.

    In the end I opted out and got the "go and sin no more" warning letter so it was moot. (I suspect that my case was simpler than Just Me's. It was pretty obvious from that paperwork that I not what one would consider a savvy investor.)

  13. One of the drawbacks of asking questions on a forum is that readers don't have all the facts and end up making (often incorrect) assumptions, as I did.
    If what you're saying is that on the PFIC you're using MTM which results in income shown on returns prior to 2011, even though the sale occurred in 2011, the I would try amending the returns so that you use the default method for 2011 (FBAR compliant year) so that there are no tax consequences during pre-2011 years. This could result in higher tax but would eliminate the PFIC from the penalty base.
    The big picture question is whether you should opt out. You could speak to a lawyer to help you decide. If the IRS is not following its own procedures (which appears to be the case) then you could get help from TAS to have the correct procedures followed -- without opting out.
    And I agree with what you're saying in the last paragraph.


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