International Tax Evasion in the Global Information Age

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

International Tax

Evasion in the Global

Information Age

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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David   S.   Kerzner

Toronto , Canada

David   W.   Chodikoff

Toronto , Canada

v

Endors ement

“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 international

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

vii

In recent decades, the topic of cross-border tax information exchange has

attracted considerable academic and policy attention. Beginning with the

OECD’s Harmful 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

Foreword

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.

First, 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 FATCA .

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 FATCA , 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.

Beyond 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 Treasury

Regulations surrounding the Internal Revenue Code ’s FATCA provisions

( Code sections 1471 to 1474) already exceed 600 pages. For US taxpayers

living abroad and seeking to comply with FATCA 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

xi

Illegal 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.

As 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

Pref ace

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.

During 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 Foreign Account Tax Compliance

Act ( FATCA ) 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.

Preface xiii

Th e  extraterritorial enforcement by the United States of its tax and

reporting laws (which is dealt with in detail in the book) combined with

the new Common Reporting Standard poses inescapable challenges for

estate planning and private wealth advisers globally.

As lawyers and authors who practice and write in the area of inter￾national tax controversy, we saw the need for a book on international

tax evasion and global exchange of information. Th e research for this

book has been greatly informed by David Kerzner’s PhD dissertation,

completed at Queen’s University in Kingston, Ontario. We wrote this

book to provide an essential tool that can be readily accessed not only

to assist professionals in the banking, fi nancial, legal, tax, and account￾ing sectors to grasp a technical understanding of these new legal regimes

but importantly to explain the policy drivers and problems surrounding

these changes. We also believe that an understanding of the themes in

this book will allow leaders in the fi nancial services sector to create new

strategies and policies throughout their organizations to manage these

new global challenges and to avoid the steep downsides that we are wit￾nessing today with the unprecedented extraterritorial application of US

administrative powers.

Toronto David S. Kerzner

May 2016 David W. Chodikoff

xv

Th e legal research that constitutes the foundation of this book began

in 2009 as part of my doctoral degree at the Faculty of Law, Queen’s

University, in Kingston, Ontario, which was successfully completed in

2014. I am grateful for the support of Associate Dean Sharry Aiken and

Associate Dean Mark Walters, of the Faculty of Law and the School

of Graduate Studies at Queen’s University, throughout this enormous

undertaking. As a student, I deeply valued the tremendous support of

and encouragement from Sharry Aiken, Phyllis Reid, and Rose M Silva at

Queen’s University. I would also like to express my gratitude to the family

of the late Eric W Cross for their support of the memorial fellowship in

his name. I was especially fortunate for the commitment and involve￾ment during my PhD studies of two extraordinary teachers and schol￾ars at Queen’s University: the late Associate Dean Stan Corbett (of the

Faculty of Law) and Professor Daniel Th ornton (of the Business School).

Th e right words fail me in expressing my gratitude to my supervisor,

Professor Arthur Cockfi eld, for sharing his brilliance as a tax scholar with

me on this project and his qualities of humility, grace, and kindness as a

mentor and guide on this long journey.

I would also like to say thank you to these individuals, who dur￾ing the course of this project generously off ered their guidance: Brian

Arnold, Nathan Boidman, Th omas Tung-Pi Chen, David Chodikoff ,

Tim Edgar, William Flanagan, Neil Harris, Bobbe Hirsh, Jinyan Li, Alan

Acknowledgements

xvi Acknowledgements

Macnaughton, Philip Wright, and Bruce Zagaris. I am especially in debt

to the following individuals for their comments on earlier drafts of this

research: Allison Christians, Arthur Cockfi eld, John Freeman, Wanjiru

Njoya, Jean Th omas, and Daniel Th ornton. Th ey are not responsible,

however, for any possible errors, or the opinions or positions advocated,

for which the authors are alone accountable.

A volume such as this, which involves statutes and cases concern￾ing the laws of Canada and the United States, combined with the legal

regimes derived from international organizations, presents many editorial

challenges and complexities. My co-author and I wish to acknowledge

the outstanding work of our editors on this manuscript, Alisa Posesorski,

Victor Selby, and John Sawicki. We are most grateful for their dedication

and camaraderie during the writing of this book. We are both profoundly

indebted to our Canadian publisher, Jeff Miller. Jeff was ever patient,

always good-humoured, and focused on producing a work of excellence.

I wish to also express my thanks to Michelle Wood for her assistance with

formatting earlier drafts of this manuscript. To my co-author, thank you

for your steadfast friendship.

Lastly, the greatest of thanks to my parents, Albert and Anita Kerzner,

my sisters, Roanne Kerzner and Marla Wasser, and my brothers-in-law,

Stephen Caff rey and Larry Wasser, who provided much love and inner

strength throughout these past years.

David S. Kerzner

I am grateful to my long-serving “Chief of Staff ,” Filomena Mendonca.

Without Fil’s steady hand on the demands of my private practice, I would

not have had the time to work on this important project. I am also thank￾ful for the wonderful family support I received from my wife, Tanya, son,

Daniel, brothers, Mark and Richard, and my mother, Beverley.

David W. Chodikoff

xvii

1 Introduction and the Problem of Off shore Tax Evasion 1

2 International Tax and the Roles of International Tax Policy

and Tax Treaties 33

3 Th e OECD’s War on Off shore Tax Evasion 1996–2014 53

4 International Tax Enforcement in Canada 105

5 International Tax Enforcement in the United States 153

6 Th e Role of Canada’s Tax Information Exchange

Agreements in the Fight against Off shore Tax Evasion 207

7 Article 26 of the OECD Model Tax Convention on Income

and on Capital 257

8 Automatic Exchange of Information 283

Contents

xviii Contents

9 Foreign Account Tax Compliance Act 313

10 International Collections Enforcement and Voluntary

Disclosures 353

11 Conclusions and Recommendations 393

Index 413