Assistance in Collection Global Business and International Fiscal Law 307

The uncertainty surrounding mutual agreements is clearly greatly exacerbated by the haphazard and negative approach to their publication. It is perhaps because they prefer to preserve their freedom of manoeuvre towards taxpayers that tax authorities are so often coy about publishing such agreements. This is a short­sighted view since, as has been repeatedly shown already in this chapter, the lack of openness and due process in international tax administration is a serious hindrance to resolution of many of the substantive problems of international taxation. A more systematic process for regularising mutual agreement procedures might emerge from the multilateral arrangements, the OECDCouncil of Europe multilateral convention and the EC Convention on Elimination of Double Taxation. Thus, the former convention requires parties to notify any interpretative agreements to the Coordinating Body, and both these agreements and any advisory opinions rendered by the Co­ordinating Body are to be circulated for information to the state signatories whether or not they have yet ratified the convention as part of the role of the Coordinating Body to `encourage the production of uniform solutions ¶Commentary, para. 243. Regrettably however, the convention contains no explicit provision for the publication either of agreements or of advisory opinions; and as has been mentioned above, the opinions of the Advisory Commission under the EC Convention are to be published only if all the state and private parties agree.

4. Assistance in Collection

States have been very cautious in the development of arrangements for mutual assistance in the collection of tax. A substantial proportion of the early tax treaties included provisions for such assistance, and there is some evidence that assistance was also provided informally Surr 1966, p.221. In the 1980s, following the growing concern about international avoidance and evasion, the issue has been given more attention but has also been controversial, and such arrangements still remain confined to a few states, or to limited circumstances. a General International Law In general international law, cooperation in for the enforcement of fiscal laws has been treated anomalously. On the one hand, courts have frequently taken the firm position that they cannot assist in the enforcement of the revenue laws of another state: this can best be explained as part of the general international law principle that states do not enforce each others penal or public laws. On the other hand, arrangements for international cooperation in penal or criminal matters, notably for the extradition of alleged offenders, normally exclude fiscal matters, even tax fraud. Hence, in the absence of specific treaty provisions, tax authorities may have little remedy against even a blatant tax evader who is neither present nor has assets in their country; yet governments have proved reluctant to enter into such agreements. There is nevertheless surprisingly little direct authority for the principle that a court will not enforce the judgment of a court of a foreign state in a tax matter. Consideration of the question often, misleadingly, begins by citing the dictum of Lord Mansfield: `For no country ever takes notice of the revenue laws of another ¶ 1 The statement was made in the context of the assertion of the principle that a private contract will be enforced even if it may entail breach of a foreign revenue law; a different view would have provided a convenient exemption from contractual liability for purchasers in an era of high tariffs and widespread smuggling. Nearly two centuries later, it was applied in quite different circumstances in Govt. of India v. Taylor 1955. This case concerned a company incorporated in the UK in 1906, which had conducted an electricity supply and tramway business in Delhi under licence to the municipality, until its business was bought by the government of India in 1947; the purchase payment was immediately remitted to England, only a few weeks before an Act was passed in India imposing a capital gains tax on any sale of a capital asset effected after 31 March 1946. The company went into voluntary liquidation under English law, but the English courts culminating in some judgments of mixed quality in the House of Lords held that the Indian governments claim was not a `liability ¶ which the liquidator was bound to discharge under the Companies Act, since it could not have been enforced in an English court, being essentially a tax claim. The court also cited with approval an unreported contemporaneous decision of an Irish court 2 rejecting the claim of the liquidator of a company against its former main director and 99 shareholder, who had transferred its assets to his Irish bank accounts and had himself left for Ireland, on the grounds that the sole remaining creditor was the Revenue, and although the claim was by the liquidator and for fraud, to enforce it would be indirectly to enforce a Revenue claim. It seems hard to understand how Lord Mansfields principle, designed to prevent breach of a foreign revenue law from defeating otherwise valid private rights, could be used to justify a refusal to enforce private law because it would entail an indirect enforcement of a foreign revenue claim Mann 1954, Mann 1955. However, in the more recent case In re State of Norways Application 1990 the British courts did not regard assistance to a foreign revenue authority to provide evidence in civil proceedings involving a tax claim as entailing breach of such a strong taboo see Section 2.b above. In the United States the issue has been more directly considered in a 1979 case, which 1 Holman v. Johnson 1775 98 E.R. 1120; see also citations in Govt. of India v. Taylor [1955] A.C. DWSHVSLWHFULWLFLVPRIWKHCVODYLVKUHSHWLWLRQ¶RIRUG0DQVILHOG VGLFWXPOEUHFKW p.461, it has become embedded in the legal subsconscious and has come to stand for a far different principle from that intended by its original source. 2 Peter Buchanan Ltd. v. McVey 1955. So impressed was the House of Lords with this case that the Irish judgment was then published in the English Law Reports. seems to be the first time a direct claim has been made by a foreign state to enforce a tax claim in a US court. 1 The court cited with approval the rationale given by Judge Learned Hand for the revenue rule: To pass upon the provisions for the public order of another state is, or at any rate should be, beyond the powers of a court; it involves the relations between the states themselves, with which courts are incompetent to deal, and which are intrusted to other authorities. It may commit the domestic state to a position which would seriously embarrass its neighbor. Revenue laws fall within the same reasoning; they affect a state in matters as vital to its existence as its criminal laws. No court ought to undertake an inquiry which it cannot prosecute without determining whether those laws are consonant with its own notions of what is proper. 2 This reasoning was originally used to justify the non­enforcement of tax claims between US states, a principle subsequently overturned by reference to the `full faith and credit ¶clause of the US constitution Milwaukee County v. White Co. 1935, and the 1979 court argued there is no similar `full faith and credit ¶ obligation in international law. The US court might have been willing to accept such an obligation, but for lack of reciprocity on the Canadian side, since in a previous decision the Canadian courts had refused to enforce a US court judgment against a tax fugitive, citing the same reasoning of Judge Learned Hand. 3 Although the reasoning in these cases is not always sound, and there is little justification for the very wide assertion often made that no case will be entertained which even indirectly entails enforcement of a foreign revenue claim, it seems clear that any arrangements for direct international recovery of taxes must be established by agreement between states. b Treaty Provisions The reluctance of states to enter into treaty arrangements for recovery of taxes is explicable by the political delicacy of measures to enforce taxation, as well as by the anomalous nature of a tax claim. Tax fraud or evasion is not normally included in international arrangements for extradition or other forms of judicial assistance in criminal cases. 4 Despite the language in statements such as Learned Hands cited above, a tax liability more closely resembles a civil judgment and could be considered enforceable subject to the usual exception in cases where such a judgment 1 H.M. The Queen ex rel. Province of British Columbia v. Gilbertson 1979. 2 Moore v. Mitchell 1929, p.604. See however the criticism of Learned Hands reasoning in Mann 1954, 470­1. 3 United States v. Harden 1963, where the Canadian court had itself quoted in explanation the same reasoning of Judge Learned Hand. 4 However, the Council of Europe conventions for both Extradition and Criminal Judicial Assistance may be extended to fiscal offences by those states which accept the relevant Protocols, European Treaty Series Nos. 98 and 99, adopted in 1978. The Convention on Information and Assistance in Administrative Matters ETS No. 100 also does not apply to fiscal matters except for those states which on ratification declare that it does, and which may make this subject to reciprocity: Article 1. conflicts with the public policy of the requested state. However, tax judgments have also been commonly excluded from arrangements for mutual enforcement of civil judgments, partly for the political reasons already cited, and partly because a tax liability is often enforced by administrative means rather than as an ordinary civil judgment. Nevertheless, there are no substantial legal obstacles to the establishment of arrangements for mutual assistance in tax recovery. Their political acceptability should be facilitated by their inclusion in double taxation treaties, to provide more effective enforcement of tax liability as a quid pro quo for treaty benefits. 1 In practice, however, they have only been concluded between states with especially close relations. The main postwar provisions are: the agreement between Belgium, the Netherlands and Luxembourg in 1952 concluded as part of the establishment of the Benelux economic union; the 1954 treaty between Austria and Germany for legal protection and asistance in tax matters; the provisions in French tax treaties with the francophonic African states Tixier and Gest 1985, paras. 434­9. The Nordic countries have since the early 1940s agreed bilateral collection arrangements, and this culminated in the multilateral convention of 1972 for mutual administrative assistance in tax matters, including collection, between Denmark, Finland, Iceland, Norway and Sweden. A provision for general assistance in recovery was included in some of the first postwar US tax treaties, but when the US Senate indicated its opposition to this provision and deleted it from the proposed treaties with Greece and South Africa in 1951, it was omitted from later treaties; however, the provision remains in the US treaties with France, Denmark, the Netherlands and Sweden. 2 The UK does not seem ever to have negotiated a collection provision. 3 Following the increasing concern with international avoidance and evasion, the OECD committee 1 This point was made by the then Second Legal Advisor to the UK Foreign Office, Eric Beckett, in a memorandum of 12.4.1943 to the Treasury PRO file IR407463, as part of the campaign to change British policy to international double taxation arrangements, leading to the UK­US treaty of 1945: see Chapter 2.1 above. Nevertheless, the US­UK treaty did not contain a recovery assistance clause, and nor had the previous US­Canada treaty of 1942, although the US Treasury gave evidence to the Congress in 1947 that both countries had indicated a willingness to agree to enforcement provisions at such future time as local considerations would permit: see Note 1950, p.493, fn. 13 and sources there cited. 2 Abrutyn and Halphen 1984 p. A­45ff. The Netherlands treaty, including the recovery provision, was extended to the Netherlands Antilles, but this has now been abrogated: see Chapter 7 above. The provisions for general assistance in recovery were never adequately activated see Note 1950; but the US IRS has been more interested in the more limited arrangements for recovery in connection with anti­abuse: see below. 3 As recounted in Chapter 5 section 1a above, an attempt was made in 1928 to introduce a provision into British law for enforcement of revenue claims within the British Empire, as a measure against international avoidance; when this failed due to political opposition, no subsequent attempt seems to have made to reintroduce such a provision. In the negotiation of the path­breaking US treaty in 1944­5, the Inland Revenue took the view that the collection provision should be omitted, because it would set a precedent for other treaties: see Chapter 2 section 1a above. drew up a comprehensive model recovery treaty with a commentary OECD 1981; and the 1988 OECDCouncil of Europe multilateral convention includes a section on recovery. 1 Nevertheless, there has not been any major new movement to participate in such arrangements; due to the orchestrated opposition to the 1988 multilateral convention discussed above, section 1, even France and the US, which have indicated that they will ratify the remainder of this convention, have excluded the recovery provisions US Congress 1990B. Essentially, agreement for assistance in recovery obliges the requested state to use the methods available to it for enforcement, treating the foreign tax claim as if it were its own; except that time­limits are governed by the applicant states law, and the requested state is not obliged to give the foreign tax claim priority over other creditors. 2 The requested state may refuse if i the applicant state has not exhausted the means available within its own territory, unless to do so would entail disproportionate difficulty; ii the taxation involved is contrary to international principles or those applicable by treaty between the states concerned; or iii to do so would conflict with its public policy. There are two basic safeguards for the taxpayer. 3 First, the liability must have been determined: it is a requirement that the claim must be the subject of an instrument which enables its enforcement; hence, it must be a properly assessed and not a provisional claim. Second, it must be no longer contestable, in other words all appeals must have been exhausted or be out of time; the 1988 multilateral treaty allows an `uncontested ¶claim to be enforced provided the taxpayer is a resident of the applicant state: although it would be difficult for the applicant state to show that the claim was uncontested if it were still contestable, there is an obligation to refund any money recovered if the taxpayer subsequently wins an appeal. The requirement that all potential appeals be exhausted could pose a serious limitation, although states may by agreement relax it. It may also be mitigated by the obligation to take conservancy measures for a claim which is not yet finalised; however, the extent to which states are able or may be willing to freeze assets in respect of contested foreign tax claims may be limited. 4 Given these safeguards, there 1 This is essentially a re­draft of the OECD 1981 model text, with a commentary largely based on the 1981 commentary in relation to the key principles and provisions. 2 In many states tax claims rank ahead of most other unsecured creditors, but it is thought unfair to give a foreign tax claim such priority over local creditors: OECD 1981 p.42. 3 A third protection which was included in the League models and bilateral treaties excluded assistance if the taxpayer were a citizen of the requested state: in drafting the 1981 model the OECD Committee observed that `most OECD member countries no longer consider it necessary to refuse assistance in UHVSHFWRIWD[HVGXHE\WKHLUQDWLRQDOV¶WKHQDWLRQDOLW\FODXVHLVEHLQJHOLPLQDWHGLQELODWHUDOWUHDWLHV having been dropped for example from the more recent French treaties with Algeria 1982 and Madagascar 1983: see Tixier and Gest 1985, p.453. 4 Conservancy is apparently not possible in the USA, although provisions for it are included in two US treaties; the US has indicated in reservations to the 1981 OECD model that for constitutional reasons administrative measures cannot be used for collection of a foreign countrys tax claim in the US, and this would include conservancy measures. Thus, the US can apparently only enforce an actual tax judgment, by judicial means OECD 1981 p. 36; Abrutyn and Halphen 1984 p. A­51. seems no strong objection to the development on a more widespread basis of arrangements providing for assistance in recovery, although by their nature such procedures are likely to be relatively infrequently used. More limited provisions for assistance in recovery, designed to prevent the obtaining of treaty benefits by persons regarded as ineligible, have been more actively and even routinely used and included in bilateral treaties. Where dividends or other payments are made to a treaty country, it may not be possible to establish whether the payment is being made to a person genuinely eligible for a reduced withholding tax, for example if the payment is made to a bank which may be acting as nominee for a non­ resident see Chapter 7 section 2b above. Thus, many US treaties include a provision based on Article 264 of the US model, which states that each `shall endeavour to collect ¶ on behalf of the other such amounts as may be necessary to ensure that treaty relief `does not enure to the benefit of persons not entitled thereto ¶ 1 In view of the use of the word `endeavour ¶ this is less than a watertight obligation; nevertheless such anti­abuse collection arrangements have been operated for many years between a number of developed countries, sometimes even without any treaty provision. Thus, both the UK and Canada have required their residents to make a return of any payments received from the US which have benefited from a reduced or nil withholding tax, and if the recipient is an agent or nominee they must declare this and withhold the appropriate tax, which is then returned to the US Treasury; this arrangement is facilitated by the supply by the US authorities of routine information on payments to residents of the treaty­partner states Abrutyn and Halphen 1984, p. A­47. A similar procedure has been operated by Switzerland: under its 1962 decree against improper use of tax treaties both federal and cantonal tax authorities may require beneficiaries of tax relief to provide information ensuring that the benefit is one validly claimed under a treaty; they may otherwise refuse certification or recover the withholding tax due to the treaty partner see Chapter 7 section 2b above. However, the arrangements for recovery of withholding tax abroad have not been considered fully satisfactory, and it is preferable for the state of the payer to establish a pre­payment control, for example by requiring certification by the paying agent that the payee is entitled to a reduced withholding tax. On the other hand, this might require a more specific definition of those not entitled to treaty benefits by means of limitation of benefits clauses, as well as stronger information exchange provisions which would require information from banks; and these provisions have proved hard to agree see above, Chapter 7 section 2, and section 2b in this chapter. 1 This provision is included in the new US­German treaty signed in 1989, Article 264.

6. Conclusion