International Tax Evasion in the Global Information Age

443 Pages·2016·6.484 MB·English

by  David S. Kerzner, David W. Chodikoff (auth.)

International Tax Evasion
I N T H E
Global Information Age
David S. Kerzner & David W. Chodikoff
International Tax Evasion in the Global
Information Age
David   S.   Kerzner • David   W.   Chodikoff
International Tax
Evasion in the Global
Information Age
David   S.   Kerzner David   W.   Chodikoff
Toronto , Canada Toronto , Canada
ISBN 978-3-319-40420-2 ISBN 978-3-319-40421-9 (eBook)
DOI 10.1007/978-3-319-40421-9
Library of Congress Control Number: 2016956909
© Irwin Law Inc. 2016
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Endorse ment
“It is diffi cult to conceive of better timing for a volume on international tax
evasion in the global information age. Th e volume provides the most
comprehensive study of the topic to date and appears just as the OECD
and G20 leaders have identifi ed this subject as a central issue in interna-
tional taxation for the next decade. Th is book should be on the desks of all
practitioners and policy-makers.”
— Richard Krever, Director, Taxation Law
and Policy Research Group, Monash University, Melbourne
“ Tax evasion is one of the most important topics in the current i nternational
tax environment. Th is book thoughtfully considers the rapid growth of
measures to combat tax evasion and addresses the delicate balance between
the rights of states and those of taxpayers – a very accessible and worthwhile
read.”
— Liesl Fichardt, Partner, Head of Tax Disputes,
Cliff ord Chance LLP, London
v
Foreword
In recent decades, the topic of cross-border tax information exchange has
attracted considerable academic and policy attention. Beginning with the
OECD’s H armful Tax Competition report of 1998, OECD countries (and
later many non-OECD countries) began to emphasize the need for eff ec-
tive cross-border exchange mechanisms, mainly to inhibit off shore tax
evasion. Th e main mechanism derived from these reform eff orts is the tax
information exchange agreement (TIEA), which is typically negotiated
between an OECD country and countries that are sometimes labelled tax
havens. Ongoing globalization, technology change, reduced tax revenues,
and concerns about international money laundering and terrorist fi nanc-
ing via tax havens have propelled cross-border tax information exchange
to even greater policy prominence.
Indeed, there are now over 800 TIEAs worldwide, a stunning develop-
ment in the international tax regime, where change is normally glacially
paced. But do TIEAs work? Will these agreements eff ectively inhibit off -
shore tax evasion and other global fi nancial crimes? David Kerzner has
written the fi rst book to critically examine these questions and concludes
the answer is no.
According to David, TIEAs do not and will not work eff ectively for a
number of reasons, including the lack of an automatic exchange mecha-
nism (as TIEAs emphasize the “information on request” approach). He
also worries that tax havens may not meaningfully cooperate to enforce
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viii Foreword
their TIEAs, as these countries do not have the political and economic
incentives to do so. He notes that OECD countries further complicate
the problem by often maintaining fi nancial secrecy laws to encourage
inward investments from non-residents.
A challenge for David, as alluded to above, is the fast-changing nature
of the political environment that surrounds cross-border tax informa-
tion exchanges, to be contrasted, again, with the traditional stability of a
regime whose main legal elements remain wedded to policies developed
by the League of Nations roughly a century ago. As explored in this book,
however, a sea change provoked by a series of developments has occurred
with respect to global tax information exchanges.
F irst, a series of tax leaks and scandals — UBS in Switzerland, HSBC in
France, the fi nancial data leak obtained by the International Consortium
of Investigative Journalists, and so on — has suggested that the prob-
lems of off shore tax evasion, international money laundering, and ter-
rorist fi nancing are much greater than previously suspected. Second, in
the wake of the 2008 global fi nancial collapse, many governments fi nd
themselves in a precarious fi scal situation and are less tolerant of revenue
losses associated with (criminal) off shore tax evasion and (legal) aggres-
sive international tax planning (as evidenced by the ongoing OECD base
erosion and profi t shifting (BEPS) reforms). Th ird, beginning in 2010
the United States embarked upon its own aggressive (overly so according
to the analysis in this book) and largely unilateral eff orts to track down
“US persons” (US citizens, green card holders, and others) living abroad
to inhibit off shore tax evasion, through a regime commonly known as the
Foreign Account Tax Compliance Act or F ATCA .
Th ese and other developments are pushing governments to consider
other cross-border exchange mechanisms in addition to TIEAs, leaving
in their wake a complex regulatory environment involving enhanced
automatic exchanges via traditional tax treaties, US sponsored intergov-
ernmental agreements to implement F ATCA, the development of “sons
of FATCA ” by some European governments, and a multilateral agree-
ment to encourage more automatic sharing of bulk taxpayer information.
Th ese developments, according to David, have eclipsed, at least to a cer-
tain extent, the earlier policy debate surrounding TIEAs. Enhanced tax
information exchanges have led to corresponding worries about taxpayer
Foreword ix
privacy and the potential misuse or abuse of this information by govern-
ments that may not have suffi cient legal protections in place.
B eyond policy concerns, the current regulatory environment is pro-
moting increasingly complex tax laws as well as supporting administra-
tive pronouncements from tax authorities. For instance, the T reasury
Regulations surrounding the I nternal Revenue Code ’s FATCA provisions
( Code sections 1471 to 1474) already exceed 600 pages. For US taxpayers
living abroad and seeking to comply with F ATCA and other tax laws, the
IRS produces over 7,000 pages of additional guidance, including instruc-
tions and forms! Both Davids have done an admirable job of boiling
down many of these technical tax laws and policies for the reader, with a
focus on the rules that govern tax information exchange between Canada
and the United States.
Accordingly, this study contributes in a signifi cant way both to the
ongoing policy and academic debate surrounding cross-border tax infor-
mation exchanges and to a tax practitioner’s ability to eff ectively advise
clients that have been swept up in the new regulatory environment.
Kingston, Ontario Arthur J Cockfi eld
Prefa ce
I llegal tax practices such as tax evasion cost governments billions of dol-
lars in lost revenues. Countries like Canada, the United States, and the
United Kingdom rely on the ability to exchange information with tax
havens and other countries to administer their tax system and combat
tax evasion. A country that allows the rich and elite to hire professionals
to hide their assets off shore so they can escape paying their share of taxes
risks that its people will question the fairness of the government’s revenue
authority. More than that, allowing off shore tax evasion to go unchecked
may call into question the very legitimacy of the government’s taxing
function and send a signal to all taxpayers that it’s okay to cheat.
A s explained in this book, where there is bank secrecy, there is often
a convergence of evil: international tax evasion, global fi nancial crime,
and international terrorism. As Professor Arthur Cockfi eld observes in
his study of the 2013 “big data” leak by the International Consortium
of Investigative Journalists (ICIJ), off shore service providers such as trust
and fi nance companies take advantage of tax haven secrecy to help indi-
viduals engage in global fi nancial crime. Commenting on the guilty plea
of BNP Paribas in 2014, US District Attorney Cyrus R Vance, Jr recog-
nized that such shared values in the international community as human
rights, peaceful coexistence, and a world free of terror are dependent on
the enforcement of our laws and, in particular, on a banking system that
is not permitted to be a conduit for criminal activity. Th e string of global
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xii Preface
banking scandals from 2008 to 2015 and from UBS to HSBC connotes
a code of conduct observed by executive leaders that runs counter to such
values, and is neither moral nor right. Th e 2016 announcement by the
ICIJ of the Panama Papers, an additional leak of more than 11.5 million
fi nancial and legal records revealing more than 214,000 off shore entities,
occurred just before the publication of this book. Th e Panama Papers
solidify the conclusions of this book that from 1998 to 2015 the OECD
has been papering over the challenges posed by exchange of informa-
tion. Th e Panama Papers are evidence of fl aws in the strategies to com-
bat tax evasion of the OECD and the Global Forum on Transparency
and Exchange of Information for Tax Purposes (Global Forum), strate-
gies that are explained in this book, and strategies that governments like
Canada’s and those of many other countries have come to rely upon.
D uring the past eight years, countries have signed hundreds of single-
purpose treaties to exchange information known as tax information
exchange agreements (TIEAs). Canada has signed twenty-two TIEAs.
In 2013, at the direction of the G20, the OECD was urged to intro-
duce automatic exchange of information throughout the ranks of its 120
member states that at that time composed the Global Forum as a global
economic priority to combat tax evasion. Th e OECD has since intro-
duced its Common Reporting Standard for automatic exchange of tax
information. Th is book presents the most comprehensive study of the
use of TIEAs by both the OECD and Canada in the war against tax eva-
sion. Th e conclusions reveal why automatic exchange of information is
not the magic bullet that the OECD claims it to be and why countries
like Canada and other members of the Global Forum need to be resil-
ient, innovative, and aggressive in adopting new homegrown strategies to
defeat tax cheats (see Chapter 11, Section B).
As part of the veritable tsunami of new laws on global exchange of
information, the United States has implemented an unprecedented infor-
mation exchange program known as the F oreign Account Tax Compliance
Act (F ATCA ) in over eighty nations, including the United Kingdom.
FATCA is designed to force foreign fi nancial institutions to give up the
names of US account holders or face substantial penalties. FATCA and
the new IRS off shore disclosure programs now have approximately 8
million US citizens living outside the United States in their gunsights.