If you invest or do business internationally, you need to know about double taxation agreements, more commonly called "tax treaties." These agreements are designed to avoid or at least minimize double taxation. However, they have another, less publicized function: to facilitate information exchange to help enforce domestic tax laws.
One of the consequences of the political firestorm in recent months over bank secrecy laws in Switzerland and other offshore financial centers is that information exchange through tax treaties will become increasingly common.
Tax treaties are based on a model treaty prepared by the Organization for Economic Cooperation and Development (OECD). The OECD regularly updates its model treaty. Each successive model provides tax authorities greater powers to retrieve financial information from the other signatory.
Early tax treaties gave signatories wide latitude to turn down requests for information. Signatories could turn down requests for information under several different rationales, all based on the concept of "comity;" i.e., the recognition accorded by one nation to the laws and institutions of another. For instance, a signatory could turn down an information request if it concerned a tax not imposed by that country (“domestic tax interest”). It could also invoke a "dual criminality" requirement: if the conduct in question wasn't illegal in both countries, the request wouldn't be honored.
However, in 2000, the OECD completely revamped the "Exchange of Information" provision in Article 26 of the model treaty. Bank secrecy laws, dual criminality requirements, and domestic tax interest requirements may no longer be invoked to prevent information exchange. These provisions have gradually made their way into the international network of tax treaties.
Therefore, if a particular country agrees to implement information exchange arrangements "consistent with OECD standards," the laws you thought might have prevented your financial secrets from being disclosed to your domestic tax authorities may no longer apply. Almost every country with strict bank secrecy laws, including Andorra, Austria, Belgium, Liechtenstein, Luxembourg, Monaco, and Singapore, has announced it will comply with the expanded version of Article 26. Panama has not provided specific assurance on this point, but has made a commitment for "effective exchange of information" in accordance with OECD standards.
Still, there are limits to Article 26. The OECD model only requires treaty signatories to exchange information on request. That is, the country requesting information must know that your assets or accounts are in a particular jurisdiction—and likely, in a particular institution—before it can request information.
These limits are unlikely to satisfy the more rabid advocates of full disclosure. You can expect the next round of the OECD model tax treaty to include a provision for mandatory "automatic" exchange of information between tax authorities.
In the meantime, the handwriting is on the wall. Offshore secrecy laws will not prevent your offshore bank from turning over your account information to your domestic tax authorities. If you have unreported offshore accounts, you need to deal with the problem now—not later. A good start would be a call to an attorney specializing in criminal tax defense.
Copyright © 2009 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society.)
