Turning Back a Tidal Wave of Tax Treaties

Wooyoung Lee
Vol. 41 Associate Editor

It is a wave that may be turning. Provisions for the exchange of information are standard in tax treaties because one of the primary purposes of bilateral tax treaties is to facilitate the exchange of information.[1] Since the US is relatively unusual among countries because it insists on taxing the income of its citizens regardless of where they are geographically,[2] the US has comparatively needed more information on its citizens abroad.

For the most part, information has flowed in one direction: from the rest of the world to the US.[3] The combination of the US’s greater incentive to hunt down information and its financial clout means that it has mostly been the US pursuing potential tax evaders in other countries.[4] This asymmetry is reflected when comparing the US’s model tax treaty with that of the Organization for Economic Cooperation and Development (OECD; a group of rich countries) The US version contains information-exchange provisions that are broader in scope than the OECD’s.[5] For example, the US treaty requires a party to allow the other party to take a deposition.[6] These kinds of conditions help ensure the US that the information gathered through these treaties can be used in a domestic court,[7] reflecting the importance of information for the US.


There are several ways that the US can collect information. Bilateral tax treaties, which are usually based on the model tax treaties, contain provisions covering information sharing.[8] A crackdown on tax evaders shortly after the 2007–08 financial crisis led to the US passing a law requiring foreign firms to disclose information on American clients.[9] This led to the Common Reporting Standard (CRS), an OECD-led initiative.[10] Signatories to the CRS (which include over 100 nations but not the US) share tax-related information with each other.[11] But because the US did not sign the CRS, it does not have to share such information.[12] What information is given out to foreign governments is done under domestic statutes.[13] But the domestic law is less generous than the CRS. Many countries get little or nothing.[14]


The result is that the US has made strong progress in snaring tax evaders. But because the flow of information has been so asymmetrical, the US has become a tax haven. An expert estimated that more than 90% of assets avoiding detection under CRS now reside in the US.[15]


But times are changing. In April 2019, Finland requested information from the IRS on three Finns who had been making heavy use of American-issued credit cards at Finnish ATMs.[16] These taxpayers, Finland’s government suspected, had money squirreled away across the Atlantic.[17] The request found its way to a district court in North Carolina, which gave the IRS leave to issue summons to the banks that had issued the credit cards.[18]


The successful Finnish request involved two legal concepts. The first was domestic and more established: the John Doe Summons. This tool, granted to the IRS in 1975,[19] allows the IRS to elicit information about a potentially troublesome taxpayer even if the IRS does not know the identity of this person.[20] But until recently, its scope had been mostly domestic. This power had been used in an international context previously, but by the US, to extract information from UBS, a Swiss bank.[21] Even then, the summons did not actually come into effect. Under the threat of the summons’ issuance, Switzerland’s parliament took action to pass the desired information along to the US.[22]


The newer trend, however, is that a foreign government initiates the request. This power came from Finland’s tax treaty with the US, the second relevant legal concept.[23] Article 26 of the treaty covers information exchanges.[24] Paragraph 3 requires the signatories to obtain and provide information that the other party requests.[25] The information-providing party is to treat the issue as though the tax and individuals were their own.[26]


The UBS incident led to debates about the advantages and disadvantages of this tool compared to normal treaty power. While John Doe was potent because it carried the weight of American domestic law behind it, one drawback was other countries’ potential annoyance at American insistence on applying its own law to foreign countries.[27] Foreign use of John Doe summons, however, does away with this drawback. Since it involves foreign governments asking the American government to apply its own laws to its own banks, there should be no kerfuffle over the clash of different countries’ laws. And since the route to a John Doe summons still goes through American institutions, namely the IRS and domestic courts, the advantages of this tool are likely to be preserved.


The curiosity is that these sources of this power are not new. The treaty has been in place since 1990.[28] The IRS’s use of John Doe summons stretches back further. Nor are the contents of Article 26 unique to the treaty with Finland. Every country that has a bilateral tax treaty with the US can exercise this option.[29] But it is only recently that countries have actually done so. Many countries might not have been even aware that this was a possibility.[30]


That looks less likely to be true as time goes on. No government is happy to be missing out on legitimate revenue. Fiscal difficulties might encourage countries – just as they did the US[31] – to pursue

[1] Michael S. Kirsch, The Limits of Administrative Guidance in the Interpretation of Tax Treaties, 87 Tex. L. Rev. 1063, 1070 (2009).

[2] Cym H. Lowell & Mark R. Martin, US Int’l Taxation: Practice and Procedure ¶ 9.03, 2 (2019).

[3] Will America go from hunter to hunted in cross-border tax evasion? The Economist, July 25, 2019.

[4] Id.

[5] Dennis D. Curtin, Exchange of Information Under the United States Income Tax Treaties, 12 Brook. J. Int’l L. 35, 47 (1986).

[6] Id.

[7] Id.

[8] Lowell & Martin, supra at 2.

[9] The Economist, supra.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] United States’ Mem. in Support of Ex Parte Pet. for Leave to Serve John Doe Summons.

[17] Id.

[18] The Economist, supra.

[19] Alfred Bender, Domination v. Diplomacy: Comparing the Effectiveness of the United States’ John Doe Summons with the United Kingdom’s 2011 Tax Treaty with Switzerland, 4 Geo. Mason J. Int’l Com. L. 286, 292 (2013).

[20] Id.

[21] Id at 277–78.

[22] Id.

[23] United States’ Mem., supra at 2.

[24] Tax Convention, Fin.-U.S., Sept. 21, 1989, S. Treaty Doc. No. 101-11 (1990).

[25] Id.

[26] Id.

[27] Bender, supra at 304.

[28] Id.

[29] The Economist, supra.

[30] Id.

[31] Bender, supra at 289.

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