Prologue – Tax Enforcement And The Revenue Rule
The common law revenue rule was designed so that one country will not enforce tax debts owed to another country. There is general agreement that the “revenue rule” is gradually disappearing. Specifically, the United States has negotiated tax treaties with at least five countries (Canada, Denmark, France, Sweden and the Netherlands) which abrogate the revenue rule. To learn more about the Revenue Rule, see the “Appendix” below.
I have previously suggested how the “assistance in collection provisions” facilitate U.S. citizenship-based taxation. My 2016 comment on “assistance in collection provisions” suggested that U.S. citizenship-based taxation gives the United States strong incentives to end the revenue rule. Specifically …
My point is this:
The “assistance in collection” mechanism in these five treaties can and will be used to allow the United States to enforce direct taxation on those who are “tax residents” of other nations AND on the economies of those other nations.
Given the U.S. practice of “citizenship-based taxation” I can’t understand why any country would enter into an “assistance in collection” treaty with the United States. Interestingly the Canada U.S. Tax Treaty does create an exemption for those who were Canadian citizens at the time tax debt arose. The Denmark U.S. Tax Treaty has a similar provision exempting citizens of Denmark.
Conclusion: It is quite clear that tax treaties which include “assistance in collection provisions” (abrogating the Revenue Rule) are overwhelmingly to the benefit of the United States. Only the United States (and the nation of Eritrea) impose taxation based on citizenship (and therefore impose taxation on the residents of other nations). These five treaties allow the United States to extend its tax base into the economies of other nations.
Present Day – June 25, 2019
The following tax treaty protocols were approved by the Senate Foreign Relations Committee:
The Protocol Amending the Convention between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and its Protocol, signed at Madrid on February 22, 1990 (Treaty Doc. 113-4).
The Protocol Amending the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income, signed at Washington on October 2, 1996, signed on September 23, 2009, at Washington, as corrected by an exchange of notes effected November 16, 2010 and a related agreement effected by an exchange of notes on September 23, 2009 (Treaty Doc. 112-1).
The Protocol Amending the Convention between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and a related agreement entered into by an exchange of notes (together the “proposed Protocol”), both signed on January 24, 2013, at Washington, together with correcting notes exchanged March 9 and March 29, 2013 (Treaty Doc. 114-1).
The Protocol Amending the Convention between the Government of the United States of America and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed on May 20, 2009, at Luxembourg (the “proposed Protocol”) and a related agreement effected by the exchange of notes also signed on May 20, 2009 (Treaty Doc. 111-8).
Each of these four treaty protocols has updated information exchange and/or collection provisions. The proposal in the treaty with Japan is most interesting and most worrying.
The Japan protocol includes a provision for assistance in collection that is somewhat more expansive than is contained in similar treaties (Canada, Sweden, Denmark, France and Netherlands). Japan does NOT normally allow dual citizenship. Therefore the collection provision in ARTICLE 27 the collection provision could possibly be used as a mechanism to force Japan to enforce U.S. taxation on U.S. citizens who are resident in Japan!!
Time will tell.
The new ARTICLES 26 and 27 of the U.S. Japan Tax Treaty (if approved by the Senate) will be:
ARTICLE 26: (Replacing the old ARTICLE 26 – Information Exchange – Getting the information they need)
1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant 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, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by paragraph 1 of Article 1 and Article 2. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of authenticated copies of original documents (including books, papers, statements, records, accounts, and writings).
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 laws of that Contracting State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes referred to in paragraph 1, or the oversight of such functions. 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.
3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:
(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
(b) to supply information which is not obtainable under the laws or in the normal course of the
administration of that or of the other Contracting State;
(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy; or
(d) to obtain or provide information that would reveal confidential communications between a
client and an attorney, solicitor or other admitted legal representative where such
(i) produced for the purposes of seeking or providing legal advice; or
(ii) produced for the purposes of use in existing or contemplated legal proceedings.
4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other Contracting State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.
5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.”
(JR Note: The USA can create any kind of tax it wants and Japan will exchange information.)
ARTICLE 27 – Replacing the old ARTICLE 27) – Assistance in collection – override of the Revenue Rule – weakened citizenship exemption
1. Subject to the provisions of this Article, the Contracting States shall lend assistance to each other in the collection of taxes, insofar as the taxation is not contrary to this Convention or any other agreement to which the Contracting States are parties, together with interest, costs of collection, additions to such taxes, and civil or administrative penalties related to such taxes (hereinafter referred to in this Article as a “revenue claim”). This assistance is not restricted by paragraph 1 of Article 1 and Article 2. Any assistance provided by a Contracting State shall be only to the extent allowable under the law of that Contracting State. 2. The assistance under paragraph 1 shall be lent only in the collection of the following revenue claims: (a) a revenue claim in respect of a company: (i) the determination of which is not eligible to be resolved by mutual agreement procedure pursuant to Article 25; (ii) the determination of which has been mutually agreed upon pursuant to Article 25; or (iii) with respect to the determination of which the company has terminated the mutual agreement procedure; (b) a revenue claim in respect of an individual. However, if the individual is a national of the Contracting State from which assistance is requested (hereinafter referred to as the “requested State”) at the time the application for assistance is received, assistance shall be lent only for revenue claims with respect to which the individual or a person acting on behalf of the individual: (i) has filed a fraudulent tax return or a fraudulent claim for refund; (ii) has willfully failed to file a tax return to evade taxes; or (iii) has transferred assets into the requested State to avoid collection of the revenue claim.
(JR Note: This means that U.S. citizens in Japan who do not have Japanese citizenship have NO protection whatsoever.)
A general weakening of the “citizenship defence” to collection
The “assistance in collection” treaties are for the purpose of breaking down the centuries old “Revenue Rule”. So far, the “assistance in collection” provisions have NOT applied to citizens of the treaty partner country – effectively establishing a “citizenship-based defence” to enforcement.
ARTICLE 27 of the proposed U.S. Japan protocol is intended to weaken the “citizenship-based defence” to assistance in collection. The Japanese government has agreed to collect from its own Japanese citizens in certain circumstances. These circumstances include cases of fraud or tax evasion including willful failure to file. Under the existing collection agreements (for example Canada) there are no limitations on the immunity of citizens (if the liability accrued while the person was a citizen).
Conclusion and moving forward …
ARTICLE 27 of the proposed U.S. Japan treaty needs to be read in context. When considered in context, one can see the “evolving nature” of these “assistance in collection” provisions. As Karen Alpert notes in her comment below:
Article 27 of the Japan protocol/treaty is particularly worrying. It gives the IRS the power to collect US taxes from Japanese-resident US citizens without Japanese citizenship (which would be most of the US citizens resident in Japan). For any dual citizens (or prior US citizens) the IRS will only have this power for tax owed on fraudulent returns or due to willful tax evasion. This is a huge departure from most existing tax treaties, especially given that Japan is one of the countries that requires new citizens to show that they have renounced their prior citizenship.
Appendix A – Two sources for U.S. Japan new treaty protocols are:
Appendix B – About The Revenue Rule:
For an extensive explanation of the Revenue Rule, please read here.
Have a question? Contact John Richardson.