No secrets are safe in the age of global tax information exchange
Many taxpayers are familiar with disclosure document requests in which taxpayers are informed that tax authorities are investigating certain transactions based on receipt of the request. But today, many types of foreign tax information exchange occur without the knowledge of the taxpayer. In addition, tax administrations around the world are expanding tax information exchange programs. For example, on May 19, 2021, the European Union (“EU”) approved a measure to spend an additional 270 million euros to improve national information exchange programs, with particular emphasis on modernization of IT systems and financing of joint audits.
Taxpayers should: 1) brush up on the main types of tax information exchanges, 2) know how that information is used, and 3) be prepared that whatever they provide to a tax administration can end between the hands of another.
The specific exchange of information takes place through the information exchange provisions of tax treaties and tax information exchange agreements (“TIEAs”). Typically, the information requested relates to a review, investigation or investigation of a taxpayer’s tax liability for a specified tax period. A taxpayer may be notified that a foreign tax administration is seeking information as part of a specific exchange request if the national authority requests new information from the taxpayer. But the taxpayer may also be kept abreast of these developments if the national tax authority can satisfy the request without contacting the taxpayer or if the national tax authority does not notify the taxpayer that it is making the request on behalf of a taxpayer. conventional partner.
The spontaneous exchange of information also takes place through tax treaties and TIEAs. This is the transmission of information which has not been specifically requested, but which, on the basis of the judgment of the sending administration, has been considered to be of potential interest to a foreign partner. The exchange typically involves information uncovered in a tax audit, investigation, or other administrative proceeding that suggests or establishes a non-compliance with the tax laws of a foreign partner, or that is otherwise deemed potentially useful. to a foreign partner for tax purposes. The IRS is not required to notify U.S.-based taxpayers if it spontaneously exchanges taxpayer information. European tax administrations, in particular, are renowned for exchanging taxpayer information in this way.
Tax treaties and TIEAs generally include provisions for the automatic exchange of information, whereby the tax treaty or the TIEA partners agree to exchange certain tax information on a regular and systematic basis, without the need to request a Specific demand. Information exchanged under this program frequently includes Country-by-Country Reports (CbCs), which provide aggregate tax jurisdiction-wide information on the global distribution of income, taxes paid and indicators of economic activity. . Taxpayers won’t know when trades will take place under these programs, but they can find out which countries currently have automatic trading arrangements in place. For example, in July 2021, the United States had finalized some fifty such agreements to automatically exchange country-by-country declarations.
These exchanges involve meetings between tax officials from two or more partner countries that do not involve specific information on taxpayers. Industry-wide exchanges focus on trends, policies and operating practices in a particular industry, economic sector or other areas of common interest. Some examples are oil and gas, offshore compliance initiatives, tax shelters, etc. Since no specific information on taxpayers is exchanged, taxpayers are not informed.
Tax administrations continue to stress the importance of exchanging taxpayer information. Given the many ways in which taxpayer information can be exchanged, taxpayers should be aware that anything they provide to one tax authority could likely end up in the hands of another. Likewise, taxpayers should be aware that even before an audit begins, auditors may already have a significant amount of information that has been exchanged between tax authorities using these devices.