In this new age of technology and ever-expanding global commerce, there is a growing need among industrialized countries for tax information sharing and cooperation among their respective tax authorities for the purposes of tax enforcement, as well as tax evasion detection and mitigation. This can be evidenced by the recent advent of the Foreign Account Tax Compliance Act (known as “FATCA”) which has resulted in over one hundred inter-governmental agreements with foreign governments, as well as the Base Erosion and Profit Shifting (“BEPS”) framework under the direction of the Organisation for Economic Co-operation and Development (“OECD”). In addition, foreign governments will enter into various other agreements with the United States and other countries in order to lay out the terms of the exchange of international tax information. These agreements are referred to as “Exchange of Information” (EOI) programs. It is important for businesses engaged in international commerce to understand the existence of these inter-governmental agreements and the types of information that can be exchanged. Examples of these agreements include:
- Tax treaties – Treaties help prevent duplication of taxable income in two different international jurisdictions. Most treaties include articles which authorize the exchange of information between the two countries of tax-related information. Information received under a treaty can only be disclosed if it is for the purpose of tax collection in the respective country by applicable regulatory agencies. Each treaty contains specific language that sets parameters of who may receive information and how it could be used.
- Tax information exchange agreements – The purpose of these bilateral agreements are to help facilitate the exchange of tax-related information between two different countries. It assists in civil and criminal tax investigations.
- Mutual legal assistance treaties – These type of treaties authorize the exchange of information to enforce criminal laws. These could be either criminal tax or non-tax matters. Historically, they have been used for obtaining banking and other financial-related records from respective treaty partners.
- Multilateral agreements – Certain multilateral agreements which the United States is a party to, will also authorize EOI for tax purposes. An example would be the Hague Convention on the Taking of Evidence.
- Tax implementation or coordination agreements – These allow for tax information exchange between the United States and American Samoa, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands. All of these territories have their own tax system, but have some regulations that overlap with United States tax law.
There are a few other organizations whose purpose is to promote mutual assistance of exchange of information for member countries such as:
- The Forum on Tax Administration (“FTA”) – The organization represents the tax administration professionals from fifty countries within the OECD as well as some non-OECD countries. Their mission is to identify, discuss, and influence relevant global trends to help enhance tax administration around the world.
- Inter-American Center of Tax Administrations (“CIAT”) – The group’s mission is to promote cooperation and mutual assistance benefits amongst member countries. The member countries include many Latin American countries who have activities in place such as facilitating discussions with many groups from the respective countries including tax officials, tax organizations, and other key stakeholders within tax administration and enforcement.
In today’s world there are many instances (perceived and real) where taxpayers engage in tax evasion activities which involve cross-border transactions, impacting different foreign governments as well as the United States. As mentioned, there are many tools at the governments’ disposal which can help detect or deter these activities. The key in this type of tax enforcement is cooperation amongst governments and the different taxing authorities. As the stakes grow as international commerce grows, it appears as if there is more of a willingness amongst governments to cooperate while the various inter-governmental agreements allow, now more than ever, for the free-flow of important tax and financial information.
Mary Vasilescu, CPA, MST is Wiss’ international tax accountant advises clients on the formation, structure and taxation of business ventures, start-up enterprises and joint ventures in the U.S. and abroad, including mergers and acquisitions, restructuring, and international tax planning.