INTRODUCTION1

In Through the Looking-Glass, by Lewis Carroll, Humpty Dumpty makes the following point when speaking to Alice:

When I use a word . . . it means just what I choose it to mean – neither more nor less.2

This article addresses the reasons why it is nearly impossible for a U.S. taxpayer to prevent the enforcement of a summons issued by the I.R.S. pursuant to a request for information initiated by a foreign tax authority. It makes no difference whether the foreign tax authority acts in good faith, misrepresents facts, or is motivated by a purpose unrelated to the computation and collection of the appropriate amount of tax. The safeguards designed to prevent the inappropriate use of information in the foreign country making the request simply provide no relief in the U.S. to the person that is the subject of the information exchange. Under the standards adopted in U.S. cases, the language in which those safeguards are couched has no relevance to a U.S. Federal District Court hearing the petition of an aggrieved taxpayer if the acts are perpetrated by a foreign government.

RIGHTS OF TAXPAYERS

The Fourth Amendment to the Constitution provides as follows: The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

In a similar vein, exchange of information provisions in most income tax treaties provide an obligation on the requesting party to keep the information secret and to disclose the information only to persons concerned with the tax assessment and collection process. For example, Article 26 (Exchange of Information) of the O.E.C.D. Model Tax Convention on Income and on Capital ("O.E.C.D. Model") provides as follows:

  1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant3 for carrying out the provisions of this Convention or to the administration or enforcement 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. The exchange of information is not restricted by Articles 1 and 2.
  2. Any information received under paragraph 1 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, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. 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. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use.

If these were the only relevant provisions applicable to an exchange of information and they were applied as written, one could assume that an intervening party to a summons is entitled to a fair hearing of all the facts. As often stated, it is dangerous to assume, especially when the I.R.S. power to obtain taxpayer information is broad.

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Footnotes

1 The article serves as a companion piece to an article in the last edition of Insights, W. Heyvaert and V.S. Mohammad, " Exchanges of Information in Tax Matters and Fundamental Rights of Taxpayers – E.C.J. Delivers Landmark Ruling in the Aftermath of Berlioz," Insights 7, no. 6 (2020): p. 4. The article addressed a landmark European exchange of information case considered by the C.J.E.U. in Joined Cases C-245/19 and C-246/19. There, the C.J.E.U. held that if a taxpayer whose information is requested in an E.U.-to-E.U. cross-border request has indirect remedies available in the country making the request, the Member State fulfilling the information request can deny the taxpayer and third parties the right to a direct judicial remedy preventing the exchange of information from taking place.

2 In Through the Looking-Glass, by Lewis Carroll (1871), Humpty Dumpty speaks these words to Alice.

3 Paragraph (5) of the accompanying Commentary elucidates that "[t]he standard of 'foreseeable relevance' is intended to provide for exchange of information in tax matters to the widest possible extent [while clarifying] that Contracting States are not at liberty to engage in 'fishing expeditions' . . . ." The Commentary adds, "the standard requires that at the time a request is made there is a reasonable possibility that the requested information will be relevant; whether . . . [it] actually proves to be . . . is immaterial." As an example, paragraphs 5.2 and 8.1 indicate that if a taxpayer is not individually identified by name or address, a request may be a fishing expedition. However, even the Commentary acknowledges such distinction may be ethereal, where it provides Competent Authorities may comply in any event, even if not obligated to do so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.