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2016 | OriginalPaper | Chapter

7. Article 26 of the OECD Model Tax Convention on Income and on Capital

Authors : David S. Kerzner, David W. Chodikoff

Published in: International Tax Evasion in the Global Information Age

Publisher: Springer International Publishing

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Abstract

This chapter explains Article 26 of the OECD Model Tax Convention on Income and on Capital. Canada has over ninety double tax conventions (DTCs) in force that contain an article modelled on Article 26, and the United States has over sixty. As explained in Chapter 6, both Canada and the United States generally reserve the use of DTCs for countries with more complex economies and rely on the use of tax information exchange agreements (TIEAs) for tax havens and smaller jurisdictions. Chapter 6 also explains problems with Canada’s international tax policies surrounding the use of DTCs and the relationship between DTCs and the “exempt surplus” rules in the Canadian foreign affiliate tax regime. Additionally, this chapter examines Article XXVII on exchange of information (EOI) in the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital. A theme of this book is evaluating how well TIEAs and EOI work to combat tax evasion. This chapter refers to an important battle between the United States and Switzerland over the use of the EOI Article in the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes on Income to obtain information on US tax cheats with undeclared bank accounts at UBS. The challenges faced by the United States in obtaining taxpayer information on undeclared American account holders evidence important international tax policy issues regarding the efficacy of EOI as a stand-alone tool to combat tax evasion. In pursuing this information from the Swiss, the United States faced legal challenges discussed in detail in Chapter 5. Moreover, the United States faced economic, political, and historical challenges in dealing with Switzerland over EOI. These multiple challenges underscore a key policy problem in dealing with tax havens to combat tax evasion. One of the themes of this research is that these policy challenges continue to be ignored by the OECD and, more recently, by the Global Forum on Transparency and Exchange of Information for Tax Purposes and the G20 in favour of solutions that seek tax harmonization in the form of treaties and model agreements. Finally, this chapter explains the procedures used by both Canada and the United States to obtain information from and exchange information with other governments.

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previous chapter The Role of Canada’s Tax Information Exchange Agreements in the Fight against Offshore Tax Evasion

next chapter Automatic Exchange of Information

OECD, Committee on Fiscal Affairs, Model Tax Convention on Income and on Capital (Paris: OECD, 1992) (loose-leaf) at Art 26 [convention and commentary together: Model Tax Treaty].

A list of Canada’s DTCs in force is available online: www.fin.gc.ca/treaties-conventions/in_force--eng.asp. A list of US treaties in force is available online: www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z#.Vlopa_BbY6M.gmail.

See Chapter 6, Section 2.2.

26 September 1980 (as amended to the protocols signed on 14 June 1983, 23 March 1984, 17 March 1997, 29 July 1997, and 21 September 2007) [Canada–US Tax Treaty].

2 October 1996, together with a protocol to the Convention, 2 October 1996, S Treaty Doc 105–8, online: www.irs.gov/pub/irs-trty/swiss.pdf [US–Switzerland Tax Treaty].

Model Tax Treaty, above note 1 at Art 26.

See OECD, Update to Article 26 of the OECD Model Tax Convention and its Commentary (Paris: OECD, 2012) Commentary to Art 26 at para 1 [Update to Article 26]. For further information and elaboration on the EOI rules, see OECD, Manual on the Implementation of Exchange of Information Provisions for Tax Purposes (Paris: OECD, 2006), online: www.oecd.org/tax/exchange-of-tax-information/36647823.pdf [Manual on Implementation].

See OECD, Automatic Exchange of Information: What It Is, How It Works, Benefits, What Remains to Be Done (Paris: OECD, 2012) at 5, online: www.oecd.org/ctp/exchange-of-tax-information/automatic-exchange-of-information-report.pdf.

See ibid. See also Section 5, below in this chapter.

See Manual on Implementation, above note 7 at 5.

See ibid.

See ibid at 6.

See ibid at 8.

See Update to Article 26, above note 7.

See ibid, Commentary to Art 26 at para 4.

See Chapter 6, Section 2.2.

See OECD, Agreement on Exchange of Information on Tax Matters (Paris: OECD, 2002) [treaty and commentary together: Model TIEA]. For a discussion of the standards and the Model TIEA, see Chapter 6.

See OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes, Information Brief (Paris: OECD, 2013) Annex I.

See Update to Article 26, above note 7, Commentary to Art 26 at para 9.

See Gracia María Luchena Mozo, “The Prevention and Resolution of Tax Conflicts within the Framework of International Exchange of Information” (2012) 52:5 European Taxation 226, observing that a mutual agreement procedure can provide an effective and efficient method for resolving international tax disputes but that its use depends on the will of the parties.

See Model Tax Treaty, above note 1, Commentary to Art 26 at para 5. Where the request relates to a group of taxpayers that are not individually identified, the commentary notes that it will be more difficult to establish that the request is not some type of fishing expedition, on the presumption that the requesting state cannot point to an ongoing tax investigation of a particular taxpayer, which in most cases would prove that the request was not random or speculative (see ibid, Commentary to Art 26 at para 5.2). Contracting states may also use an alternative to the foreseeable relevance standard by replacing “is foreseeably relevant” with “is necessary,” “is relevant,” or “may be relevant” (see ibid, Commentary to Art 26 at para 5.3).

See ibid. See Gilles Larin & Alexandra Diebel, “The Swiss Twist: The Exchange-of-Information Provisions of the Canada–Switzerland Protocol” (2012) 60 Canadian Tax Journal 1 at 31–35, for a discussion of fishing expeditions under British and Canadian caselaw and for a detailed examination of the history of the provisions dealing with EOI between Canada and Switzerland, including the new protocol signed in 2010.

See Model Tax Treaty, above note 1, Commentary to Art 26 at para 5.2.

See ibid, Commentary to Art 26 at para 11.

See ibid.

See ibid at Art 26(2).

See ibid, Commentary to Art 26 at para 12.2.

See Update to Article 26, above note 7, Commentary to Art 26 at para 12.3.

See Model Tax Treaty, above note 1, Commentary to Art 26 at paras 16–19.

See ibid, Commentary to Art 26 at para 14.

See ibid, Commentary to Art 26 at para 15.

See ibid, Commentary to Art 26 at para 14.1.

See ibid, Commentary to Art 26 at para 19.2.

See ibid, Commentary to Art 26 at para 19.5.

See Update to Article 26, above note 7, Commentary to Art 26 at para 19.6.

See ibid, Commentary to Art 26 at paras 19.10 & 19.11.

See ibid, Commentary to Art 26 at paras 19.12 & 19.13.

US–Switzerland Tax Treaty, above note 5 at Art 26.

5 May 1997, Can TS 1998 No 15 (entered into force 21 April 1998) at Art 25, online: www.fin.gc.ca/treaties-conventions/switzerland-suisse-eng.asp.

See United States v UBS AG, 09-20423 MC-GOLD (SD Fl 19 February 2009) (Amicus Brief of Government of Switzerland), petition to enforce John Doe summons at 7, citing Bilateral Tax Treaties and Protocol: Hearing before the Committee on Foreign Relations, 105th Cong 43–44 (1977) (statement of Kenneth J Kies, chief of staff, Joint Committee on Taxation), online: www.bj.admin.ch/dam/data/bj/wirtschaft/fallubs/amicus-brief-e.pdf.

See United States v UBS AG, above note 41.

See Larin & Diebel, above note 22 at 12–13.

See ibid.

See United States, Congress, Joint Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty between the United States and Switzerland (Washington, DC: Joint Committee on Taxation, 2011) at 23, online: www.jct.gov/publications.html?func=startdown&id=3791 [JCT, Proposed Swiss Protocol]. See also US–Switzerland Tax Treaty, above note 5.

See US–Switzerland Tax Treaty, above note 5; Mutual Agreement of January 23, 2003, regarding the Administration of Article 26 (Exchange of Information) of the Swiss–U.S. Income Tax Convention of October 2, 1996, online: www.treasury.gov/press-center/press-releases/Pages/mutual.aspx [Mutual Agreement re Article 26].

Mutual Agreement re Article 26, above note 46 at para 1.

See JCT, Proposed Swiss Protocol, above note 45 at 34. One area of concern regarding the proposed protocol signed on 23 September 2009 by the United States and Switzerland is the Swiss position on requests that do not name the taxpayer, such as in the context of the UBS case and the John Doe summons, and whether other means of identification will be admissible in the future or whether a more litigious pathway will be required (see ibid at 35).

See Chapter 5, Sections Illusions of EOI: The United States, Switzerland, and UBS and 4.4, regarding the US Department of Justice’s use of criminal prosecution against UBS and the Swiss banking industry under the Swiss Bank Program.

Canada–US Tax Treaty, above note 4 at Art XXVII.

See ibid, 1984 Technical Explanation to Art 27.

See ibid at Art XXVII(1).

See ibid at Art XXVII(4).

See ibid at Art XXVII(1).

See ibid, Technical Explanation, 1995 Protocol to Art 27.

See ibid at Art XXVII(2).

See ibid at Art XXVII(3). See also Section 2.5, above in this chapter, for discussion of the limitations in Article 26(3) of the Model Tax Treaty, above note 1.

See Canada–US Tax Treaty, above note 4 at Art XXVII(5). See also Section 2.7, above in this chapter, for discussion of Article 26(5) of the Model Tax Treaty, above note 1.

See Canada–US Tax Treaty, above note 4 at Art XXVII(6).

(15 November 2006) at Art 26(6), online: www.treasury.gov/press-center/press-releases/Documents/hp16801.pdf.

See Canada–US Tax Treaty, above note 4 at Art XXVII(7).

See OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Canada 2011 — Combined: Phase 1 + Phase 2 (Paris: OECD, 2011) at 51, online: http://dx.doi.org/10.1787/9789264110458-en [Canada Peer Review Report].

See ibid at 42.

See ibid. See also Income Tax Act, RSC 1985, c 1 (5th Supp), s 8(1).

See Canada Peer Review Report, above note 62 at 42.

See ibid at 66.

See ibid.

See ibid. An EOI procedure manual provides a step-by-step description of the procedures involved in the course of an EOI request and also lists relevant actions that CRA personnel must take. In addition, there is also an EOI Services reference guide that describes in great detail how Canada handles requests pursuant to automatic and spontaneous EOI mechanisms and to criminal tax matters and those that come through as a result of Canada’s involvement in the Joint International Tax Shelter Information & Collaboration Network (see ibid at 66).

See ibid at 43.

See ibid.

See ibid at 64.

See ibid.

See ibid. Regarding measured response times (for substantive and complete responses), in 2009, 42 percent of the requests could be answered within 90 days, 25 percent could be answered within 180 days, and the 33 percent remaining required more than 180 days (see ibid at 65). Canada now notifies its partners if a request cannot be responded to within 90 days of receipt, giving a reason for the delay (see ibid).

See United States, Government Accountability Office, Report to the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate: Tax Administration — IRS’s Information Exchanges with Other Countries Could Be Improved through Better Performance Information (Washington, DC: Government Accountability Office, 2011) at 12, online: http://www.gao.gov/assets/590/585299.pdf [2011 GAO Report on Information Exchange].

See ibid at 6.

See ibid.

See OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: United States 2011 — Combined: Phase 1 + Phase 2 (Paris: OECD, 2011) at 62, online: http://dx.doi.org/10.1787/9789264115064-en [US Peer Review Report].

See 2011 GAO Report on Information Exchange, above note 78 at 16–18.

See ibid at 24.

See ibid.

See ibid at 21 (inbound requests may involve multiple taxpayers).

See ibid.

See ibid at 22.

See ibid.

See ibid at 23.

See ibid at 8: request activity is concentrated in about ten countries, which account for almost 70 percent of all requests.

See ibid.

See ibid, Appendix III.

Incoming requests must contain the following: specific identification of the taxpayer, an itemized list of specific information requested, a detailed narrative identifying the tax nexus of the relevance of the information sought to the taxpayer and the issues examined, and an explanation of how the request for transactions, facts, or documents pertains to a tax or a tax liability covered by a tax treaty or a TIEA (see ibid). More recently, a valid request for information will not always require the name of a particular taxpayer under examination (see ibid at 17).

See ibid, Appendix III: information results may be incomplete, so a status update is provided at sixty-day intervals until the request is resolved.

See ibid.

100

The agent or examiner must prepare a memorandum justifying the request and containing the following: the name of the taxpayer in question, the requester’s name and phone number and the address or fax number where the response should be sent, any background information that should not be sent to a foreign competent authority, any statutory, court, or other dates by which the information is required, and whether the request includes grand jury information (see ibid). An additional outgoing attachment must contain the following: the name and address of the taxpayer in question, the type of tax and tax years involved (fiscal/calendar), evidence that an investigation is being conducted, the location of the information and why the United States believes that it is there, the specific information needed, how the information is relevant to the investigation, any statutory, court, or other dates by which the information is required, and any documentation certification requirements (see ibid).

101

See US Peer Review Report, above note 81 at 86.

102

See ibid at 89.

103

See ibid. The IRS also maintains a section on EOI in its Internal Revenue Manual (4.60.1) (see ibid).

104

Council of Europe & OECD, Convention on Mutual Administrative Assistance in Tax Matters, 25 January 1988, EurTS No 127. For a discussion of the convention, see Chapter 8.

105

The group is composed of over 151 members, or national financial intelligence units. It seeks to fight against money laundering and terrorism financing through EOI and cooperation: see The Egmont Group of Financial Intelligence Units, “About,” online: http://www.egmontgroup.org/about.

106

See Joint International Tax Shelter Information Centre, Memorandum of Understanding, online: www.irs.gov/pub/irs-utl/jitsic-finalmou.pdf.

107

For a detailed description of this organization, see Jinyan Li, Arthur Cockfield, & J Scott Wilkie, International Taxation in Canada — Principles and Practices, 2d ed (Markham, ON: LexisNexis, 2011) at 393.

108

The United States has entered into approximately forty-nine mutual legal assistance treaties (MLATs): see 2011 GAO Report on Information Exchange, above note 78 at 12. Unlike tax treaties or TIEAs, the focus of assistance under an MLAT, including on tax matters, is on the investigation, prosecution, and prevention of criminal offences, or criminal proceedings (see ibid).

109

See ibid at 7. In circumstances where the United States and a treaty partner have common issues regarding the examination or investigation of a taxpayer, officials may meet to discuss aspects of the examination or investigation such as audit plans or information needs (see ibid).

110

In February 2008, a former employee of LGT Bank in Liechtenstein provided German authorities with data on hundreds of accounts at LGT Bank, causing the bank scandal scene to erupt: see JCT, Proposed Swiss Protocol, above note 45 at 24. The UBS scandal unfolded in May 2008 with the leak by informant Bradley Birkenfeld: see Edvard Pettersson, “Ex–UBS Banker Sues Olenicoff for Malicious Lawsuit” Bloomberg (5 December 2012), online: www.bloomberg.com/news/articles/2012-12-05/exubs-banker-sues-olenicoff-for-malicious-lawsuit: Birkenfeld was a former UBS banker who had managed $20 billion of US client wealth and assisted his clients in evading IRS reporting requirements; he provided important information to the US Department of Justice and later obtained a whistleblower award of $104 million. In April 2013, a very large leak of data regarding about 120,000 offshore bank accounts, including 450 held by Canadian residents, was revealed by the International Consortium of Investigative Journalists, based in Washington, DC: see Janet McFarland & Bill Curry, “Banking: Document Leak Reveals Widespread Use of Tax Havens” Globe and Mail (4 April 2013), online: http://fw.to/YW5XUuW.

111

Internal Revenue Code, USC 26 (1986) of 1986, as amended, and the Treasury Regulations issued thereunder at Chapter 4, § 7623. For a discussion of the IRS Whistleblower Office, see Scott D Michel, Zhanna A Ziering, & Young Ran Kim “U.S. Offshore Account Enforcement Issues” (2014) 16 Journal of Tax Practice & Procedure 65 at 68–69.

112

See CRA, “Informant Leads Program,” online: www.cra-arc.gc.ca/leads/.

113

See David Jolly, “Group of 20 Supports Sharing Bank Data to End International Tax Evasion” New York Times (20 April 2013) B6, online: http://nyti.ms/1Qsti1R: the leak by the International Consortium of Investigative Journalists caused public outrage regarding certain high-profile European political figures.

114

See OECD, Centre for Tax Policy and Administration, “OECD Releases System to Reduce Compliance Cost and Facilitate Cross-border Investment” (Paris: OECD, 2013), online: www.oecd.org/ctp/system-to-reduce-compliance-cost-facilitate-cross-border-investment.htm [“OECD Releases System”]: the system was developed after many years of cooperation between the OECD, the European Union, governments, and businesses. In January 2013, the OECD approved the TRACE Implementation Package for the Adoption of the Authorized Intermediary System, which contains documents and forms that can be used by any country wishing to implement TRACE’s unique system for authorized intermediaries: see OECD, “Treaty Relief and Compliance Enhancement (TRACE) — Implementation Package Approved by CFA” (Paris: OECD, 2013), online: www.oecd.org/ctp/exchange-of-tax-information/treatyreliefandcomplianceenhancementtrace.htm. For a discussion of the US qualified intermediary system, see Chapter 5, Section Background on the US Qualified Intermediary (QI) System.

115

See “OECD Releases System,” above note 114.

116

See OECD, TRACE Implementation Package for the Adoption of the Authorized Intermediary System (Paris: OECD, 2013) at 4, online: www.oecd.org/ctp/exchange-of-tax-information/TRACE_Implementation_Package_Website.pdf [TRACE Implementation Package]. However, unlike the US qualified intermediary system, which does not require the disclosure of certain individuals to the withholding agent or to the IRS, the TRACE Implementation Package, ibid at 5, requires that an intermediary claiming benefits on a pooled basis provide to the source country tax administrators on an annual basis (rather than at the time of the payment) investor-specific information about the beneficial owners of the income.

117

See ibid. The TRACE Implementation Package, ibid at 4–6, describes procedures that an authorized intermediary must follow to comply with the disclosure requirements.

118

Enacted by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act, Public Law 111-147, and signed into law by the president on 18 March 2010.

Kerzner, David S, Vitaly Timokhov, & David W Chodikoff, eds. The Tax Advisor’s Guide to the Canada–U.S. Tax Treaty (Toronto: Thomson Reuters Carswell, 2008) (loose-leaf).

Larin, Gilles, & Alexandra Diebel. “The Swiss Twist: The Exchange-of-Information Provisions of the Canada–Switzerland Protocol” (2012) 60 Canadian Tax Journal 1.

McCracken, Sara K. “Going, Going, Gone. .. Global: A Canadian Perspective on International Tax Administration Issues in the ‘Exchange-of-Information Age’” (2002) 50 Canadian Tax Journal 1869.

Oberson, Xavier. International Exchange of Information in Tax Matters: Towards Global Transparency, (Cheltenham, UK: Edward Elgar, 2015)CrossRef

Schenk-Geers, Tonny. International Exchange of Information and the Protection of Taxpayers , (Alphen aan den Rijn, NL: Kluwer Law International, 2009).

Title: Article 26 of the OECD Model Tax Convention on Income and on Capital
Authors: David S. Kerzner
David W. Chodikoff
Publisher: Springer International Publishing
Book: International Tax Evasion in the Global Information Age
Print ISBN: 978-3-319-40420-2

Electronic ISBN: 978-3-319-40421-9

Copyright Year: 2016
DOI: https://doi.org/10.1007/978-3-319-40421-9_7

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